China’s two largest internet companies are in the headlines for major moves in financial service, reflecting the rapidly evolving picture for this newer part of their business.
Alibaba (BABA.US) hit a positive note as its affiliate Ant Financial announced an insurance tie-up with Cathay Financial (2882.TW), one of Taiwan’s leading financial services companies. The news was less upbeat for Tencent (00700.HK), with word that the head of its young WeBank unit was leaving just nine months after the bank’s launch.
Both of these stories reflect the huge potential financial services hold for big companies like Alibaba and Tencent, as Beijing opens the sector to private investment.
But at the same time, the newness of the opening means that many rules are unclear and sometimes even contradictory. Tencent has learned that lesson quickly with WeBank, which has faced major limitations in its early days.
Among the biggest limitations, WeBank and other new private banks have been barred from setting up brick-and-mortar branches, and are only being allowed to do business online initially.
That provides a huge challenge since face-to-face meetings are often key in forging relationships with customers and determining their creditworthiness.
WeBank and other new private banks have also been banned from accepting deposits so far, meaning all of their loans will have to be funded by their founding investors.
With so many limitations against it, perhaps it’s not surprising that WeBank’s chief Cao Tong has resigned for unspecified personal reasons, according to Chinese media reports.
The reports lacked details, but it does appear the action was initiated by Cao himself and wasn’t the result of any conflict with the bank’s board of directors.
It has been reported that WeBank’s executives come from a wide range of backgrounds and include top talent from some of China’s most dynamic banks and government institutions.
Cao himself came from the government, and his departure is almost certain to deal a setback to WeBank’s development.
The bank made its first loan at the start of this year, right after its high-profile launch, and rolled out a mobile lending app just last month.
Launching such a major new business is never easy, and the progress has probably been slower than expected due to the many limitations on the company.
We could see some more high-level departures until WeBank finds its footing. But things should settle down over the next year or two, as this new field of private banks eventually finds their niche under China’s financial services liberalization.
Ant’s new insurance play
That liberalization has also seen Alibaba’s Ant announce the new tie-up with Cathay Financial, which will see the former invest in the latter’s China insurance business.
More specifically, the deal will see Ant pay 1.2 billion yuan, or nearly US$200 million, for 60 percent of Cathay Insurance Co., the China insurance unit of Cathay Financial.
The story didn’t get much media coverage, largely due to the fact that foreign companies have made little headway into China’s insurance market despite years of trying.
Cathay is just one of several foreign companies that have tried unsuccessfully to break into a market dominated by big state-run firms like China Life (02628.HK; 601628.CN), Ping An (02318.HK; 601318.CN) and New China Life (01336.HK; 601336.CN).
The tie-up appears to be Cathay’s admission of defeat in the difficult market, though it could still derive some benefit through its minority stake in the new alliance.
Alibaba has already made a number of moves to enter the Chinese insurance market through various initiatives, mostly centered on online products.
Alibaba’s moves to date haven’t yielded huge results, in large part because most Chinese aren’t familiar with insurance and are often highly skeptical of the product.
This latest tie-up with Cathay looks more focused on off-line sales that probably have a higher success rate with Chinese consumers. But that said, Alibaba is still likely to face stiff headwinds due to the entrenched position of the big state-run insurance companies.
Bottom line: Stiff restrictions on private investment in Chinese financial services will hobble a new insurance tie-up for Ant Financial, and were likely a big factor behind the resignation of the head of Tencent’s young WeBank.
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