Abstract: The development of the industrial internet brings both opportunities and challenges to the digitization of financial institutions. More importantly, banks need to update their organizational structure, business models and corporate culture to keep up with the internet thinking, and forge a sound ecosystem for open banking.
I. The development of the industrial internet offers new opportunities for banks' digitization.
Compared with retail business, corporate banking business has been making slower progress in China, which is closely related to Internet’s development in the country.
Over the past two decades, the internet has linked online platforms and individual consumers, and the emergence of Internet+ has improved services and enabled quick deliveries of products and services to consumers. This is known as the B2B2C model, i.e. business (product or service providers) to business (e-commerce platforms) to customers, which is gaining momentum right now.
The digital economy has entered a new stage with the emergence of the industrial internet. By connecting businesses across various sectors, factories or components within a business, the industrial internet empowers highly efficient delivery of products and services that meet the consumers' demand.
With the large-scale commercialization of 5G and the development of the internet of things (IoT), processes at all factories will be digitized, including placing orders, warehousing, invoicing and operations. This development will also offer opportunities for the digital transformation of banks. Combination of the two will creates huge possibilities for new business models.
Universal access to credit has only helped meet demands for loans of small amounts; Many small and micro enterprises (SMEs) actually need much bigger amounts, i.e. over 5 million yuan, or even 10 or 20 million yuan. Due to the non-standard nature of corporate banking business, current risk control models based on big data are not well-suited for making lending decisions to the SMEs.
To help SMEs survive and thrive, we must develop supply chains. Supply chains are actually part of the industrial internet, and its integration with finance is expected to eventually solve the financing problems faced by small and micro enterprises. Of course, both online and offline services will be used. There are now many leading industrial internet platforms that have in-depth understanding of the upstream and downstream companies along the supply chain as well as access to comprehensive data such as the warehousing, logistics and distribution of these companies. Therefore digitization of financial institutions should be embedded into future development of the industrial internet and help breed industrial platforms.
With such integration, financial institutions could play a bigger role. Based on clients' data such as their transactions and the equipment they owe, FIs could use intelligent methods to advise the businesses on their production and operation, including how to manage manpower, resources and capital. For example, they could give big data-based advice to dairy farmers on the preferred scale of their cow business, and the manpower and technologies needed, which would help the farmers' improve efficiency and achieve the economy of scale and make good use of money. This shows new service models based on deep integration of finance and the industrial internet are very promising.
The integration of the industrial internet and finance not only provides solutions to the management of credit, payments and settlements, account and funds, but also helps businesses upgrade their production and operations for greater efficiency. It offers comprehensive solutions based on a wide range of online and offline products and services, and embodies a rich variety of financial service concepts including inclusive finance, microfinance, industrial finance and comprehensive services, etc. With these features, it provides a sound basis for banks to standardize their corporate business.
In summary, integration of the industrial internet and finance is a major direction of the digitization of the banking sector. It brings both opportunities and challenges.
II. Banks need differentiated strategies in their digitization
Each bank has its unique advantages, culture, history and customer base, therefore it is necessary for them to adopt tailored strategies and measures to realize their own transformations.
For example, community banks in the United States are rather developed, but they did not refuse to embrace the digital trends. Instead, they have combined the online and offline models, and gradually transformed offline sales outlets into experience sites where they show their products to customers.
Many large banks offer a comprehensive set of products services which small and medium-sized banks do not enjoy. Therefore, these smaller banks need external help to promote their digital transformation. Large banks, though capable of doing almost everything independently, will also need to adapt to the trend of open banking.
Developing open banking is not just a matter of technology investment. More importantly, it needs to find a path for transformation. Banks need to know their weakness, seek cooperation accordingly, share technological and data resources and related costs, realize complementary advantages, and explore sustainable business models.
III. Build an open banking ecosystem
Banks not only need adequate R&D investments to support their digitization; more importantly, they have to develop proper, customer-oriented philosophies, governance structures, organizational structures and service models. In this regard, they are actually facing much bigger pressure.
Banks today are caught in a dilemma where their organizational structures, business models and corporate cultures have failed to keep up with the internet thinking. The internet culture features openness, equality, innovation and sharing; in contrast, the organizational structures of big banks largely remain traditional, conservative, hierarchical and standardized. But this runs against the innovative internet thinking and the new trend of digitization. That's why I suggest banks adjust their business models, reorganize their structure, and build an open banking ecosystem.
The fundamental change that open banking brings is that banks will provide financial products and services based on more open scenarios rather than doing it on their own behind closed doors. It’s far from enough if they only develop scenario-based retail business with existing products; instead, they need to build an open banking ecosystem to do cross-marketing and provide cross-channel, cross-platform services. To that end, all banks, big or small, need to adjust their business models.
However, building open banking involves many issue, e.g. how to ensure the security of underlying data shared among partners, where is the boundary of data sharing, and how to share data properly. We need to step up formulating unified standards and security regulations to facilitate the sound development of open banking.
