Download Feasibility and Restriction Factors Analysis of Personal Financial

Feasibility and Restriction Factors Analysis of Personal Financial
Services’ Development Conducted by the City Commercial Bank
LI Bing
School of Economics and Management,
Henan Polytechnic University, P.R.China, 454000
[email protected]
Abstract: The majority of city commercial banks have not fully reflected their market orientation which
is "modern citizen bank" in current operation, and facing difficulties in their development. In order
to get great progress in the fierce competition of the financial industry, personal financial services
should be a reasonable choice. This paper analyzes the feasibility and restriction factors for the city
commercial bank to develop personal financial services currently and puts forward some
recommendations.
Keywords: the city commercial bank, personal financial services, feasibility, restriction factors
1 Introduction
Based on years of rapid economic growth, residents’ personal income levels have greatly increased in
our country and more clients with certain wealth and considerable idea of investment appeared, they put
forward higher and more complex requirements on financial services. This caused various commercial
banks set foot in personal finance services which has been neglected and treated it as a new profit
growth point. The so-called personal finance services, according to China's " Provisional Measures on
commercial banks’ Personal Financial Services" refers to professional services commercial banks
provide for the individual customer with financial analysis, financial planning, investment advising,
asset management and other activities. With the comprehensive opening of our country’s banking
industry, personal financial services with good development prospects and high potential profit, become
competition focus of domestic banks and foreign banks. As "modern citizen banks", the city commercial
bank’s main customer group is urban residents naturally. Therefore, seizing the opportunity to develop
personal financial services should be a better choice for the development of the city commercial bank
with strong regional limitations. Following are brief analysis of the feasibility and restriction factors for
the city commercial bank to carry out personal financial services currently.
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2 Feasibility Analysis of the City Commercial Bank’s Personal Financial Services
2.1 Considerable advantages for the city commercial bank to develop the personal finance services
(1)The Location advantage.The City commercial bank is generally located in regional center city
which economy is more developed and active, and both the resident’s family and individual holdings of
financial assets are to a certain scale, so they have internal financial management needs, thus causes the
city commercial bank have a potentially more solid customer base in the development of the personal
financial services.
(2) Information superiority. On one hand, as based their management mainly upon the city, so the city
commercial bank have pretty good geographical advantages over large banks’ branches with access to
the client’s information. In addition to gaining financial indicators through open channels that reflect
clients’ income, creditability, etc, the city commercial bank can also get some "soft information" related
to clients’ changes in revenue levels or financial needs through extensive relationship networks. These
soft information can’t be easily obtained through open channels and can be used as effective
supplement to financial indicators to improve the "asymmetric information" status between the bank and
their customers to largest degree, and reduce operational risks and costs; On the other hand, city
commercial banks’ operating scale are generally smaller, they have the status of legal entity, their
organizational structures are highly flat and management levels are relatively less, so the transmission of
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information is more rapid, and the decision-making chain is shorter. Thus, the bank’s responses to the
customer’s changing needs of financial management are more sensitive and the decision-making are
efficient. All these enable financial management staff provide more human, caring and effective
financial services.
(3)Network advantage. As one of the local enterprises, the city commercial bank was demanded to
operate only in the city since its establishment. Coupled with its largest shareholder, the local
government, the city commercial bank usually sets up branches not only in the city’s more prosperous
and more convenient golden zone, but goes deep into blocks and communities. So its network is
superior to the local major banks, this is more convenient for customers to conduct transactions, and is
also helpful for the bank to promote its financial products and provide more suitable, more human
services.
2.2 The city commercial bank’s overall strength has been greatly enhanced, social credibility has
been improved
After more than 10 years’ developing, the city commercial bank’s profitability had been significantly
improved in recent years, the average profit margin of the city commercial bank rose to 0.65% in 2005
nationally, nearly half of them could be more than the regulatory standards--0.6%; their total assets had
reached 2.04 trillion Yuan at the end of 2005; the quality of assets had been marked improved, the bad
credit rate dropped to less than 10% in 2005, 11 city commercial banks achieved excellent standard;
70 city commercial banks released their annual financial reports and the information releasing quality
had significantly enhanced. So the bank’s social image and credibility are greatly improved. This laid a
good foundation for launching personal financial services.
2.3 The rising of the resident’s income levels with the high-speed economic growth
Based on the relevant statistical data, we can see that the per-capita disposable income of urban
residents after deducting price increasing factor increased by 10.4 percent at the end of 2006 than the
end of 2005, reached 11,759 Yuan, and at the same period, the balance of savings deposits of urban and
rural residents was 16.1587 trillion Yuan, urban residents’ per capita disposable income after deducting
price factors grew by about 13 per cent in 2007. These figures show that with the sustained and rapid
economic growth, China's individual disposable income has also increased. Accordingly, the resident’s
needs of financial services had transferred from traditional unitary savings business of the past to high
level financial services such as investment advising, their financial assets held are not only confined to
savings, but to stocks, funds, bonds, foreign exchange and other kinds. Yet, most residents are lack of
knowledge of these financial products, the faster tempo of life and heavier work pressure also make
them have no time to attend to preserve and increase the value of existing assets. This is the very field
the city commercial banks with a community nature could find.
2.4 Changes in the age structure of population
In accordance with international standards of the ageing of population, China has entered the stage of
ageing and the ageing process has accelerated continuously. It is estimated that by 2014 China's total
number of the elderly (aged 60 and over the age of 60) will exceed 200 million; in 2026 will be more
than 300 million. The ageing of the population will generate enormous pressure to economic
development and the social security system. At the same time, the aged also have their special needs of
financial products. Because of the uncertainty of future expenditure, the aged generally more concerned
about the liquidity and security of assets, their investing philosophy become more conservative and
cautious. For the reality of our imperfect social security system and the capital market system, the old
people generally have higher tendency of savings. Currently, financial products designed by all
commercial banks special to this ever-expanding group are very little. The city commercial bank with
the "location" advantage will have a more prosperous future for developing personal financial services
aimed at this increasingly larger group through market segmentation and financial product innovation.
2.5 Continuous improvement of the social credit collection system
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The firm’s and individual credit collection systems are the main body of the social credibility system,
which is the foundation of preventing financial risks and safeguarding the modern financial system’s
normal operation. Since 1999, the People's Bank of China approved to make experiment on individuals’
credit collection in Shanghai, the construction of our country's social credit collection system has gained
some achievements. In early 2004, the People's Bank of China organized commercial banks to build a
nationwide unified individual credit information database, which is a credit data information sharing
platform for all commercial banks. This database went into formal operation in January 2006, up to July
2007, and the database has included more than 560 million people’s credit records. This will help
commercial banks raise their efficiency, effectively guard against credit risk, design and provide the
client with appropriate personal financial products and services based on the comprehensive grasp of
customers’ credit information.
2.6 Related industries involved in personal financial services developed and matured continuously
Personal financial services is a more comprehensive business involving cash, deposits and loans,
stocks, bonds, funds, insurance, foreign exchange, real estate, trust, and other financial tools, it covers
accounting, asset assessment, financial analysis and other related industries. At present, industries and
corresponding management approaches matched to various financial products in our country are more
and more mature, this will provide the city commercial bank with more convenience and security to
develop effective personal financial services.
2.7 Supporting from the government and the policy
As the local bank, the city commercial bank’s support to the local economy is an indispensable link
for the local economy to achieve sustainable development. At the time of its establishment, the largest
shareholder of the city commercial bank is the local government in general, so its development is also
related to the immediate interests of the local government. Therefore, the local government and the
financial sector usually offer preferential policies and more business support to the city commercial
bank, such as the network settings, the replacement of bad assets in order to help defuse financial risks
and reduce the burden of the city commercial banks. In addition, China's existing financial institution
system is not lack of large banks, it is precisely lack of small and medium-sized ones including city
commercial banks. Therefore, raising the competitiveness of China's small and medium-sized
commercial banks is an important strategy of China’s banking reform and opening up. So, the China
Banking Regulatory Commission promulgated the “Outline Program for Regulatory and Development
of the City Commercial Bank” in November 2004 after analyzing problems faced by city commercial
banks in their development and supervision. The program drew up a series of rules in strengthening
supervision, risk management, intensifying internal control mechanism, and other aspects, it provides a
policy support for city commercial banks’ sustainable development.
In addition to the above analysis, there is one point should be mentioned. The city commercial bank is
being attacked by four major state-owned commercial banks and joint-stock banks and foreign banks,
but on the whole, domestic personal financial services is still in the initial stage at present, products
domestic banks launched are of strong homogeneity and unitary variety, foreign banks had just received
the "national treatment", their distribution of networks are limited. The three parties’ competition mainly
focused on customers with high level of income, so competition of personal financial services in the
high-end market is fiercer. Thus, the city commercial bank with small scale should explore and meet the
local potential small and medium-sized customer’s financial needs, gains the ascendancy in the
lower-end financial services market that is not exactly full competition, especially underdeveloped
regions foreign banks have not yet entered.
3 Restriction Factors of City Commercial Banks’ Development of Personal
Financial Services
3.1City commercial banks’ own reasons
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(1) Adequate attention has not been given to Personal financial services, the market orientation is
fuzzy. Although the city commercial bank has determined its market orientation as "serving the local
economy, the small and medium-sized enterprise and the urban resident" since its existence, but with the
limits of existing system, concepts and policies, quite a number of city commercial banks did not reflect
its real operating characteristics in line with this market orientation in their operation. Its market
orientation is fuzzy, it paid insufficient attention to intermediate services including personal finance
services and is lack of the urgency and initiative for services’ conducting.
(2) Has not really established a customer-focused service concept and lack of market segmentation.
At present, most city commercial banks are still operating with the traditional concept of
"banking-center" or "product-center", focusing on businesses and neglecting the customer’s needs and
value. Its market segmentation on the personal financial services is not good, divisions of high, medium
and low end customers are unclear, customer structure is irrational, and customer management is more
chaos.So they haven’t got a long-term, stable, mature customer base, and therefore, the targeted and
differentiated products and services are scarce.
(3) Products are of unitary variety and marketing is inadequate. Due to the more support from the
local government, the city commercial bank lives in clover for a long time. This led its range of products
mainly concentrated in deposits and loans, products are of unitary variety and lack of features for most
city commercial banks; Be enslaved to the lower level of science and technology and the quality of
personnel, the city commercial bank hasn’t a clear product positioning and development strategy, the
ability of product innovation is infirmness. Coupled with the inadequate financial market and customer
segmentation, the bank could not launch targeted, effective marketing, the market competitiveness is not
so strong.
(4) Lack of technology and personnel support. With the continuous development of business, the city
commercial bank had rebuilt its business system already, but the overall operational support system has
not been fully established. Particularly, technologies supporting the service, marketing, security and
other aspects are poor, the overall level of electronic and internet-based service is lower, and the
difference of application level is also larger. Many city commercial banks haven’t offered services of
Internet banking, telephone banking, mobile banking, and etc. IT support to the field of personal
financial management is inadequate.
Personal financial services should provide comprehensive customer services, there must be higher
quality personnel with knowledge of business and financial expertise. On the whole, the quality of the
city commercial bank’s existing staff is generally low, highly qualified personnel especially versatile
ones with professional education and specialized in personal financial services are especially lacked.
According to a sample survey made by relevant departments in 2004 on 20 city commercial banks, the
ratio of the staff whose first degree was bachelor in city commercial banks was 5%, the ratio of staff
with intermediate and senior title was 8 %, the ratio of the staff whose major was finance and economy
was 26%, so the high-end professional is in a serious shortage situation. A lot of the staff does not
possess comprehensive knowledge of the common financial assets such as stocks, bonds, insurance and
funds. They are lack of own analysis and understanding of macroeconomic policies and micro-economic
operations, so they haven’t got the ability to provide specific customers with financial management
plans made to measure. Moreover, the majority of city commercial banks belong to local financial
institutions, the developing space is relatively limit, so it is difficult to attract the genuine high-end
talents, this made a low level of duplication of the old and new staff. Lack of talents is the critical factor
constraining city commercial banks to develop personal financial services.
(5) Low level of risk management. This problem is one of the major obstacles restricting city
commercial banks’ development for a long time. Although after more than 10 years’ development, there
are many problems remain in city commercial banks’ risk management. Mainly demonstrated by the
followings: have not established a sound risk management system, risk management activities are
relatively concentrated in the traditional areas of credit; risk management technologies are backward,
risk identification and property assessment capabilities are poor; information system needed by risk
management is inadequate risk management personnel is lack. Under the situation that China's
market-oriented reform of interest rate continues to accelerate, the banking competition has become
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increasingly intense, the lower level of risk management makes city commercial banks lack a solid
foundation in expanding the personal financial market and developing products.
3.2 External restriction factors
(1)The restriction of the Segregated operation policy. Mixed operation is the trend of western
financial industry’s development, but at present, China's financial industry is still a strict segregated
operation. China's "Law of Commercial Banks" prohibits commercial banks from mixed operation in
our country clearly. This rule greatly related to the rectifying of financal order in 1993 that many banks
do mixed operations with the absence of self-discipline , internal risk control mechanism, as well as
inadequate external monitoring. The operation of this model is basically in line with current stage of
China's economy and the level of the financial system’s development. But with the deepening and the
accelerating pace of the financial system reform, especially in December 2006, the transition period of
China's WTO accession went to the end, the financial industry was comprehensive opening, foreign
banks and domestic banks are have the same treatment, many overseas financial groups with strength
had went into various financial fields in China, the market competition is becoming increasingly fierce.
Foreign banks have very obvious advantage in the personal finance services and this business is its
operating focus, their operation will greatly impact domestic banks on personal financial services, city
commercial banks can not spared. February 2005,the "Rules Governing the Establishment of Fund
Management Company by Commercial Banks " makes the curtain of mixed operation opened for
China's financial industry, but most unlisted city commercial banks have not be legalized. Current
restrictions on their operation make city commercial banks can not achieve in effective funds
distribution, lack of flexibility of asset management and the ability of financial innovation is poor. So it
would be difficult to provide their clients with comprehensive financial services, even so, it would only
put forward the suggestion and can not carry out actual operation.
(2) Bad credit environment at this stage will be the an obstacle for personal financial services’ launching.
Our citizens do not have a strong sense of honesty, the poor credit environment is a major chronic
illness in China's economic development. Although China's social credit collection system has already
formed to a certain scale, but loss of credit is still a widespread problem in current economic and
financial activities. The city commercial bank did not pay attention to the establishment of the personal
credit system in its past operation, and have no customer relationship management system, all these will
be a threat to the content and efficiency of personal financial services.
4 Conclusions
Based on the above analysis, if city commercial banks want to make significant progress under such
situation as the banking competition is fierce, market-oriented interest rate reforming is speeding up, the
resident’s personal and family disposable income are growing, based on the local, fully carrying out the
personal finance services should be a wise business choice. But there are still some restriction factors for
city commercial banks to develop personal financial services currently, so city commercial banks need
improve their management from various aspects in order to lay good foundation for the personal
financial services. The improvement including: clearing its market positioning practically and truly
embracing the business philosophy of "the citizen bank"; giving considerable attention to personal
financial services, enriching and strengthening the personal financial services force, setting up a
specialized personal financial services agency in the bank of relatively independent and clear
responsibilities; increasing investment to raise the bank's scientific and technological level to provide
technical support for business operations; enhancing the professional staff’s quality through systematic
learning and training, making them rich in knowledge of related fields, building more comprehensive
financial management personnel enabled to develop financial products and effective marketing to the
targeted client; establishing a refined customer-centric management system through scientific and
reasonable personal financial services market segmentation, setting up a detailed database as far as
possible to cover the whole region, dividing different kinds of customers according to relevant
indicators and designing financial management programs according to different targeted customers;
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effectively improving the bank’s ability of risk management through the improvement of science and
technology and the quality of the staff, and so on. In short, on the basis of the works above-mentioned,
making full use of existing advantages, city commercial banks should gain greater market share in local
personal financial services market as soon as possible.
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[J].The Banker.2007 7 :p120 122 (in Chinese)
[4]Wang Weidong. Seizing the retail financial market by foreign banks[J].Modern Business.2007
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