By the end of the first half of the year, the number of banks signed to the Bank-bank Platform of the Industrial Bank (IB) totaled at 223, consisting of more than 12,000 outlets. This number of outlets is 22 times the number of outlets run by the Industrial Bank, and is comparable to the networks run by some of the large state-owned banks. According to the planning of Zheng Xinlin, the General Manager of Institutional Department of IB, the Bank-bank Platform is still in its preliminary stages of development. “Our network will only be fundamentally completed once the number of linked outlets hits 20,000, a little bit larger in scale than the networks of some of the large state-owned banks. This network provides member banks with enormous potential to enhance their level of modernized management, enrich their product lines, explore non-local markets and boost their market competitiveness.”
Gathering Resources to Combat Constraints
The standing of China's banks can be seen from their number of outlets. The four large banks ABC, ICBC, CCB and BOC all have more than 10,000 outlets. In stark contrast, the other banks fall behind by order of magnitude. The Bank of Communications has just over 2,000 outlets, and most of the other nationwide commercial banks have only about five or six hundred outlets.
As a medium-sized joint-stock commercial bank, IB's 538 outlets have basically given it coverage in China's major cities. But where a single outlet costs about four or five million Yuan to run every year, expanding on a large scale can be an extremely costly venture. In an increasingly competitive market, IB has found opportunities in interbank cooperation, and has launched the “Bank-bank Platform” brand to provide integrated services to banking and financial customers.
Zheng Xinlin, General Manager of Institutional Department of IB, told us that: “The generation of the Bank-bank Platform has a lot to do with our experiences during the growth of the IB. During the process of our development from a local to a national bank, we realized that competition between banks is highly dependent on outlets. Banks are institutions that rely on outlets to survive. We realized that some small and medium banks lacked backbone networks in major cities, and that we lacked networks in second tier small and medium cities. Therefore, we came up with the idea of vertical integration and horizontal alliance, interconnecting outlets and acting as agents for each other.”
The concept of “complementing each other's strengths, sharing resources and mutual benefiting” forms the conceptual basis of the Bank-bank Platform. On May 13 this year, the Bank-bank Platform signed its first nationwide commercial bank, the Evergrowing Bank. The two sides signed an agreement on comprehensive strategic cooperation and business cooperation in counter interconnecting and finance portals.
People have been puzzled about the cooperation between IB and the Evergrowing Bank, which is highly homogeneous in business with IB. Looking at the banks that have previously signed to the Bank-bank Platform, 60%-70% are city commercial banks, 30% are rural credit cooperatives and the rest are village banks. Zheng Xinlin explained that: “Although we are in competition with each other, the benefits from cooperation are bigger than competition at this stage. The broader the network, the larger the effect, and this is true for both parties. Our initial partners were small in scale, but now we are welcoming more nationwide banks to our network. From our own perspective, we established this network, and we perform the clearance, data exchange and maintenance of IT systems. Since we are the core of the network, we do not worry about being replaced by other banks.”
According to the preliminary planning of the China Banking Regulatory Commission, China will promote the establishment of 2,000 village banks. This has become the new focus for the strategic development of the Bank-bank Platform. Zheng Xinlin confessed that although village banks are small in scale and offer little contribution to the growth of the network, they have huge potential for development in the future. By the end of the first half of this year, 15 village banks had signed to the Bank-bank Platform, which held a 10% market share in the agency payment and settlement for village banks.
Now, the number of outlets connected to IB's Bank-bank Platform is over 12,000. “Single member banks are not large in scale, but they come together to form a large whole. So the power of this joint collective should not be underestimated. Of course, this is only the first step in a larger league of cooperation. The key points are whether we can keep everyone in form, whether the technical level can be enhanced and whether their understanding to products is sufficient.” Zheng Xinlin analyzed, “we will provide interconnected banks with complete financial service solutions covering wealth management, technological output, financing service, agency of foreign exchange and operation of funds in the aim of becoming ‘a professional service provider for small and medium financial institutions and banks'.”
Although not all institutions are capable of establishing this kind of platform, there are still some competitors. Zheng Xinlin is often faced with the problem of losing his employees to the competition. However, in the opinion of Zheng Xinlin, IB has its special advantages as the only Bank-bank Platform in operation by a commercial bank. He said: “strengths in network technology are indispensable in establishing the Bank-bank Platform, but breakthroughs in management concepts are the key to the establishment of the platform. At present, there are three domestic banks that have intelligent property rights for their own core systems, but some banks are unable to drop their barriers and share their core technology with other-banks from a psychological perspective. But IB's management has done this.”
Value Measurement of 12,000 Outlets
It is difficult to quantify the contribution in value made by the Bank-bank Platform. According to Zheng Xinlin, the direct revenue brought by the Bank-bank Platform comes from intermediate incomes, including stable cash flow incomes like settlement fee income and agency business fee income, and intermittent cash flow incomes like information system construction and maintenance income. These revenues come from the products operated on the Bank-bank Platform. In addition to network support, IB is able to provide banks on the platform with comprehensive services in eight major areas, including payment and settlement, wealth management, technological output, financing services, agency of foreign exchange, structural optimization of capital, assets and liabilities, utilization of funds and training and exchange. There are more than 250 products available on the platform at present. “These products are the results of our own growth, and so they are able to aptly meet the demands of growing small and medium banks. Every year, we keep adding to it, and every member entering this network can use these services at the lowest cost.” Zheng Xinlin said.
Since direct revenues are mainly reflected as a form of intermediate business income of the bank, and the percentage that they represent in the overall profits of IB are by no means high. Zheng Xinlin has attempted to gauge the value of the Bank-bank Platform in other ways. He said: “if we take the difference between the amount of business done by IB utilizing outlets of other banks and the amount of business done by other banks utilizing IB's outlets, we would have to invest in dozens of new outlets to do this amount of business”. Taking finance products for example, the Bank-bank Platform has made great contributions as a sales channel. Last year, the Bank-bank Platform sold RMB 51.4 billion in finance products to small and medium banks, which is 331% of the total amount of finance products sold in 2008. By the end of the first half of this year, the Bank-bank Platform had sold a record RMB 33.75 billion in finance products to small and medium banks.
Analysts tend to perceive the value of the Bank-bank Platform from the perspective of inter-bank operations. Banking Analyst Wang Mingfei of Orient Securities told us that “on the one hand, the Bank-bank Platform can earn revenue from fees; on the other hand, it can effectively attract liabilities, enlarge the asset scale and make up for the shortage of IB in this aspect. The inter-bank business of IB is rather active from both the asset end and the liability end. From the interim report of the IB this year, interbank deposits accounted for 21.5%, over 10% higher than other banks of similar asset scale.”
Analyst Li Yamin of Shenyin & Wanguo Securities thought “in the first half of this year, the net profit of IB increased by 40.82% compared to the same period of last year. IB was able to realize a year-on-year increase in interest margin despite the 28% drop in the loan earning rate, which it did by strengthening the utilization of interbank funds by using its strengths in interbank business and seizing on the opportunity of the increasing interest rate in the first half of the year.”
In the opinion of Zheng Xinlin, the potential of the Bank-bank Platform is much greater than this. “From a strategic perspective, the Bank-bank Platform is an integration of financing resources. Its final users are bank customers. Only when they utilize this platform in depth can it be effective.” He said, “Now people are only concerned about its contribution to profit, but the comprehensive benefits of the Bank-bank Platform are hard to evaluate. Profits in China 's banking sector increase rapidly, but the development mode of simply relying on interest margins for profit is not sustainable. Once the interest rate becomes further market-oriented, the importance of the Bank-bank Platform will be more evident. What we earn are intermediate business incomes. If it is too easy to earn from interest margins, people are not going to be willing to devote more energy to intermediate business, and are not too concerned with costs. If we look at overseas banks, their offices are becoming smaller and smaller. Some even move off the street and upstairs. But the offices of domestic banks are becoming bigger and bigger. The costs of outlets will be more expensive in the future and interest margins will thin out. So, the Bank-bank Platform will be of greater significance to every bank.”
Zheng Xinlin hopes to achieve an unconventional retail transformation of the IB through the Bank-bank Platform. This may be the greatest value of the Bank-bank Platform. He said: “Now, services such as credit cards, finance, mortgages and personal business loans have large proportions in the business volume at local outlets. In the future, can we make use of the Bank-bank Platform to develop remote business? We would only need to send sales staff to the remote outlet, and we wouldn't need the infrastructure. This way we could extend our business at low cost. Services may be processed directly at village banks. This might be a new way to transform our retail business. Build a better mousetrap and the world will beat a path to your door. The CMB card is just like a better mousetrap. So it will definitely be possible for us to expand markets, develop retail business and realize leapfrog development with the Bank-bank Platform.”
(Journalist of Sanlian Life Weekly: Chen Si)