China's internet finance brands take on big-four banks

Digital financial services looked mostly like inconsequential hype three years ago, but continued interest from Chinese consumers may not be waning as the internet reshapes China's financial industry, with “internet financing” and "digital banking" popular buzzwords since 2014.

According to Nielsen’s Financial Tracking Report, around 45 per cent of 17,000 online respondents claimed that they have invested in non-conventional financial institutions and internet-based wealth management products (including P2P lending sites like Dianrong).

McKinsey reported a higher percentage: roughly 60 per cent of 3,500 respondents surveyed in 2014 answered yes to actively using financial services on the internet that go beyond just internet banking.

One force driving this trend, according to the consulting firm, is the supportive stance by Chinese regulators toward financial innovation, including inviting internet players to enter the financial services industry.

Without the need to invest in physical branches, digital players have put marketing money into online ads on platforms where existing Alibaba and Tencent users are already active on, say Alipay and WeChat, as well as outdoor ads (see below) on public transport and in close proximity to big-four banks.

Since the launch of Yu’e Bao (an internet-based wealth management product owned by Alibaba) in 2013, the number of registered users had gone beyond 149 million by the third quarter of last year.

China’s consumers are evolving into three main types, driven by their acceptance level of digital financial services.

47 per cent use both online banking services from banks and financial services provided by internet companies. These consumers have an average of 4.5 to 6.0 banking products compared with 2.5 to 3.0 products for a non-user, according to McKinsey. Nielsen's data stated that four in ten check the performance of their internet banking products on a daily basis, and about eight in 10 track earnings at least once every week.

Basic users (11 per cent) use only online banking services from banks, but do not use financial services from internet companies. Still, the combination of these two is more than the number of non-users (42 per cent) who do not use any internet-based financial services at all.

McKinsey's researchers Kenny Lam, Jared Shu and Elaine Huang suggested the main reason for using digital financial services continues to be “anytime-anywhere convenience”. Alice Yu, vice president of Nielsen China, elaborated that low thresholds and high fluidity are additional reasons behind a preference for internet-based wealth management products.

In addition, McKinsey found that more than 70 per cent of Chinese consumers would consider opening an account with a pure digital bank. More interestingly, nearly the same percentage of consumers would consider a pure digital bank as their primary bank, though that will depend on whether it has competitive prices and whether it is one of the bigger digital banks in the market.

When it comes to online payment, Nielsen’s survey showed that half of respondents are willing to use WeChat Bank (WeBank for short), which is still regarded as an innovative internet-financing concept for now.

Consumers said they will try the functions for payment recharging (56 per cent), bank transfer (56 per cent), detailed billing information (47 per cent), customer service (46 per cent) and credit card payment reminders (43 per cent).

What are most important to the digital customer are personalization and branding, while non online-banking users care most about branch access and ease of use.

For non-users, the main reason for not using digital financial services is concerns about security, with users stating that they trust financial services of traditional banks more than internet companies.

With the generation of big data behind digital payments making it possible for the financial industry to further understand its consumer from different perspectives, McKinsey's implications for internet finance companies are:

• To target the traditionally “un-bankable” segment (for example, lower-mass consumers in China whose annual household income are between RMB53,000 to RMB88,000) that financial services companies do not traditionally focus on.

• To develop an “affluent-like” value proposition that can only be delivered economically by internet companies (for example, an interface for personalised portfolio management)

• To capture the digital wallet share of users by being fully integrated with the digital lifestyles of this segment (for example, providing services to housewives, retirees and businessmen, based on their different lifestyles).

• To strengthen comfort levels around the security risk associated with online purchases of financial products (for example, explore the possibility of setting up an offline presence offering limited services to build trust in consumers who want to physically “see” their bank).