2012 china financial industry trends and outlook

Webinar: A look at the Top-10 China Financial Technology Trends for 2012

January 18th, 2012 - 17:00 – 17:45 Beijing Standard Time

Moderator:Laura MitchelsonKapronasia Marketing

Presenter:Ken DingKapronasia Research

The webinar will start in a few minutes.

For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: [email protected]. Twitter: @chinafintech

A look at the Top-10 China Financial Technology Trends for 2012

Prepared by Ken DingJanuary 18th, 2012

Methodology

• Findings based on

• Secondary research - internal knowledge, government, vendor and financial institutions’ reports.

• Primary research – Interviews with FIs, vendors and industry experts.

• Report purpose:

• Identify China’s top financial technology trends for 2012

• Explore the current situation

• Evaluate the potential opportunities

• Forecast what will happen in 2012

China’s Financial Market Situation

• Economy growing; banking assets growing

• 5 year demand for trade finance and international settlement will remain strong

• Slowing pace of credit lending and non-performing loans are expected to remain risk factors to continued growth

• China’s financial market will continue to reform; 12th Five-Year Plan: “financial institutions need more business innovation”

12th Five-Year Plan period : from 2011 to 2015

Financial IT infrastructure Outlook

• Continued reforms -> pushing banks to invest in IT infrastructure

• Overlooked opportunities from small and medium banks

• Local vendors are more familiar with market, more competitive; localization for foreign players is important

$8.9$10.3

$12.2

$14.5

0

2

4

6

8

10

12

14

16

2009 2010 2011E 2012E

US

D b

illio

n

Chinese banking industry IT spend, 2009-2012

Bankcards include credit and debit cards

Source: Kapronasia, PBOC 2010

Top-10 China Financial Technology Trends for 2012

1. EMV Migration

2. Online Banking

3. Mobile Banking

4. Core Banking

5. Risk Control of Chinese Banks

6. Cloud Computing of Banking

7. Virtualization of Banking

8. Supply Chain Finance Technology

9. Mobile Near Field Payment

10. IT Construction of Securities Companies

Trend Number 1: EMV MigrationTrend Number 2: Mobile Near Field PaymentsTrend Number 3: Supply Chain Finance Technology

EMV Migration – Overview

Overview of China’s EMV migration

• Moving from traditional magnetic stripe bank cards to the smart chip bank cards (IC card)

• Key task for the industry detailed in China’s 12th Five-Year Plan period;

• A national PBOC 2.0 standard, similar to EMV, but not the same

Advantages of IC cards over traditional bankcards

• Higher security

• More functions and better user experience

PBOC: The People's Bank of China

EMV Migration – Card Usage

Card usage continues to grow as more cards are issued and used in place of cash -> shift from a traditionally cash based society

$475$626

$1,089

$1,656

$2,608

0

500

1000

1500

2000

2500

3000

2007 2008 2009 2010 2011E

US

D b

illi

on

China's Bankcard Consumption Transaction Value

Bankcards include credit and debit cards


EMV Migration – Number of cards in market

Nearly 2 Cards / person in China, which still lags behind western markets where 3-5/person is typical -> more cards expected

1,500

1,8002,066

2,415

2,820

0

1,000

2,000

3,000

4,000

2007 2008 2009 2010 2011E

Mil

lio

n

China’s Bankcard Volume in Circulation, 2007-2011


EMV Migration – Migration to IC card progress

Government mandate pushing issuance@

9

29

0

5

10

15

20

25

30

35

2010 2011E

Mil

lio

n

PBOC 2.0 IC Cards in Circulation, 2006-2011

Only 1% of total bankcard circulation in 2011 -> a large number of cards still need to be converted


EMV Migration – Migration Timeline

@but implementation still behind -> many more IC cards still to be issued

Jun 2011 – the five large commercial

banks start issuing financial IC cards

Jan 2013 – all nationwide

commercial banks begin issuing financial

IC cards;

Jan 2015 – All RMB settlement should be

in the form of financial IC cards 900 million IC

cards to be issued by the end of 2015

Today – 29M IC Cards

EMV Migration – Opportunities

EMV Migration offers opportunities for all players along the value chain

Player Opportunity

Card producers

Large commercial banks will be the main consumers of financial cards.

Terminal Producers

Aside from updating current POS terminals and ATMs, CUP or banks need to purchase new POS and ATM terminals every year

Software VendorsSoftware update and end-to-end EMV migration solutions for banks

Mobile phone near-field payment – Players / Value chain

Mobile payments nascent in China, but the value chain complex

Two types of Mobile Payments in China:

1) Remote Payment: Through SMS, Internet or “remote technologies” on mobile phones

2) Near Field Payment: “Proximity technologies” NFC, RFID, Bluetooth, and IrDA; phone swiped at POS

CustomersMobile phones

Terminals

Merchants

4 Main Players

CUP

Operators

3rd parties

Banks

Typically partner

Technology

Phone vendors

Hardware Providers

SoftwareProviders

Operators’ network

Mobile near-field payment – Standards

2 competing standards; national standards not yet set

Standards have not yet been defined leading to many competing business and technology models

13.56MHz

• An international standard

2.4GHz

• An independent standard developed by China

Will likely co-exist in future

Various technology models are available in the market

NFC based Others

�SD-NFC�SIM- NFC�NFC phones......

�Stickers�Barcode�BluetoothLL.

Mobile near-field payment – Business Models

Nearly every player has adopted a different business model, some more successful than others

CUP Dominant

3rd Party Dominant

Cooperative

Operator Dominant

CU

P (

Ban

k)

En

gag

em

en

tL

OW

H

IGH

LOW HIGHOperator Engagement

User CUP MerchantBank

User 3rd Party Merchant User Operator Merchant

High Success

Medium Success

Low Success

Operator CUPBank

3rd Party

Mobile near-field payment – Opportunities

Although the market is developing rapidly, there are still opportunities for fintech vendors

Software and Hardware IT

vendors

Issuing and acquiring systems

Transaction processing systems

Application development and risk control

Added-value services such as BI and loyalty plans

End-to-end software solution vendors

Terminal production and distribution

Maintenance and innovation

Supply Chain Finance Technology – Overview

Supply Chain Finance (SCF)

• Bring together information – provides all the parties in the supply chain insight into what is happening

• Efficiency – optimize working capital throughout the end-to-end supply chain

• Key for Chinese companies as economy and trade grows

$792 $956 $1,133 $1,006$1,395

$1,743

$969$1,221

$1,431$1,202

$1,578

$1,899

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006 2007 2008 2009 2010 2011

US

Db

illio

n

China’s Import & Export, 2006-2011

Import Export

Supply Chain Finance Tech – Driven by Internationalisation

A strong economy and recovering trade is driving the need for more accurate insight into supply chains

• Advance of RMB Internationalization

$571$79,365

$330,159

0

200,000

400,000

2009 2010 2011

US

D m

illio

n

China's Cross-border RMB trade settlement, 2009-2011

Source: Kapronasia, PBOC 2011, : National Bureau of Statistics of China, 2011

Supply Chain Finance Technology – Complexity

Increasing financial regulation is making it difficult for corporations and especially small and medium sized enterprises

Customers SituationBenefits of better Supply Chain

Finance Technology

Corporations

• Flanked by liquidity-strapped suppliers and demandingcustomers

• High cost of funding • Challenges on efficient working

capital management

• Extend credit terms w suppliers• Enhance ability to control risk • Ease working capital• Support sales growth

Small / medium

enterprises (SMEs)

• Tight liquidity • Great trouble in financing• Struggling for survival

• Address credit and funding needs

Supply Chain Finance Technology – Banks

Banks are a key component of better supply chain management and are increasingly starting to offer tailored solutions

Banks Situation

Local commercial banks• Start paying more attention to trade finance business• Offer basic supply chain financial services• Still in infancy – only focus on large-scale enterprises

Foreign banks• Increasing customer demand – both domestic and cross-

border• Standard Chartered, Citi, others – heavily entrenched

Needs• Needs to be flexible, compatible and operate seamlessly with existing systems• Integrate many financial products & services on a single end-to-end platform• Control risk yet offer more added-value services

Difficulties

Inside:• Lack experts on SCF, both from

business side and technology side• High cost• Time-consuming

Outside:• Industry is still nascent - few

opportunities to learn• Weak local IT vendors - few mature

SCF solution products

Strategiesbanks are taking to address

difficulties

Inside:

• More money is being spent on updating SCF platform - such as online SCF and cross-border services

• More research on SCF technologies

Outside:• More communication- join more

conference or events• More contact with international vendors

Supply Chain Finance Technology – Challenges

Domestic banks still face challenges in implementing solutions

Report Availability

• Pre-release link to be sent to all webinar registrants

• General availability by end of January

• Will also be available on:

– www.kapronasia.com

Webinar: A look at the Top-10 China Financial Technology Trends for 2012

Moderator:Laura MitchelsonKapronasia Marketing

Presenter:Ken DingKapronasia Research

For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: [email protected]. Twitter: @chinafintech

Questions and Answers