Where to put your money now? Online deposits face stricter supervision

Tracy Li
The landscape of Internet banking is changing as authorities crack down on illegal financial technology firms.
Tracy Li
Shot by Tracy Li.

Chinese people tend to be savers. Where they once carried bags of money to deposit in banks, most have come to the habit of clicking their mobile phones to invest in savings products through third-party brokers.

Online deposit products have grown so fast that once diehard skeptics like Shanghai health manager Lily Li, 32, finally succumbed to the digital transformation of banking and began investing in bank wealth-management products via Ant Group’s Alipay mobile payment app.

But now she is facing yet another transformation in the industry. Nonbank, online third-party platforms such as Alipay, Tencent’s WeChat Pay and JD Finance, which once were major force in promoting bank-deposit products, have come under government scrutiny for what one high-ranking official called “driving without a license.”

Since the middle of December, the platforms have ceased to add new online deposit products and stopped selling products to new customers. Their withdrawal from online marketing was the result of what was called “attention by regulatory authorities.”

What is disturbing to authorities?

Internet deposit products sold on various platforms were mainly provided by city commercial and private banks. In order to woo investors, the interest rates of such offerings tended to be much higher than regular bank deposits.

Yingkou Coastal Bank, for instance, previously offered a 90-day term deposit on the online platform Airstar Finance that boasted an annual interest rate of 4.4 percent – almost triple the rate at the Industrial and Commercial Bank of China, the nation’s largest lender. Airstar is backed by Chinese smartphone maker Xiaomi.

To make it more attractive, Yingkou Coastal’s savings product allowed advance withdrawals and fee-free transactions.

Industry insiders attributed the sudden halt of the online deposit business, which has been surging in the past three years, to a recent speech by a senior official at the People’s Bank of China, the nation’s central bank.

“The liquidity touted by online deposit products is different from traditional savings, and such financial services offered by Internet financial firms are an illegal financial activity,” said Sun Tianqi, director of the Financial Stability Bureau at the central bank. “It’s just like ‘dangerous driving without a license’ and should be under supervision.”

Three days after the speech, Alibaba’s Alipay took the lead in removing all Internet savings offerings from its wealth management webpage. Other major platforms followed suit.

“We have made steady and orderly adjustments to existing customers and deposit businesses,” announced JD Digits, which owns JD Finance, adding that relevant products will be visible online only to existing holders and that their interest rates won’t be affected.

“In the future, JD Finance will pay close attention to relevant regulatory policies and earnestly implement them,” the platform said.

There’s little doubt that a new wind is blowing through the online fintech sector.

In November, China suspended what was hailed the world’s largest initial public offering by Alibaba’s Ant Group on the Hong Kong and Shanghai exchanges. The unexpected, last minute moratorium caught markets by surprise and signaled that China plans to get tougher on the financial technology sector, Su Xiaorui, a senior research fellow at the Madai Institute, told Shanghai Daily in a recent interview.

On the last day of 2020, the China Banking and Insurance Regulatory Commission issued a statement applauding the efforts of commercial banks to promote online deposits, saying it would help improve the efficiency of the financial services sector.

However, the watchdog did cite problems, such as inadequate compliance, imprudent risk management and insufficient consumer protection.

“Be it in the offline or online deposit business, banks should strictly implement relevant laws and regulations,” the statement emphasized.

Some smaller banks came to rely heavily on Internet platforms that generated nearly 83 percent of their deposit business, the central bank’s Sun said.

Compared with established players, smaller banks have felt greater pressure to attract new depositors but few of them have adequate means of replenishing their capital, according to Madai researcher Su.

“With fewer physical branches, these small lenders have turned to big tech firms for help, although they are usually at a disadvantage in the collaboration,” she said.

In their growing dependence on online brokers, the smaller banks failed to build strong operational and risk-control capabilities.

Where to put your money now? Online deposits face stricter supervision

To address that problem, regulators required banks to independently conduct core risk-control operations, including credit approval and contract signing, and said such business may not be outsourced.

“Smaller banks will be affected most and they must figure out new ways to help themselves, like learning to interact more with customers on their own platforms,” Su suggested.

Together with the People's Bank of China, the China Banking and Insurance Regulatory Commission said it has recently drafted documents on the regulation of the deposit business of commercial banks conducted online. The regulations will be made public “in due course,” the commission said.

People who are used to comparing and selecting deposit products on third-party platforms might be left with fewer choices, Su noted.

“In the long run, customers’ interests and rights will be better protected under the regulation,” she said.

Consumer Li said she will think twice before making any wealth management decisions online.

Instead, she said, she hopes that that similar deposit products will be made available through mainstream banking outlets. She said she would carefully review terms of deposits before making any final purchases via mobile banking apps.

Li told Shanghai Daily she has confidence in physical bank branches and their own online platforms.

Wang Hailin, an information technology worker in his 20s, shares her thinking.

He said he will buy savings product on the app of Bank of Shanghai every payday and feels more confident about that route rather than about investing via online finance platforms.

For insurance agent Liu Yingting, the policy change means that she, too, will switch from third-party platforms to banks’ own mobile apps. She said she once bought a one-year savings product on Alipay, but didn’t renew it upon expiry.

Liu said she is now diversifying her investments beyond deposit products to include funds, bonds and insurance products.

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