Bashusong: The trend of China's banking industry transformation in the era of digital economy

Zhongxin Jingwei Client December 29 Title: "Ba ShuSong: The Trend of China's Banking Industry Transformation in the Era of Digital Economy"

　　Author Ba Shusong (Chief Economist, China Banking Association, Executive Dean, HSBC Institute of Finance, Peking University)

　　In the era of digital economy, the transformation trend of China's banking industry has attracted much attention. At present, globalization is very differentiated, and in such a very differentiated era, the digital economy is a rare consensus that all countries are focusing on development, which is both short-term epidemic promotion and medium- and long-term grasp of development trends.

　　The digital economy is a bright spot in global economic growth

　　Judging from the relative growth rate of the global economy, the digital economy has become a rare bright spot in the adjustment of the global economy. The average nominal growth rate of the global digital economy in 2019 was 5.4%, higher than the nominal growth rate of global GDP by 3.1 percentage points in the same period; the growth rate of China's digital economy was 3.5 times the growth rate of GDP. At different levels of development, the digital economy in developing countries increased by 7.9% year-on-year, surpassing developed countries by 3.4 percentage points.

　　In the context of economic transformation, the industrial Internet, as the driving factor of production factors, stimulates the growth of the real economy by pulling ICT (informatization) and TFP (total factor productivity). According to relevant estimates, the GDP increase brought about by the application of industrial Internet-related investment and application in 2019-2024 will reach 13% of the overall GDP increase.

　　From the perspective of the development environment, the online development of life scenarios is the cornerstone of the development of the digital economy, and it has also triggered some controversies over the ownership of data property rights and interests. The online performance of life scenes is manifested in several aspects, and the traffic shows exponential growth. At the same time, online retail sales of goods maintained rapid growth. During the pandemic, online retail has supported the functioning of the economy, especially the functioning of cities. The superposition of multiple modes such as mobile payment, short video, live broadcasting, and online shopping bursts out of the business model of live streaming with goods.

　　From the perspective of financial institutions, there are some obvious progress on both the ToB side and the ToC side, which has led to the digital transformation of different customer groups in the financial market. On the ToC side, the online transformation of life scenarios has laid the foundation for promoting the full digitization of personal financial services. Mobile payment and small financial loans provide the soil for development, expanding into new areas such as intelligent investment services and digital currency. In turn, the development of mobile payment and small financial loans has created some new formats. On the ToB side, online and intelligent has promoted the comprehensive digitization of enterprise financial services. The integration of digital technology with the business model of traditional financial institutions, especially in risk management, is widely used.

　　From the perspective of data-related logic, the logic of data elements is for financial institutions, one is scene finance, which improves the availability of financial data. The second is science and technology finance, which improves the ability of financial data processing and analysis, and the combination of the two provides conditions for the transformation of financial institutions.

　　From the perspective of financial functions, the basic functions of the financial industry include resource allocation, channel basic pricing, transaction security, etc., then digitalization will inevitably derive a series of new products, new models, and new formats. These are currently in progress.

　　Exploration of the transformation of China's banking industry

　　In the process of digital transformation, China's banking industry has always been a very active body in financial digitalization, and banks have been exploring and promoting digital transformation in different dimensions to adapt to the new requirements of the digital economy for product and service models, from e-commerce and direct banking to financial technology companies and open banking.

　　The exploration of the digital transformation of China's banking industry is first of all an e-commerce platform. Its focus is to build a transaction scene and integrate it into the real economy. The bank's e-commerce platform has a credit card points mall, an access-based e-commerce platform, an independent e-commerce platform, and a self-built e-commerce platform, which is a very active exploration and effort. However, from the current assessment, the overall activity is limited.

　　The second direction is direct banking. Direct banking has no branches, and its low-cost operation model draws new customers at the same time, but also hopes to effectively reduce customer acquisition costs through this model to improve revenue. But in the case of continuous homogenization of product models, it is not easy to innovate. Judging from the progress of direct banking, since the launch of the direct sales bank of Minsheng Bank in February 2014, there have been more than 100 direct sales banks in china's banking industry. However, we have counted that from 2017 to 2019, there are only 4 direct sales banks with more than 200,000 active customers, namely Changsha Bank E Bank, Jiangsu Bank Direct Sales Bank, Bank of Ningbo Direct Sales Bank, and Guiyang Bank Shuangshuang Bank. While direct banking has indeed made progress in reducing customer acquisition costs, the differentiation is clear.

　　The third direction is the establishment of fintech subsidiaries. In general, a variety of models are used in parallel internal and external synchronization, but it remains to be seen how the profit model of these subsidiaries will be. Some large banks are involved in fintech through cross-border cooperation and by setting up subsidiaries. There are also many banking systems that have set up their own fintech subsidiaries, all of which have made positive progress.

　　The fourth direction is open banking. Judging from the current situation, banks of different sizes and sizes have adopted different models, and most of the large and medium-sized banks adopt the model of self-built and co-built ecosystems, which has the advantage of making full use of the customer and technological foundations that have been built to attract other partners to settle on their own platforms and realize the construction of ecosystems. Most of the small banks have adopted the combination of joining the mature financial ecosystem or adopting a joint model of group heating to promote open banking.

　　How to achieve a breakthrough in the digital transformation of banks?

　　From the current observation, the digital transformation of China's banking industry faces many constraints. In terms of channels, the realization of a single channel lacks scenarios, and it is difficult to accurately and efficiently reach target users. In terms of customer base, the vague focus is on 20% of the population, and the lack of refined cultivation for 80% of the long-tail customer group is difficult to adapt to changes in customer behavior. In terms of infrastructure, it is impossible to meet the needs of various financial application scenarios, and the huge market demand requires higher IT systems. In terms of the application of data assets, the dimension is single, relying on the processing of customer transaction data, and lacking more three-dimensional and multidimensional data.

　　How to achieve a breakthrough in the digital transformation of banks? We believe that there are the following directions for reference.

　　The first direction is to realize the connection of scene expansion. Connect to more scenarios, including digital ecological expansion, but also to adapt to the dramatic changes in digital survival of customer behavior. In the subdivision industry, the more segmented the market, the more there is actually a blue ocean of scenes. At the same time, it can also actively promote the specialization of vertical scenarios and provide customized, specialized and integrated financial services for subdivided industries. Carry out scene-based innovative deployment, take the scene as the carrier, and combine financial services and daily consumption behavior life scenarios.

　　The second direction is to open up new connections to the platform. First, we must enrich and upgrade the platform scenario, in the stage of scenario-based promotion, the primary goal of open banking is to cover the market, dock the core platform, and dock diversified scenarios. Second, to reduce the entry threshold, banks should select a small number of bank functions with wide applicability and mature performance to make API interfaces, and actively link mainstream platforms using scientific marketing strategies. Third, we must build a product output system at the same time, especially in the integration stage of the platform, when the bank API market is becoming more and more complete, combing the pre-transaction, transaction, post-transaction and its technical support and basic support to stabilize the market share of the industry, the bank's focus will return to its own API platform construction, forming advantageous products.

　　In the third direction, it is necessary to reconstruct the organizational structure around the factors of data production and promote the new connection of data asset management. Create a banking architecture that facilitates the operation of data assets. Banks have to deal with a large amount of data every day, the daily operation of the bank is nothing more than capital flow, information flow, so the operation management should be intelligent, to achieve the replacement of intelligent equipment; product and service data, to achieve real-time monitoring and rapid insight of customer and business information. Banks should accelerate the construction of a bank-wide data asset management platform to achieve centralized management, in-depth mining and cross-application of data assets; create the processing capacity of non-structural, semi-structured, streaming data and other differentiated data; take data sources as important strategic resources and performance indicators, and establish corresponding management mechanisms. Banks can't sit on the golden hill and still can't find its business model. At the same time, it is necessary to be open in the architecture system and improve the open output capacity.

　　The fourth direction, the technical connection of federal learning. Federated learning is an encrypted distributed machine learning technology that provides financial institutions with a joint modeling service for big data risk control that can protect data privacy, remote operation, and low-cost rapid iteration. Similar to this is privacy computing. Compared with traditional federated modeling, federated learning has multiple advantages: the data does not leave the local environment and does not disclose the underlying data, so it can be adopted, but it can also maintain privacy. Under the condition that everyone has paid more and more attention to data privacy, we can also use data, break down data silos, and promote data connection, which has a very wide range of application prospects.

　　The fifth direction is to promote the digitalization of supervision. Because financial institutions are digitizing, regulation must be digitized accordingly, including providing some relaxed environment for these innovative activities in terms of supervision, often called regulatory sandboxes, allowing financial institutions to touch the regulatory framework and do some exploration in a specific environment. At the same time, because digitalization is moving forward, more and more business is carried out on the network, and the business of financial institutions is becoming more and more dependent on the network, so network security is becoming more and more important. At the same time, there is also a very important direction in the era of digital economy, relying on The Internet business, from the very beginning, its data is open, very easy to cross-border flow. The differences in regulatory systems, legal systems and application environments faced by the cross-border flow of data put forward higher requirements for regulatory coordination, so the digital transformation of banks must also require regulatory synchronous digital transformation. (Zhongxin Jingwei APP)

　　(This article is based on Ba Shusong's speech at the "2020 China FinTech Innovation International Forum" on December 24, and has not been reviewed by me.) )

　　Bashusong

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