Traditional banks must innovate to counter threat from Internet finance

Robust growth in Internet finance looks set to threaten the profits of traditional banking.

Figures from the China Business News Institute show that close to 700 online peer-to-peer (P2P) lending platforms were established in China last year, a big increase from 110 in 2012. The annual trading volume of P2P businesses reached 110 billion yuan ($17.67 billion) in 2013, about 10 times that of 2012.

Alibaba Group, the largest e-commerce operator in China, said its petty loan advances, based on small businesses' daily performance, totaled more than 170 billion yuan between 2010 and this year.

"Traditional banking was hit heavily by Internet finance," said Hou Weidong, vice president and chief information officer at Bank of Communications, when attending the country's High-level Financial Reform and Development Forum at Tongji University on Saturday.

"Many small companies and retail customers obtained loans from channels outside the (traditional) banking system, which lowers banks' income from interest spreads," said Hou. "Internet finance also eats into the savings of traditional banking, which increases banks' financing costs".

In addition, Hou said good customer experiences encourage more individuals and companies to make the switch to online finance.

Hou suggested banks should strengthen innovation to fight competition from the internet finance sector.