*This article is an excerpt with key highlights from WeBank’s recent presentation at the 2021 Knowledge Annual Conference of the IFC.
The pandemic has shoved the global economy into a state of chaos, affecting both large corporations and SMEs across nearly all sectors. However, the global outbreak has also brought opportunities to innovate financial services, propelling the rise of digital banking.
WeBank was China’s first digital-only bank established in late 2014, and has grown into China’s largest digital bank.
In reviewing the last five years of digital banking, WeBank’s growth and experience servicing the mass market in China can be summarized in the following points:
- The four critical factors make a successful digital bank - infrastructure, technology, ecosystem, and policy.
- Regulatory support and public infrastructure are key.
- Chinese digital banks have lower revenue per customer but reach profitability faster.
- Simple and intuitive design works across multiple segments for financial inclusion
These four critical factors make a successful digital bank.
When we look at digital banking in China and around the region, four key factors can enable these banks' success: infrastructure, technology, ecosystem, and policy.
Suitable common infrastructures, such as a national ID biometric usable for electronic Know-Your-Customer (eKYC), modern credit bureaus and real-time payment systems that offer twenty-four-seven services, are vital not only for enabling digital financial services but also ensuring that these products and services are offered at a manageable cost for a more sustainable, competitive environment.
Technology can further lower costs and simplify certain processes, which collectively offer a smoother and more easily understood user experience. To name just two examples: automation is streamlining traditionally disjointed manual processes in the loan application and review process; and modern technical architecture that afford scability and flexibility can help new digital banks easily, and cost-effectively launch new products to stay relevant.
Third, it is important that digital finance accompany a growing usage and development of other digital businesses. The digital footprints created by users in transportation, e-commerce, entertainment and communication ensure a rich pool of alternative data sources, as well as more channels for engagement and a higher overall rate of digital literacy.
Lastly, an enabling policy environment that supports remote forms of digital finance is needed. Clear guidance on API or open banking guidelines and effective channels for innovative projects with appropriate oversight (e.g., regulatory sandboxes) have fostered the development of many new, successful technologies and business models.
Regulatory support and public infrastructure are key.
Currently, one of the biggest challenges facing new entrants is that the cost of running a bank versus the revenue of serving underserved customers is essentially a low-margin business. For virtual banks to succeed, it is imperative that their cost structure and digital business model be enabled by suitable infrastructure and technologies. Regulators and policymakers can organize or support the development of more shared resources, such as a robust eID/eKYC infrastructure and lower-cost operating models, such as allowing for core systems to be put into the cloud.
Chinese digital banks have lower revenue per customer but reach profitability faster.
WeBank and peer digital banks operating in countries of relatively large population have an average revenue per customer figure lower than digital bank counterparts in Europe but have been able to reach profitability sooner by controlling costs. Based on our calculations using publically disclosed figures of other digital banks, the average annual cost per account for WeBank to maintain is somewhere between 5-20% of many challenger banks in Europe and one-tenth that of incumbent banks in China.
In addition to account maintenance, costs across all business operations are similarly reduced using the latest technologies. Our chatbot handles 98% of inbound questions from customers, for example.
Another major consideration is in the process of acquiring customers. Each product is designed to be deployable in multiple channels. This allows us to easily work with third-party partner platforms which embed our products and services into their channel for greater customer reach and accessibility. We have this in combination with our direct banking strategy. Both approaches employ precision marketing and don't rely on cash-based incentives to attract customers, but rather our shorter application or process times.
Simple and intuitive design works well across multiple segments and for financial inclusion.
Financial inclusion efforts in China cover a wide spectrum products that target different underserved segments. However, given WeBank's core competency as a technically sophisticated bank with no branch network, our primary product offering has targeted the mass market rather than specific niche areas. In this way, a single product might serve a combination of rural clients, urban migrant workers, and young employees with less credit history. Of course, these products strive to offer all customers a better experience and a more flexible service than what might have already been offered previously.
Given that a significant proportion of China's population has a smartphone, a nationally-issued ID, a digital wallet, and a basic bank account, the barriers to reaching a significant portion of these underserved segments are greatly reduced. While we may not yet offer any specific products for the rural market, those mass-market products are designed with including these segments in mind.
By lowering the overall cost structure, leveraging a wider range of available data sources, and designing products to be simple to understand and use by the entire population, we've been able to serve over 1.7 million SMEs and hundreds of millions of individuals. For about 60% of these SMEs who have received a credit line from us, it has been the first such product they have received from a bank.