Why China's banks must rise to the online payments challenge

The online payments market is evolving fast and banks need to adapt if they are to face off the competition and grab a piece of the extra $200-billion revenue-action expected by 2025.

The fast-growing world of online payments represents a major challenge for banks in China.

As much as 13% of Chinese bank revenues from payments, or $61 billion, is likely to be displaced by third-party digital payment and non-bank competitors by 2025, according to a report by consultancy Accenture published on Monday. 

Total payment revenues on the Chinese mainland are set to grow at a compound annual rate of 9.1% to $494 billion by 2025, it said. But only banks that can adapt to the latest technologies will be able to capture a share of this booming business.


It could also be a case of now or never.

The banking industry in China is coming to the end of the current economic cycle in less-than-ideal health, McKinsey notes in its newly minted global banking review, with profitability down as revenue growth has slowed.

Chinese banking revenue averaged 13.4% between 2010 to 2018, having been at 18.9% in the 2002 to 2007 period, according to McKinsey's global banking review.

“The time for bold and critical moves is now,” Joydeep Sengupta, a Singapore-based McKinsey senior partner, said. “History tells us that 40% of the top banks today will drop to the bottom half of peers in the next cycle. Moves made today, be it to build scale or restructure business models, will have a defining role in combating the probability of that slide.”

The rapid development of online payments challenges the traditional banking model – and in China it is a huge business, not just because of the country's vast population but also due to the fast rate at which the technology is being embraced. The Chinese mainland is now the single-largest contributing country to global online payment revenues, with an annual growth rate of 10% compared with 6% in the US, McKinsey estimates.


To date, it hasn't been an easy market for non-domestic players to compete in. However, they too are now sniffing around.

China reported last week that Payoneer, a payment network of MasterCard, is seeking a payments license in China. If it succeeds, it will be the second major foreign name to enter the market after PayPal acquired local payments company Gopay in September.

For these new overseas participants, there are several things to bear in mind: “sensitivity with the regulators, and a deep understanding of the landscape and regulatory environment is essential,” Sengupta and Violet Chung, another partner at McKinsey, told FinanceAsia in an emailed reply.

For China's banks, nonetheless, it's more reason to adapt fast to the payments challenge by building out their online offering.

“Real-time payment is a way to add value to online banking channels,” Raja Gopalakrishnan, executive vice president of international banking and payment at Fidelity National Information, said. “It has the potential to help banks play a role in the consumer’s lifestyle via enhanced services made possible via the banks’ mobile banking.”

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