It's time for local banks to reconsider their strategies and come up with more innovative products and services for customers who might otherwise be wooed away by overseas rivals.

Facing unprecedented competition from overseas banks, with four of them launching locally incorporated businesses on the mainland, domestic players are beginning to feel the need for a major paradigm shift.

In Shanghai, the nation's financial hub, where the banking battle will be the bloodiest, local banks must seek innovative products and services, especially in the wealth management sector, to fend off competition in the retail market.

"For the banking industry in Shanghai, this is the best time in its history to innovate and develop," said the China Banking Regulatory Commission's Shanghai bureau, citing a double-digit economic expansion for more than 10 years in the city and an improvement in the overall financial environment.

Innovative products will appear in sectors including wealth management, e-banking payment, derivative transactions, intermediary business and private banking services, the regulator believes.

For a long time, local banks in the city have been satisfied with just meeting the basic needs of customers and not actively pursuing changes.

But as times change, customers have become techno-savvy and the threat from overseas rivals is far more real, the need for innovation is more pressing than ever.

"Chinese commercial lenders are quickening their pace to institutionalize product innovation," the regulator said in a recent report.

The banks are thus providing a wider range of wealth management products, becoming more active in renminbi derivative transactions, and offering new products to boost their housing mortgage lending business. Shanghai's credit card market is booming, e-banking has picked up and a wide range of trust products are flooding the market.

Fee-based income generated by commercial banks in Shanghai jumped 36 percent in 2006 on the previous year, accounting for 18 percent of the total operating profit, up 2.84 percentage points. Electronic bank transactions by individuals also jumped 119 percent in the second half of 2006.

But the regulator has been quick to add that many banks are merely doing what others have already developed.

Statistics from the Chinese central bank's Shanghai headquarters indicate that domestic institutions still heavily rely on profit from the traditional business, namely the spread between lending and deposit rates.

But this could change as overseas competitors propel local lenders to innovate, the regulator believes. Foreign banks will focus on several categories of financial services in which they have better expertise and which have higher profit potential. These include intermediate businesses in foreign currency and money management.

Christine Ip, country head of Consumer Banking at Standard Chartered Bank's China operations, said customer service is something overseas lenders could share with local counterparts through cooperation.

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