Banking on technology

Chinese financial institutions do not want to be caught short when technologically advanced foreign banks begin moving in on their business.

With WTO accession fast approaching, many sectors of the Chinese economy are bracing themselves for global competition. The banking sector is one area undergoing rapid modernization as executives try to implement better risk management and other global best practices. IT budgets are also being increased and priority given to technology initiatives.

In general today, foreign banks are only permitted to engage in wholesale business, offering foreign currency products to foreign or foreign-invested enterprises, although there has been some scope for offering renminbi services to these companies. Under the WTO agreement, China will allow foreign banks to handle all foreign currency transactions for foreign clients and local businesses and individuals. They will also be able to extend local currency offerings for foreign companies. Moreover, within two years foreign banks will be allowed to handle local currency transactions for Chinese businesses, subject to the geographic phase-in, and within five years for Chinese individuals without geographic restriction.

There will be intense competition for lucrative business segments in the coming years. Domestic banks have the local knowledge and branch structure, while foreign players are generally coming in with more sophisticated products and technology. But local institutions, often backed by government programmess, are working to erode the foreigners' lead.

Both China's large national and regional middle tier banks aim to bring themselves up to globally competitive standards, which in the case of the mid-tier banks, will also make them more attractive as possible joint venture partners for foreign financial institutions.

"Most critical will be the transformation of China's Big Four commercial banks as they attempt to combine their continent-wide bricks and mortar networks with internet-age technology, Western management principles and an in-depth understanding of the needs of their customers," says Albert Bressand, MD of Paris-based think tank PROMETHEE. The Big Four state owned banks are Industrial and  Commercial Bank of China (ICBC), Bank of China, China Construction Bank, and the Agricultural Bank of China.

Meanwhile smaller nimbler banks like Pudong Development Bank and Minsheng Bank are already listed and are opening the way to modernity for the four giants, while others such as Bank of Communications and China Merchants Bank are being quite vocal about their technology initiatives.

"Everyone of them are focusing more on IT however they're doing it to solve very different problems," explains Spencer Loh , CEO and president of Shanghai Huateng Software Systems. "The tier one banks are looking more at consolidation and centralization of their infrastructure. But the tier two banks don’t have the cumbersome scale of the Big Four, so have more freedom and less baggage to carry. Even though they may spend less than the tier one banks, the results they get might be more evident.

Shanghai Huateng Software Systems is niche-software developer specializing in payment software, including the complex systems that link banks, automatic-teller machines and merchants. Over the past year, Huateng has partnered with South Korean and Hong Kong companies to develop products for their markets. But its most high profile clients so far have been in China where it played a key role in the "Golden Card" project, a network of interlinked automated tellers at banks across the country. It also helped modernize the network infrastructure at the Postal Savings Bank, now the country's fifth largest deposit taking institution.

"I don’t believe that any one bank can be held up as having the best technology," adds Loh. "But in single areas, for instance the internet, you could hold up examples of banks with successful strategies. China Merchants Bank has a good reputation for their internet work."

Tony Parkinson, director of the Enterprise Business Group in Compaq's Greater China division, says he has noticed a lot of outside advice being bought in to review banks' existing IT infrastructures. "Increasingly systems integrators and consultants from Hong Kong are advising on technology strategies – whether to replace the legacy systems that are getting old and tired, or to expand them with new technology add-ons."

Different banks have had different approaches over the past one and a half decades, but most large banks have developed their own proprietary software and systems to match the Chinese banking system. Some of these banks are undergoing evaluation with an eye to replacing these systems with off-the-shelf products from a vendor that can then be customized, but a few still plan to continue down the proprietary path and upgrade their existing system themselves.

"Banks have traditionally been resistant to buying and modifying software. But this is changing," adds Timothy Cheung, IBM's head of banking.for Greater China.

Home made

Even though the local IT industry is being pushed and promoted by the Chinese central and local governments, many areas of technology used in a modern day financial institution are still by necessity dominated by international vendors. "The local software industry hasn't really got to the stage of being able to develop a globally competitive core banking system. It is similar with specialist areas such as risk management, although this is changing," says Cheung.

But in other areas the local technology companies can offer specialist knowledge about the intricacies of China's financial system, and these local players, such as Huateng, or Neusoft, which is the country's largest publicly traded software company, are being approached for partnerships by both foreign IT vendors and foreign banks.

"Particular areas of interest for banks are bankcard processing centers, internet banking, and electronic payment systems," says Loh. "Although many foreign banks already utilize their own technology and products in these areas outside of China, they often lack the local market knowledge and experience necessary to customize and integrate services with China's existing and constantly changing unique banking infrastructure in China. As such, many are now looking for assistance in technology development."

An even more important issue for Chinese banks than what kind of infrastructure they buy, is what they do with it once it is installed. "Technologically all of the banks there are quite advanced already. But even more important is the management. Can the bank actually use the technology to its full potential to increase efficiency and cut costs?" asks Cheung. "The smaller emerging banks are doing this a little better, but it's not because of a superior skill set, it's just because they are usually more regional in scale and not national and so can better implement the management changes."
For the big nationwide banks another problems comes into play, one that is an important consideration in any discussion about China's economy. How much control the central government has over local and provincial governments can vary from total to virtually none – and the same could be said of the large state-owed banks. Often although a policy is dictated from head office, provincial branches may or may not follow the recommendations. This is one reason why the tier one banks are looking to centralize their processing and IT infrastructure so as to be able to better manage and control it.

Go West young banker

The government hopes to improve the overall quality of this central management, and not just in IT. Many banks have their own overseas training and exchange programs, but the government has recently backed one which will see 10,000 Chinese bank employees trained in the United States. The program, currently underway at San Francisco State University, is designed to bring China's financial services into step with global practices in a wide range of areas.

Yea-Mow Chen, chair and professor of the university's Department of Finance says that imminent competition arising from joining the WTO has stirred a strong desire to modernize. "Now Chinese banks are required to be responsible for their own profits and losses. What that means is that they don't have to follow the instructions from the various governments on policy loans," says Chen. "Unfortunately the key managers and directors of banks are still appointed by the government and the majority of them have ties at the state or local government level. They just cannot resist the pressure from the various levels of governments for loan extension to certain targeted sectors and corporate firms."

Chen suggests separating the ownership and management first, setting up a system for professional management to manage the banks, before a real profit-oriented system can be efficiently created. But then there is still a physical stumbling block to gaining true efficiency in the system, and that is the continuing reliance on paperwork and chops.

"This  represents a very backward system that has created many problems to Chinese banks and their customers, and also impairs efficiency," says Chen. "For example, customers might have to wait for a few days to receive the money wire-transferred from another bank.  Another example is that customers might not be able to check into their accounts to verify their transactions.  The biggest problem is that there is no national network that could transfer customer information from one city to the other for credit verification. All of these can be done in a matter of a few minutes in the Western world.

Currently the training programme focuses on updating management knowledge and techniques in areas that include credit analysis, risk management, new products and services, bank marketing, human resources management, WTO and strategy planning, and other management related issues. But Chen says more topics are being suggested to Chinese bankers for the next round of training, and  IT-related issues will likely be on the agenda.

Even though China's banks might not have yet exploited IT to the extent seen in other nations, over the past 10-15 years they have come a long way and automated many of the tasks that should be automated. Now they're at the critical juncture where they can change processes, look more at risk management and exploiting IT to their competitive advantage.

Share our publication on social media
Share our publication on social media