Banks give out red envelopes amid internet challenge

February 17, 2015 08:02
Many state-owned banks are working hard to woo depositors amid the stiff competition put up by internet financial firms. Photo: Bloomberg

Giving out red envelopes that contain lucky money is a Chinese tradition to celebrate the Spring Festival or the Lunar New Year. In the past two years, the custom has been given a digital spin: cash gifts are sent via mobile devices.

The country’s two largest internet companies – Alibaba and Tencent – are giving red envelopes to online users, with other internet companies following suit.

Ctrip, an online travel agency, has announced that it is handing out red envelopes worth 1 billion yuan (US$160 million) during the Spring Festival period. Online taxi-hailing companies such as Kuaidi and Didi, which announced their merger over the weekend, are also gifting their users.

Banks have also joined the lucky money-sending spree. Pudong Development Bank, Huaxia Bank, Pingan Bank and Bank of Communications, among other financial institutions, sent out red envelopes through various online channels such as Alipay and WeChat.

The banks’ enthusiasm to embrace the online trend reflects an important development in the financial industry. Banks are trying all means to court depositors amid mounting competition from internet financial players.

Many Chinese banks are feeling the effects of shrinking deposit base, rising financing costs and narrowing profit margins. Making profit is not as easy as it used to be.

Last year, commercial banks’ profits amounted to 1.55 trillion yuan, up 9.65 percent from 2013, according to the China Banking Regulatory Commission. The growth rate was sharply down compared with 14.5 percent in 2013 and 18.9 percent in 2012.

The slowdown is mainly the result of intensified competition in the financial industry, which is a welcome development as it will help reduce state banks’ monopoly, diversify and enrich a multilayer financial market and enhance the overall efficiency and service levels of the sector.

Because of the intensified competition, banks are losing ground in attracting deposits.

Last year bank deposits grew 9.48 trillion yuan, 3.08 trillion yuan less than a year ago. Deposits of households increased 4.14 trillion yuan, 1.35 trillion yuan less than the previous year's growth.

Securing deposits used to be an easy task for banks due to the absence of alternative investment channels for people. But things changed when online financial programs mushroomed.

Many depositors would like to put their money into online financial products since 2013 when Alibaba, China’s largest e-commerce company, launched Yu’ebao, an internet financial fund product that offers better returns than bank deposits.

Indeed, Yu’ebao can be described as an “enlightening” product that contributed greatly to raising the awareness of wealth management among the general public. Soon other internet companies launched similar products, leveraging the influence and convenience of the internet.

More than 100 million users have opened accounts to invest in such products. Yu’ebao alone had attracted nearly 580 billion yuan by the end of last year. This huge cash pile, if not invested in Yu’ebao, could have largely found its way into banks as deposits – as it had been in the past decades.

Another channel that causes outflows of bank deposits is peer-to-peer (P2P) platforms. Although irregularities and bankruptcies haunted the P2P sector from time to time, the platforms have continued to win the hearts of many small investors who are attracted by higher return and lower threshold.

Many depositors withdrew their money from banks and invested in P2P products. Last year, the scale of the online P2P market jumped more than 110 percent to more than 200 billion yuan.

Considering the long-term trend in an aging society where savings will be turned into consumption, China’s banks will face a slower growth of deposits. This means that banks’ financing costs will grow, net interest rate will narrow, and profit margin will shrink.

With more players such as internet financial companies and private banks joining the market with more freedom in setting interest rates, traditional banks, especially the state behemoths, will have to face stiffer competition, improve their efficiency and services, step up innovation and pay more attention to small business customers.

In this sense, the difficulties faced by the state banking industry bode well for the long-term development of the country’s financial sector.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.