Opportunities galore await Chinese financial institutions, provided they learn from the harsh lessons imparted to their Western counterparts, experts say

The global financial crisis has given Chinese banks an opportunity to grab a larger share of the world's banking market, but to do so they need to improve their operating models and customer service, experts say.

Richard Lumb, chief executive of Accenture's Financial Services Group, a global management consultancy, recently told journalists in Beijing that Chinese banks must standardize their internal operating models to reduce bureaucracy, offer a wider range of customer services and improve technology if they are to capitalize on the retreat of Western banks that has taken place in recent years.

"Differentiation and simplification is a journey that we believe Chinese banks need to go on," he says. "Most of the banks in China are undertaking different types of activities loosely connected with those principles, but we believe the new operating models will require greater focus on them."

Chinese banks are behind their Western counterparts in terms of customer segmentation and customized services, says Sushil Saluja, senior managing director of Accenture's Financial Services group in the Asia-Pacific.

But he is glad to have seen Chinese banks' shift toward operating models and best practice in operating models based on simplification inside the bank and differentiation outside, and emphasizes a need to focus on the needs of individual segments of customers.

Saluja says that as the world's banking industry is in transition, what Chinese banks should do is "absorb and improve some of the innovative and transformational concepts and ideas generated at home and abroad and put them into practice".

"There is a lot of opportunity for back-office standardizations and simplification across the Chinese bank industry to take costs down and to release pressure on the profits," he says. "There are a lot of opportunities for the use of new technology, like mobility and the Internet in general to reduce cost and distribution in marketing."

Saluja adds that there are some good parallels with manufacturing. For example, a car manufacturer may produce six or 10 different models of a car but only have two or three different chassis, and then sitting on the two or three different chassis will be six to 10 different car bodies. The wheels will be standardized across all cars, as will most of the components.

"That's an example of how we see manufacturing being able to differentiate products and services they provide to their customers, while standardizing the manufacture and the components that go into those."

Saluja comments favorably upon the fact that Chinese banks effectively have two operating models, one focused on domestic operations, again differentiated on the outside and simplified inside. The second is a standardized operating model used in each of the major international markets in which Chinese banks operate.

To better realize differentiation and simplification, technological innovation is also vital to Chinese banks, he says.

Saluja adds that innovation has historically been focused on products and manufacturing tangible items, but he is now seeing the emergence of a new form of innovation centered on customer service and the ability to differentiate the way financial services companies meet the needs of their clients by using different channels and products as well as integrating the two.

"For us, things like mobility represent the beginning of the next wave of innovation that we'll see in financial services. And we see China as the heart of developing some of these new innovations that will take place across the world."

Liu Ligang, chief China economist at ANZ Banking Group Ltd, agrees.

"Faced with more and more fierce competition, it's critical for Chinese banks to make full use of innovative technologies such as social media and mobile technology to increase customer intimacy and develop their payment business," Liu says.

Accenture's Lumb says that Chinese banks will continue to outshine their western counterparts, as the global financial crisis has weakened Western banks' performance and has created a great opportunity for Chinese banks to develop their business both domestically and internationally.

In 2011, banks in the Chinese mainland accounted for nearly one-third of total global profits, and this phenomenon could be repeated in the next few years as they are so strong, he says.

Chinese banks accounted for 29.3 percent of total global profits in 2011, up from 4 percent in 2007. Meanwhile, eurozone banks account for just 6 percent of total bank profits, compared with 46 percent in 2007, according to a global survey of 1,000 banks published in the British magazine The Banker.

Lumb says that many Western banks are withdrawing from or shrinking their business in international markets to focus on local markets due to post-crisis regulatory changes, which makes it harder for them to make profits. Some Western banks have even spent billions of dollars to adapt to the stricter regulations.

He says that before the crisis, most Western banks' return on equity was more than 20 percent, but now the average is 7 percent.

"In the short term, clearly we see a huge shrinkage in business in the West, maybe 200,000 jobs have been lost in the banking industry in London," Lumb says, pointing out that the United Bank of Switzerland has withdrawn from the international investment industry and French banks such as BNP Paribas Euronext and Societe Generale are reducing their business in Asia to concentrate more on their local market.

"Their aim at present is to reduce cost and to strengthen profitability, instead of expansion," he says.

Moreover, the uncertainty surrounding the economic outlook in the West provides more opportunities for Chinese banks.

"Many Western banks are less confident about making decisions and doing different things. That's part of the reason why Chinese banks can grow significantly externally, and also domestically have the opportunity to leapfrog their Western counterparts," Lumb says.

He says that the areas in which Chinese banks can have superior capabilities to Western banks include customer acquisition, customer management and retention.

"First of all just the scale of customers in China is very different to what most Western banks are used to dealing with. A large bank in the UK might have 50 million customers and here the Bank of China's got 260 million customers," Lumb says.

On top of this, Chinese banks are taking on new customers at a far greater rate than Western banks, which in general have a stagnant customer base.

A third reason is that Western banks are encumbered with legacy infrastructure in branches and a way of doing business, whereas in China Lumb thinks there is more opportunity for new distribution technologies the use of mobile phones, for example, to reach new customers.

He says that Chinese bank regulators should learn from the Western bank industry and be more careful about stimulating and running the economy, and consider why they got into trouble with the credit bubble and the financial crisis.

Liu Ligang with ANZ Bank says that China's banking system could benefit from regulatory reform that would allow greater competition to emerge and drive an improvement in operations and services.

The biggest challenge for Chinese banks domestically is rising competition from non-bank financial institutions and managing rising risks from interest rate liberalization, he says.

"Externally, Chinese banks will need to manage their international expansion to serve Chinese firms that are rapidly going abroad. The lack of talent to manage such a rapid expansion will be a challenge for Chinese banks expanding abroad."

Lumb believes that in the domestic market Chinese banks face no immediate threat from international competition, and their challenge will depend on the strength of the Chinese economy.

Contact the writers at chenyingqun@chinadaily.com.cn and huhaiyan@chinadaily.com.cn

(China Daily 02/22/2013 page16)