In our earlier blogpost “How is FinTech disrupting financial services?,” we examined how FinTech is disrupting five core segments of the financial services—retail banking, lending, payments, insurance, and wealth management. Today, we will dive deeper into retail banking and lending services and discuss how FinTech has served customers hitherto underserved by traditional banks. We’ll illustrate through examples of FinTech startups in China, one of the most vibrant FinTech ecosystems today.
Retail banking and lending are core economic activities for any functioning economy and enjoy attractive profitability. As of 2016, China had nearly 4400 financial institutions supporting a GDP of $11 trillion, yet only 25% of the 900M individuals covered by People’s Bank of China (PBOC) credit reference center have access to a credit card.
Why would traditional financial institutions still underserve customers in the areas of banking and lending? We believe the phenomenon is driven by three factors: high customer acquisition and operating costs, an inability to match digital service level expectations from customers, and insufficient credit histories for some consumers. FinTech firms are structurally advantaged in each of these areas.
To acquire and serve new customers, traditional banks have to invest in physical branches, IT infrastructure, and staff labor. But FinTech firms like WeBank and Ant Financials have unique access to 900 million highly engaged digital customers via Tencent and Alibaba respectively. For them, customer acquisition is just a click away. As a result, the customer acquisition cost for FinTech firms is close to marginal, while that of traditional Chinese banks can be over 300 yuan.
FinTech firms also have simpler product portfolios supported by a distributed cloud IT architecture leading to an average IT operating cost of less than 10 yuan per account. Compare that to the approximately 100 yuan that traditional Chinese banks spend (and, just for reference, the approximately 700 yuan that leading US-based banks spend). This non-trivial difference in customer acquisition and account operating economics gives FinTech firms a significant cost to serve edge.
Going forward, more and more FinTech firms will exclusively use digital channels for lowering their cost of customer acquisition. According to PwC, “social media will be the primary medium to connect, engage, inform and understand customers…as well as the place where customers research and compare banks’ offerings.”
As technology becomes part of our daily lives, from social media to messaging to e-commerce to search to content consumption, customers are demanding digital service levels to transact with their financial provider on their mobile devices. The days of 9am-to-5pm, Monday-through-Friday banking are basically gone, and FinTech firms have raised the bar exponentially on service metrics. At WeBank, the average loan approval time is 0.3 seconds, and its technology infrastructure can handle up to 240,000 transactions per second. In addition to offering 24/7 customer service, WeBank has used advanced chatbot functionality to also reduce its labor cost for outbound security and verification calls by 75% in just the last 3 years. All this requires a significant and long-term investment in technology; at WeBank, IT constitutes over half of the employee base.
Banks make lending decisions based on credit worthiness of the customer or small businesses, but what happens if there isn’t enough credit history to work with? According to the 2016 International Monetary Fund’s Financial Access Survey, only a quarter of 1.4B Chinese have a documented credit history.
In response, China’s FinTech firms are building their own customer credit scores from non-traditional sources of creditworthiness, including social activity, financial literacy quizzes, games on optimizing mock budgets, and stability of digital behavior. Brookings provides more details in What’s happening with China’s FinTech industry?: “[Alibaba’s] Sesame Credit assigns users a score ranging from 350 to 950 based on five criteria: credit history, online transactional habits, personal information, ability to honor an agreement, and social network affiliations…. Sesame Credit and Tencent Credit draw on the two tech giants’ massive pool of user data to assign credit scores, incorporating criteria like a borrower’s social network, online shopping history, educational background, income level, and profession.”
So, what are the go-forward options for traditional banks? They certainly have competitive advantages from a large customer base, a regulated industry, and brand reputation. And many have aggressively invested in FinTech capabilities. However, that may not be enough for them to compete with FinTech firms. David Ku, CEO and Chairman of WeBank, summarizes its structural advantage over traditional banks, saying, “We are essentially a technology company with a banking license, and our growth strategy is powered by ABCD—agility, blockchain, cloud, data.”
FinTech 1.0 for traditional banks was about finance first and tech later. To compete aggressively, they may need to embrace TechFin—technology first and finance later.
We would like to sincerely thank Joe Chen, Executive VP at WeBank, for his generous insights for this blogpost.