O2O venture reveals change sweeping banks

Jiangsu Suning Co Ltd, launched in mid-June, is China's first private-sector online-to-offline or O2O bank. It signifies one more business model in the booming private-sector banking segment.

Backed by Chinese retailer Suning Commerce Group Co Ltd, Jiangsu Suning goes a step further than China's private banks that were established over the past two years.

More than half of them focus on businesses driven by internet-based technologies like e-banking. They include Tencent-backed WeBank, Alibaba-backed MyBank, Xiaomi-backed XW Bank, and Jilin Yilian Bank, which is affiliated to Chinese on-demand local services giant Meituan Dianping.

But it is Jiangsu Suning alone that marries traditional brick-and-mortar banking with the digital dimension.

By June, more than 17 private banks were approved by the authorities concerned. And 14 of them have started operations already. More private banks are awaiting approvals, according to the China Banking Regulatory Commission.

"Many entrepreneurs are inspired by the launch of private banks, and are preparing to apply to set up more private banks. In Shanghai, a private bank will be set up in Zhangjiang, a high-tech industrial park. There will be another new bank in 2018," said Zheng Yang, director of the Shanghai Municipal Financial Service Office.

Many of the new-age banks are expected to allocate more resources to internet-based services instead of expanding brick-and-mortar networks widely, according to Li Linqi, a researcher with Lianxun Securities.

"It is a great and important decision for the regulators concerned to open up the banking sector to private capital. These banks are backed by private enterprises that understand the needs of borrowers. They understand that online banking services will improve efficiency, usher in inclusive financing. And internet-based technologies will also help smaller banks in risk management," said Li.

Zeng Gang, a researcher with the China Academy of Social Sciences, said that online banking services also deliver on the parent company's desire to cut operational costs and become asset-light, said Zeng.

Xie Qiang, deputy head of Shanghai Huarui Bank, the first private bank in the metro, said the bank has been applying internet-based technologies to its risk management functions, which speeds up lending to high-tech startups.

The bank launched an online financing system for high-tech startups in September last year, enabling borrowers to apply for loans online. The lender is able to verify prospective borrowers' credentials, needs and other aspects like financial capacity and growth potential, and then decide if it is prudent to extend a loan.

By the end of last year, the bank had no non-performing loans at all, said Xie.

Smaller banks in China need to diversify their businesses and find suitable niches to specialize in, said analysts.

Overall, the banking sector's profitability is under pressure as the market is experiencing a series of deleveraging reforms for a long-term, healthy and stable development.

Liquidity has also weakened among smaller banks and their businesses are impacted by shrinking margins as financing costs rise, according to a research note by Moody's Investors Service.

"For private banks, it is important to grow in differentiated models. The banks can take advantage of their backers' own resources, and can focus on a theme, be it a supply chain financing for a specific sector, or serving industries in a cluster within a specific region, or serving a particular group of clients, such as startup entrepreneurs," China Galaxy Securities said in a research note.