That is the stark challenge facing China's state-owned lenders, an industry conference in Hong Kong was told on Friday.
Already evidence is building that the country's creaky financial system may be facing its own iPhone moment as upstart newcomers challenge the established order and threaten existing players who fail to keep up with new technology and shifting trends.
The profitability of Chinese banks, as measured by return on equity, has dropped to about 11% to 16% from 20% to 30% in just 10 years as changes in consumer behaviour and booming internet finance firms have gobbled up a growing chunk of their earnings, financial statements show.
“Chinese banks have undergone a period of tremendous change in recent times, where their overall profitability have come down to meet their international counterparts, as well as those in the utility and manufacturing businesses,” Ba Shusong, chief China economist at Hong Kong Exchanges and Clearing, told the audience at the Hong Kong Institute of Bankers.
Internet companies, including Alibaba and various online lending platforms, are chasing the opportunities among China’s rising and tech-savvy middle-class millennials, offering small loans (from $100 to $5,000) to college graduates, temporary or part-time workers, and small-business owners at the click of a few buttons. The money they borrow can be used to buy the latest smart phone or to cover an urgent need for working capital.
The expected demand for these sorts of banking services is gargantuan given what is happening to the Chinese economy. From just Rmb6 billion in 2013, China's internet consumer market is expected to grow to Rmb3.4 trillion by 2019, as the economy's growth engine shifts from investment to domestic consumption, according to iResearch, a consulting firm.
Foreign companies from Apple to Mexican avocado exporters are duly benefiting from the soaring demand. China is Apple’s second-largest market by sales.
Not special anymore
Seven Chinese banks are in the global top-30 by total assets, according to a report this year by S&P Global Market Intelligence. Aside from the Big Four, which also top the global rankings -- Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China -- there are Bank of Communications, China Postal Savings Bank of China, and Industrial Bank (China).
In 2012 Premier Wen Jiabao accused the country's state-owned banks of being too big and too powerful, vowing to break up their oligopoly. However, companies like Alibaba are already eating into their power bases with the launch of online payment systems, such as AliPay, which seek to “unbank” the population.
According to the People’s Bank of China, there are still more than 900 million people in China without credit records, representing about 65% of the population in 2015. By comparison, almost 9 out of 10 American people have a credit score.
“Excluding [their] overseas business, [the] growth of the state-owned mainland banks [is] virtually none,” Ba warned. “Production innovation and expanding into overseas markets are vital to the development of the state-owned banks.”
Many state-owned Chinese banks emphasise corporate lending and often prefer to lend to large state-owned counterparts because of policy and credit risk concerns. But they face rising demand from ordinary people looking to invest beyond China's volatile property and stock markets.
In 2015 already there were 200 million people in China with a total wealth of $28.3 trillion, research by China's Southwestern University of Finance and Economics shows.
As Wang Dufu, president of ICBC Card Center, told China Daily in July, “...retail business is the future battlefield for banks."
