Taking a swipe

Internet entrepreneur Jack Ma has long been critical of how Chinese banks are unwilling to lend to small companies. Speaking five years ago at a business forum, the founder of the Alibaba Group issued a challenge to the financial system. “If banks don’t change, we will change banks,” he proclaimed.

Ma looks to have changed the strategy of at least one bank – although not in a way he may have wished. The Financial Times reports that one of the country’s largest lenders has entered Ma’s turf. In a move that the FT equates to HSBC taking on Amazon, China Construction Bank (CCB) has launched an online shopping platform, buy.ccb.com.

The venture originates from a parting of ways between Alibaba and CCB on AliLoan: a lending scheme in which Alibaba used its customer database to build credit histories for small businesses, whom CCB then lent to.

According to reports in the Economic Observer, the cooperation ended because Alibaba also wanted to take a cut on the interest earned from bank loans. But CCB demurred, feeling that it would be easier for banks to establish e-commerce businesses than for platforms like Alibaba to get into the banking sector.

The arrangement expired in 2011, leaving CCB to make its own way on the internet. If successful, the benefits could be twofold. By selling directly to the consumer, the bank could take a slice of China’s rapidly growing online shopping industry, which had transactions worth Rmb5.9 trillion ($947 billion) in 2011. Furthermore, the trading venture should help improve the bank’s own credit database.

CCB is not alone in its e-commerce ambitions. Bank of Communications has also opened its own online mall and Bank of China and China Minsheng Bank are said to be looking at going into e-commerce.

Differing from pure e-commerce platforms like Alibaba and 360buy, CCB doesn’t charge rent, commission or advertising fees for stores on its online platform. Instead the goal is to profit from services to customers, including hire purchase arrangements, online loans and secured transactions, says 21CN Business Herald.

The move from finance to online shopping might seem counterintuitive, but it also makes more sense in the context of an increasingly competitive industry in which the banks are gradually losing the government support that has bolstered their profitability for years.

“Competition is very severe now for Chinese banks, and information about clients is the key for their competitiveness,” an analyst told the FT.

The most recent policy measure to hit industry profits is a reduction in fees for card transactions. Fees charged from merchants for card payments in restaurants, supermarkets and department stores will be reduced at the end of February, says Xinhuanet.com, for an aggregate saving of Rmb4 billion a year.

Ye Changqing, manager of Yonghui Supermarket, told International Business Daily that the original swipe rate for sales at his company amounted to the banks getting annual fees worth more than Rmb30 million, which accounted for nearly 10% of the firm’s net profit.

Policymakers are hoping that merchants will pass on some of the savings in the lower charges to consumers. Lower prices, it is hoped, should then stimulate more spending, which will be good for retailers’ profits.

But the reduction in revenues for banks – because of lower card fees – will be relatively small compared to the prospective impact of the government’s longer-term plan to liberalise interest rates. Premier Wen Jiabao recently reaffirmed Beijing’s plans to move to market-based interest rates during a recent visit to the central bank, reports Reuters.

Last year, the government took a significant step in this direction, when it gave the banks more flexibility to decide on the rates charged to borrowers, as long as they remain within a defined range (see WiC163). As we wrote at the time, the banks have been trying to defend their cushy net interest margins (the difference between the rate at which they lend out money, and the rate they pay depositors). But longer term, fully liberalised rates – which will spur competition between lenders – should see net interest margins shrink rather than grow.

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