How should commercial banks exert their efforts after the digital transformation of inclusive finance in the new stage?

Optimizing Strategies for Commercial Banks in the Wake of Digital Transformation in Inclusive Finance

Source: Ningbo Financial

On September 25, 2023, the State Council issued the “Implementation Opinions on Promoting the High-Quality Development of Inclusive Finance” (Guofa [2023] No. 15), which clarified the guiding ideology, basic principles, and main goals for promoting the high-quality development of inclusive finance in the next five years. Among them, the key points are optimizing the products and services in the key areas of inclusive finance and promoting the development of digital inclusive finance. These points provide guidance to commercial banks.

In recent years, in order to fully implement the decisions and arrangements of the Party Central Committee and the State Council, Ningbo, as a demonstration zone for high-quality development and common prosperity construction in Zhejiang Province, and a national reform pilot zone for inclusive finance, has continuously promoted inclusive finance to promote common prosperity and effectively improve the coverage, accessibility, and satisfaction of inclusive financial services. As of the end of 2022, there were nearly 500,000 small and micro enterprises and over 700,000 individual businesses in Ningbo, accounting for more than 95% of the total market entities in Ningbo. As the most dynamic and creative group in the market economy activities in Ningbo, small and micro enterprises, individual businesses, and other inclusive groups are undoubtedly important pillars for employment and tax revenues. Solving their difficulties in financing and the high cost of financing and breaking through the constraints on their development have long been topics explored by financial institutions.

With the rapid development and extensive application of the new generation of information technology, major commercial banks have continuously deepened reforms, strengthened technological empowerment, and laid out digital transformation and development. The development concepts, service methods, management models, and competitive landscape of commercial banks have undergone profound changes, especially the “digital empowerment,” which has brought new development opportunities and challenges to commercial banks.

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01 Exploration and achievements of digital transformation in inclusive finance by commercial banks

The inclusive groups have characteristics of “large quantity, small amount, wide coverage, and dispersion.” There are generally problems of financial management irregularities and lack of effective collateral, which leads to high investment, low returns, and high risks for commercial banks in carrying out inclusive finance business. By applying digital technology and integrating big data, artificial intelligence, cloud computing, blockchain, and other information technologies into inclusive finance business, it further expands the coverage of inclusive financial services, breaks the limitations of time and space in inclusive financial services, and enables more accurate positioning of the needs of inclusive financial customers and enhances the risk control capabilities of banks.

1 Online product innovation

By introducing digital technology and accessing data from industries such as industry and commerce, taxation, credit, judiciary, and customs, precise portraits of inclusive groups can be realized, which greatly reduces the service costs of banks, improves approval efficiency and risk control capabilities, and accelerates the innovation efficiency of inclusive products. For example, Agricultural Bank of China’s “Small and Micro E-loan” series of products, Construction Bank’s “Small and Micro Quick Loan” series of products, Bank of China’s “China Bank Enterprise E-loan,” etc., are all application achievements of digital technology. Online products have become the “sharp spear” for the development of inclusive credit business.

2. Online Customer Service Platforms Established

In recent years, Agricultural Bank and Construction Bank have successively launched applications or apps such as “Inclusive E-stations” and “Understand You”. These commercial banks use digital technology to build an ecosystem that integrates all customers, products, channels, and processes. These platforms provide inclusive customers with “one-stop” and “24/7” online financial services, meeting their comprehensive financial needs, breaking the limitations of time and space, and achieving multi-channel coordination between online and offline businesses.

Case:

Agricultural Bank uses multiple financial technologies to launch the “Inclusive E-stations” exclusive online service platform for small and micro enterprise customers, covering comprehensive financial services such as corporate account opening and inclusive loans. It provides small and micro enterprises with fully online one-stop loan services and online accurate loan estimations. The Agricultural Bank’s “Inclusive E-stations” includes three core functions: “I want to open an account, I want a loan, I want to sign a contract”. It has been deployed through various channels such as enterprise mobile banking, portal websites, H5, and WeChat mini programs. It extends the touchpoints of inclusive financial services, contributes to the development of small and micro enterprises, and has become a highly recognized brand in the industry for small and micro enterprise financial services.

3. Digital Empowerment of “Supply Chain” Businesses

As the country vigorously promotes the transformation and upgrading of industrial chain supply chains, major commercial banks are actively promoting the digital empowerment of supply chain businesses. They extend financial services to both ends of the industrial chain, focusing on the core enterprises and integrating various types of information such as logistics, information flow, and fund flow based on real transactions between the core enterprises and the upstream and downstream chain enterprises. They explore the financial needs of customer groups composed of core enterprises and their multi-level upstream and downstream enterprises, and provide comprehensive financial services for supply chain enterprises.

4. Building and Upgrading Digital Risk Control Systems

Digital technology has broken the means and boundaries of traditional bank risk control. By empowering data and driving algorithms, it enhances risk identification, early warning, and disposal efficiency. It constructs risk control models based on multi-dimensional data, enabling the transformation of risk control systems from being driven solely by traditional collateral to being co-developed with digitalization. This greatly improves the risk control capabilities and efficiency of banks.

02. Addressing the Challenges of Inclusive Financial Digital Transformation

As the digital transformation of inclusive finance by commercial banks continues to advance, inclusive finance has transitioned from a high-growth stage to a stage of high-quality development. In this stage, inclusive finance faces new and higher challenges in terms of product innovation, risk prevention and control, and financial services.

For example, the online products offered by major commercial banks in the market are often quite similar, and there is a need to further strengthen online product innovation. Existing inclusive online products can be roughly divided into two categories: credit-based products (mainly based on customers’ deposit, settlement, financial assets, and tax payment situations to determine the credit limit) and mortgage-based products (mainly based on the market value of collateral provided by customers to determine the credit limit, with high product homogeneity, and the attractiveness of bank products to customers often determined by loan interest rates). They lack localized innovative products. Bank products are often developed by the headquarters, resulting in a low level of satisfaction for the specific needs of customers in the Ningbo region. The application of customer multidimensional data in product innovation still has limitations, and inclusive products lack regional characteristics and scenario-based innovation.

For example, the digital risk control capability needs further enhancement. Although the application of digital technology has improved the risk control capability of banks, limited data sources and data lag make it difficult to obtain comprehensive customer data. The ability to identify black-related, evil-related, shell companies, and intermediaries in loan intermediation still needs improvement, making it difficult to achieve comprehensive and accurate risk detection. Therefore, risk management capability remains the core key to the development of inclusive finance for commercial banks. In addition, while online products are driving the rapid development of inclusive finance business, they unavoidably lead to a rapid increase in non-performing loans, which also puts higher demands on banks’ ability to dispose of non-performing loans.

For example, the capability of inclusive financial services needs further improvement. Currently, banks’ marketing models still revolve around physical branches. With the rapid development of online business, commercial banks, especially grassroots banks, are facing increasing pressure in managing customer relationships and inadequate customer service capabilities. We need to face the fact that the digital development of inclusive financial business has brought in a large number of customers to physical branches, resulting in situations where “existing customers cannot be effectively managed and new customers cannot be effectively acquired”. The problem of marketing and service lagging behind the development speed in turn constrains the sustainable development of inclusive business. The digital transformation raises higher requirements for bank employees to adapt to the changing environment by learning new business models, marketing methods, and new system tools.

03 Recommendations for the Digital Transformation of Commercial Banks in Inclusive Finance

Developing inclusive finance is an important embodiment of China’s distinctive financial work, political nature, and people-oriented orientation. It is a necessary requirement for grasping the new stage of development, implementing the new development philosophy, and constructing a new development pattern. In the increasingly complex economic situation, the group of inclusive customers is under the greatest pressure. Therefore, commercial banks must continuously promote the digital transformation of inclusive finance, which can be done from the following aspects.

1. Promote product innovation

The first is to strengthen the application of data in product innovation. During the digital transformation process, it is necessary to strengthen the “open source” work of the database and actively connect with the government, regulatory agencies, regional financing platforms, third-party companies, etc. to cross-validate customer portraits using multidimensional data, thereby improving the accuracy of customer evaluation. The second is to accelerate the innovation of region-specific products. In response to the limitations of existing products, it is necessary to strengthen the innovation of products suitable for localized customers, actively research and develop region-specific products, and introduce personalized products that meet the needs of different types, industries, and customer demands to expand the coverage of the marketing customer base.

2. Enhance risk prevention and control level

Relying on technology and data as key elements, establish a risk prevention and control system that covers all customers, all products, all processes, and all channels. Through internal and external information, continuously update and iterate products, strengthen the system’s pre-loan risk identification, in-loan risk interception, and post-loan risk management, continuously improve early warning and post-loan models, and enhance the forward-looking and effectiveness of risk control. Speed up the disposal efficiency of non-performing loans in inclusive finance, timely resolve existing risks, and stabilize the asset quality of inclusive credit business.

3 Building a Highly Skilled Talent Pool to Support the Digital Transformation of Inclusive and Financial Technology

The digital transformation requires bank employees, especially frontline customer managers, to adopt a digital mindset, continuously learn and familiarize themselves with digital products, systems, and tools, and change their old work patterns and habits. First, accelerate the construction of a digital talent pool. Through recruitment, job adjustments, and other forms, especially by strengthening the training of technology and marketing talent, establish a team of inclusive and financial technology professionals. Second, establish an inclusive and financial technology digital training system. Strengthen regular and categorized training, tailor training courses for customer managers at different stages and different skill levels, achieve comprehensive business training coverage, and bridge the “last mile” of inclusive financial training. Third, continuously enrich educational resources. By writing inclusive business training manuals, recording inclusive business training videos, and other means, continually meet the learning needs of employees.

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