Sean Harrison looks at the potential for non-bank competitors to gain market share in digitally savvy China.

Non-bank competitors seeking to enter a sufficiently large market, with healthy margins, increasingly digital savvy consumers and a fluid market landscape providing opportunities to gain market share, should look no further than China.

The higher net interest margins in China, relative to regional peers, offers room for non-bank entrants to undercut the prices of the incumbents and still make a profit, or a least break even. In contrast, the wafer-thin margins being made by Taiwanese incumbents would make profits significantly harder to come by.

The higher net interest margins in China, relative to regional peers, offers room for non-bank entrants to undercut the prices of the incumbents and still make a profit or a least break even. In contrast, the wafer-thin margins being made by Taiwanese incumbents would make profits significantly harder to come by. Source: GlobalData

Incumbent banks in China have increased net operating income without significantly increasing their cost bases. This suggests they are successfully migrating customers onto lower-cost, digital-only platforms. For a non-competitor, this is good news, because Chinese consumers are becoming accustomed to digital-only banking.

This is helpful to non-banks because it will lower customer acquisition costs. Moreover, it will make persuading new customers to trust and switch to non-bank brands easier due to their growing familiarity with digital-only platforms.

Financial performance of top ten Chinese incumbents. Source: GlobalData

The dominance of the top 10 incumbents makes it easier for smaller non-bank competitors to take market share from a few big players than it would be if the market was fragmented with more medium and smaller players, who would be likely to defend their customer bases aggressively.

In addition, the amount of market share transfer indicates that the Chinese market is relatively fluid, with customers used to switching providers. Some of the market transfers will be down to M&A activity, but nonetheless it still indicates that there is the opportunity to gain market share.

Combined market share of top incumbents 2016. Source: GlobalData

Market share change of top three 2010-16. Source: GlobalData

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– This article is reproduced with kind permission from Verdict Financial. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo by estherpoon, Shutterstock.com

About the author

Sean Harrison

Sean Harrison focuses on retail banking issues across a range of markets, and is passionate about understanding evolving consumer needs and what this means for the impending segmentation of the industry.

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