Regulatory brake on fintech deposit products to weigh on smaller banks

By Yang Kunyi Source: Global Times Published: 2020/12/21 20:10:27

Fintech File photo: VCG

Chinese regulator's move to halt deposit products on major fintech platforms will weigh heavily on small banks, especially private ones, which rely on the third-party platforms to attract deposits. 

Fintech platforms are important source of deposits for China's smaller banks, which can use them to avert regulatory constraints on traditional banking and attract customers with comparatively higher interest rates. Out of the 19 private banks in China, 10 are selling products on JD Finance, and another four are considering launching new products. 

However, as the winds of policy shift in China, several fintech giants have been removing deposit products from their platforms at the weekend. JD Digit, a subordinate of Chinese e-commerce giant Inc (JD), said on Sunday that the JD Finance App stopped updates on new deposit products and halted future purchases of related financial products.

Other fintech companies, including Ant Group, Baidu and Tencent, have all reportedly removed online deposit services from their platforms.

Yillion Bank, a private bank based in Northeast China's Jilin Province, has launched its products with 13 fintech companies, and has retained 13.93 billion yuan ($2.13 billion) of deposits from third-party platforms, twice the amount collected at its own platform, according to the bank's third quarter financial report. 

Compared with state-owned commercial banks, private banks face tougher regulations on attracting deposits, including where and from whom they can take.

"In traditional banking, private banks are only allowed to sell their deposit products in a limited area, near where they are based," Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times. 

"But if their products are offered on third-party platforms, the products can be sold to anyone in China, wherever they are," Dong said. 

In the gray area of regulation, private banks also get to offer deposit products at interest rates nearing or even exceeding the legal ceiling. 

According to a report by The Securities Daily, the monthly annualized return offered by some private banks can be up to 7.35 percent, compared with interest rates of about 4 percent at large state-owned commercial banks. 

The high interest rate is driven by a lack of regulation as well as fierce competition among private banks for market share, and it has drastically increased banks' cost of deposits, Dong said.

"The high cost of deposits means that banks will have to offer loans at dangerously elevated level to people and corporations with weak credit to prop up their balance sheets," Dong said. "That can be especially risky for fintech platforms."


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