China: Getting to the retail banking customer

Rebalancing growth

A common criticism of the Chinese economy is that it is too dependent on being the world’s factory – relying heavily on exports to grow GDP. The government and regulators of course recognise this and in the 12th Five Year plan, which was recently approved by the central government, they listed domestic consumption as one of the top priorities over the next five years.

Actually, if you took a walk through the glitzy Plaza 66 in Shanghai though you would be hard-pressed to find someone who wasn’t consuming and consuming very conspicuously as well – buying Burberry scarves, Rolex watches and that Chinese favourite: the LV bag. In fact recent studies from Forbes and CLSA point to the growing wealth of Chinese consumers growing both in sheer numbers and total amount spent on luxury goods.

A wealthier customer = A more demanding customer

For years, the Chinese financial industry was largely uncompetitive. There were four big banks: Bank of China, Industrial Commercial Bank of China, Agricultural Bank of China and China Construction Bank. Each had its focus customer segments that their names suggested and they largely dominated their respective markets.

When I first arrived in China years ago, to pay my rent, I had to go to my bank, wait in line, take physical money out of the bank and then walk across the street and reverse the procedure at my landlord’s bank – all in all this took over an hour, but at that time, it was the norm and customers were used to dealing with it and not complaining. Over the past five years however, the large four have faced an increasing challenge from small and medium banks (SMBs).

These SMBs, which consist primarily of City Commercial Banks, Joint Stock Commercial Banks, and rural banks, are for the most part, completely separate from the state government. Without these often restrictive government ties, the SMBs are much more nimble than their larger state-owned cousins and have leveraged this speed to really innovate and rapidly capture market share from the larger more entrenched banks.

A survey by McKinsey, a management consultancy, in the early 2000’s measured the % of Chinese retail banking customers that had a ‘switching moment’ every year as defined as making the decision to stay or not to stay with their current bank. At that time, the rate was about 20% in the US, 10% in South East Asia and only 1% in China – which meant that every year only 1 of 100 Chinese people made the firm decision to stay with or leave their bank. A survey that we did recently suggested that this percentage is now around 10% in China - clearly customers recognise that they have a choice in banking providers.

Go West

Of course the typical LV customer is not a very accurate representation of the market as a whole. On the other end of the wealth spectrum is China’s rural population who represents one-third of China’s GDP yet comprises nearly two-thirds of China’s population.

For years, the Chinese government has pushed a ‘go west’ program encouraging manufacturers and enterprises to setup factories and offices in the poorer western part of the country. More recently the government has spearheaded a number of initiatives to develop the rural banking segment, which is seen as critical for further developing the regions.

Infrastructure in these geographies is poor as compared to the cities and more developed regions. Banks that have been tasked with connecting to these consumers through rural outlets will have to establish new channels and new approaches to connect with these distant customers. Not dissimilar to the challenges seen in Africa and India, mobile banking will likely be a key component.

Conclusion

So combine a wealthier more fickle customer with a more competitive environment and the stage is set for an increasingly dynamic industry where banks cannot just rest on their laurels. In addition, the demands of expanding into rural communities will test banks’ abilities to rapidly and effectively deploy products and services to remote areas.

Throughout the rest of 2011, we will see dramatic changes in the way that banks interact with retail, rural and high-net worth clients. Differentiation will come from those banks who are able to firstly, understand their customers and then secondly, provide products and services that match their needs through the channels that they want.