For a more coherent and effective digital strategy, more Chinese banks will likely switch to the potentially costlier route of building their own financial technology units, away from project-based contracts with technology providers, industry executives said.
"The fintech boom in China is forcing banks to beef up their technology budget as they move to the next phase of digital transformation," Pan Guangwei, executive vice president of the China Banking Association, said at the 15th China International Finance Forum in Shanghai on Dec. 16.
So far six Chinese banks — Industrial Bank Co. Ltd., Ping An Bank Co. Ltd., China Merchants Bank Co. Ltd., China Everbright Bank Co. Ltd., China Construction Bank Corp. and China Minsheng Banking Corp. Ltd. — have established fintech units.
Pan said joint-stock banks are more likely to take the lead in establishing fintech units, due to their stronger balance sheets compared to regional lenders and more flexibility compare to the large state-owned banks.
"Chinese banks are far behind technology firms in developing intellectual property rights or attracting talent due to the traditional management system," Pan said, adding creating these units will allow banks more flexibility in innovation and budgeting.
Lin Leiming, vice president of CCB Fintech — a wholly owned subsidiary of China Construction Bank — said the banks' fintech units enjoy the advantages of support from the parent group, as well as a deeper understanding of banking services, industry regulations and licensing.
"We hope to create an efficient incentive mechanism and to stimulate internal innovation potential through the reform," Lin said.
The Chinese lender consolidated seven of its development centers and one research center into the fintech unit in April. The unit's long-term goal is to offer fintech solutions to outside parties, such as competitors, corporate and strategic clients, according to Lin.
"At this stage competition between banks and fintech companies is intensifying… but banks are rising to the challenge by launching technology units to restructure the business scope," Lin said.
However, Pan did not expect the restructuring to bear fruits anytime soon.
"It will take at least years for banks to go through the digitization process and reshape existing banking approaches," he said.
Pan believed that a key challenge for banks is how to poach talents from technology providers and other financial institutions.
"Banks are at a weak position in terms of attracting [fintech] talents from large technology firms or to retain these talents after recruiting them," he said.
As banks put more weight on digitization, Pan also warned there might be further decline in traditional jobs in the banking sector.
"It requires a balancing act amid the rise of new technologies," he said.