New entrants pose tough challenges to established financial sector players

Players in the fast-evolving digital finance arena will compete on the four "commanding heights" of applications, infrastructure, platforms and channels, and traditional financial institutions need to develop a new mindset to compete, according to a report released on Thursday by The Boston Consulting Group.

Digital finance, the most vibrant segment of China's financial services industry in the past year, has experienced an influx of new competitors including Internet companies, emerging digital finance operators (peer-to-peer lending, crowdfunding and vertical search providers), telecom carriers and infrastructure vendors.

They all pose a challenge to the longstanding dominance of conventional financial institutions such as banks, insurers and securities firms.

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BCG interviewed 40 executives at established domestic financial institutions, and it found that during the past 12 months, those executives' attitudes toward digital finance have shifted from doubt and even contempt to apprehension and anxiety.

"It is very stressful to compete with Internet companies. Guided by the venture capital idea, they allow for a trial-and-error process, with experimentation and failure. But commercial banks have a structured innovation system that values risk and input-output measurements," said one banker cited in the report.

"Our e-banking department is designed to be a 'channel department' in the bank. It is difficult to leverage innovations in other key departments by only working through our department," BCG was told by another banker, whose thinking is prevalent in the banking industry.

The report noted that although traditional banks have launched many initiatives in digital finance, such as e-commerce websites and P2P platforms, the toughest job is changing their own attitudes.

"Every bank knows the importance of being 'customer-centric', but in practice many products are designed out of consideration for procedural management, not customers' needs or convenience," said Tjun Tang, a BCG senior partner and a co-author of the report.

"To excel in digital finance requires a very different type of corporate DNA. We see in Internet companies that engineers drive the (whole process of) app development, testing, rapid prototyping, customer rating and improvement. Traditional banks have to foster a culture of innovation, to encourage active ideas from all parts of the organization, as opposed to top-down work," he said.

"Conventional financial institutions have realized that it is increasingly difficult to differentiate their financial products only through the innovation of the product itself. Customers only accept them when they are embedded in the customers' daily lives," the report said.

Beyond apps, traditional financial institutions must also compete with other players in infrastructure (such as third-party payments), platforms (social networking and navigation) and channels (integrating multiple channels), BCG said.

Tang gave the example of Ping An Insurance (Group) Co of China Ltd. The traditional insurer in recent years launched initiatives on various fronts. Ping An Lfex is an asset matchmaking platform consolidating the company's position in infrastructure. The Ping An Wanlitong point platform built its platform advantage, and its secondhand car sale website created an app to attract customers.

Tang noted that Ping An set up parallel digital teams and hired executives from Internet companies to launch these new ventures. Hopefully, these ventures will energize the rest of the company.

David He, another co-author of the report, said that traditional banks still have advantages that include financial product expertise, risk management, offline networks, talent and capital. As long as they react properly to the emerging challenges, digital finance actually is "a huge opportunity".