Direct banking in China, although a decade or so behind its international counterparts, arrived just before the rapid development of China's internet economy and digital finance. Including China Minsheng Bank's direct banking among them, over a hundred direct banks have stumbled through a decade of operation, with most fading from the industry's view. However, they have ultimately provided valuable experience for subsequent banks to test the waters of digitalization.

As the first domestic bank to "eat the crab," China Minsheng Bank's direct banking has officially pressed the "termination button" after ten years of operation. According to the bank's announcement, starting from July 15th, the direct banking app and PC version of China Minsheng Bank will be integrated with the mobile banking app of China Minsheng Bank, and the direct banking app and PC version will cease service.

Advertisement

Thus, the first national joint-stock bank in China to initiate the establishment of a direct bank has completely exited the direct banking business field after three years since the start of the revocation of the direct banking division at the head office and the cessation of app operations in 2021. According to incomplete statistics by "Caijing," in the past two years, at least 17 banks have announced adjustments to their direct banking channels, either by directly stopping services or integrating related functions into their mobile banking apps.

Internet banking, virtual banking, digital banking, mobile banking... In the context of deepening digital transformation, online operations have become the "standard configuration" for banks. However, if we rewind the clock to a decade ago, direct banking was indeed a pioneering attempt for traditional banks to connect with the internet.

"The 'disappearance' of direct banks is a trend," industry insiders point out. With the tightening of internet finance regulation and the deepening of digital transformation in traditional banks, issues such as the lack of innovation and homogenization in direct banking have gradually been exposed, and their value is no longer what it used to be.

However, it cannot be denied that in the journey of traditional banks seeking digital innovation, the birth of direct banking is like planting a seed, and the digital concept it carries has already been integrated into the bloodstream of traditional banks.

"As the digital transformation of banks accelerates, banks are paying more attention to the development of online business, and many banks are focusing on building mobile banking apps, improving service quality and customer experience by integrating backend service resources," a business person in charge of a city commercial bank told "Caijing." The digital economy is accelerating the development of banks' online operations, and in the future, the functions of mobile banking apps will be more comprehensive, while other types of banking apps will be gradually reduced. This is one of the important trends in the development of the banking industry.

In two years, 17 direct banks have been shut down or integrated."Never heard of it." This is the initial reaction of most people when Caijing magazine mentions the concept of direct banking to several ordinary bank users.

In fact, direct banking is not a new concept; it first emerged in the developed countries of Europe and America in the 1990s. Under the direct banking model, it is possible to operate without establishing physical business outlets, instead, direct business transactions between the business center and end customers are achieved through media tools such as mail, telephone, fax, the internet, and interactive television.

Since there is no need to establish branches, direct banks do not require a large number of management and business personnel. While providing users with more convenient and cost-effective financial services, their operating costs are far lower than those of traditional banks. Public information shows that ING Direct, established by the Dutch International Group (ING) in Canada in 1997, is one of the earlier institutions to explore the direct banking model internationally. Based on its successful operation, this business model has also been replicated by institutions in the United States and other places.

In 2013, the direct banking model "crossed the ocean" and landed in China. In this year, Bank of Beijing and the Dutch ING Group jointly launched the direct banking service model, and Minsheng Bank partnered with Alibaba to prepare for direct banking. In February of the following year, the first domestic direct bank, "Minsheng Bank Direct Banking," was officially launched online, with no physical outlets, no issuance of physical cards, and completely online operations, providing customers with a more convenient and cost-effective financial service experience.

After a decade of exploration, from its rise to "disappearance," the development direction of Minsheng Bank's direct banking also reflects the current state of direct banking. Recently, banks such as Hankou Bank and Hami City Commercial Bank have also started a "slimming" mode: the former's direct banking app was shut down on July 9th, with business migrated to the mobile banking app; the latter stopped operating the direct banking WeChat public account on July 11th, with all functions and services migrated to the bank's mobile banking app.

According to incomplete statistics from Caijing, in the past two years, at least 17 banks have adjusted their direct banking channels. Some banks have integrated direct banking services with mobile banking apps while discontinuing direct banking app services, and some banks have directly taken down their direct banking apps.

"The characteristics are not distinct, there is an overlap with the business boundary model of mobile banking; the industry's homogenization competition is obvious; the app maintenance cost is high, and the customer acquisition advantage is not obvious; the user experience is poor, etc." When talking about the "retreat" of direct banking, a person from a city commercial bank in North China told Caijing.

Caijing has noticed that, so far, the direct banking apps that can still be found in app stores are mostly urban and rural commercial banks, such as Hunan Bank, Qingdao Rural Commercial Bank, Chongqing Rural Commercial Bank, Langfang Bank, etc. In terms of interface settings, the functional classification is relatively clear. However, during the actual test process, some bank direct banking apps have issues such as freezing and crashing, and some apps have a relatively single product variety.

A senior executive of a small and medium-sized bank told Caijing that direct banking has played a certain role in the development of their bank, but the problems are indeed prominent. Especially against the backdrop of the accelerated promotion of the digital transformation of the banking industry, the merger and upgrade of direct banking have become inevitable.

Began on the eve of bank digitalization.Direct banking in China, although introduced more than a decade later than in foreign countries, emerged on the eve of the rapid development of China's internet economy and digital finance. At that time, the domestic internet economy was booming, and the continuous introduction of innovative financial products such as "Yu'e Bao" quickly expanded market share, impacting traditional banking. As it became increasingly difficult to acquire new customers and existing customers were also being lost, direct banking, which could break through the limitations of traditional physical branches, was seen as an effective channel for expanding customer base.

In 2014, banks such as Minsheng, Xingye, Pufa, and Zheshang successively launched direct banking services; in July 2015, the issuance of the "Guiding Opinions on Promoting the Healthy Development of Internet Finance" further accelerated the explosive growth of direct banking. For a time, direct banking became a hot spot for domestic commercial banks to compete in layout. The "China Direct Banking White Paper" shows that by November 2017, the number of direct banks in China had reached 114, with city commercial banks showing particularly high enthusiasm.

Overall, the functions of domestic direct banks generally cover three categories: in terms of financial product transactions, more than half of the direct banks in the industry offer financial products such as bank wealth management, money market funds, and non-money market funds; in terms of lending services, more than half of the direct banks have deployed loan functions; in terms of life services, more than half of the direct banks support living expenses payment, a minority of direct banks support credit card repayment, and a very small number of direct banks provide services such as ticketing, medical care, and travel.

"Before February 28, 2014, Chinese citizens who wanted to have a bank account could only open one at a bank premises. From that day on, they could open a bank account online, which was then called an electronic account. This might have been a small step for individuals, but it was a big step for the banking industry. Looking globally, it was also a big step," Jia Fengjun, then deputy general manager of the Direct Banking Business Division of Minsheng Bank, pointed out in an article in "The Banker" magazine in 2020.

In Jia Fengjun's view, direct banking has promoted innovation in personal accounts in the banking industry. He stated, "The original banks were stationary merchants, but now they can become itinerant merchants. Before the II and III class accounts, banks were onlookers of ecosystems and scenarios; after having II and III class accounts, the situation is quite different. Banks can become the protagonists of ecosystems and scenarios, or at least one of the protagonists."

The annual report shows that in the year of official launch, Minsheng Direct Bank had 1.4681 million customers, and the innovative financial product "Ruyi Bao" had a subscription amount of 236.687 billion yuan. Subsequently, Minsheng Direct Bank entered a period of rapid development. By the end of 2018, the number of customers of Minsheng Direct Bank reached 19.1713 million, and the financial assets under management reached 132.291 billion yuan.

An industry insider who once participated in the construction of the direct banking app recalled, "At that time, we worked overtime and fought day and night to launch the direct banking app as soon as possible. During the years of rapid development of direct banking, we created a full-platform direct self-service financial service model, released a direct app that changed its appearance and skin with each season and festival, and witnessed assets and services reaching new levels again and again."

The digitalization of China's financial industry continues to accelerate, but the rapid development momentum of direct banking has not continued. Taking Minsheng Direct Bank as an example, the annual report shows that from 2019 to 2020, the number of customers of Minsheng Direct Bank reached 29.203 million and 33.273 million respectively, but the financial assets under management were reduced compared to the scale of 2018, with 109.832 billion yuan and 115.752 billion yuan respectively. In the bank's 2021 annual report, there are few mentions of direct banking.

At the same time, the homogenization of direct banking development has also caused a certain amount of resource waste, and adjustments have followed. Since 2017, direct banking of Ping An Bank, Pufa Bank, and Guangfa Bank have been integrated into their respective bank apps.

It can be seen that hundreds of direct banks, including Minsheng Direct Bank, have been running for ten years with ups and downs, and most of them have now faded out of the industry's vision. However, they have ultimately provided valuable experience for the subsequent trial of bank digitalization."Fading Away" or "Phoenix Rebirth"?

In the view of many industry insiders, the development of direct banking has not met expectations, with multiple underlying practical factors at play.

A person from a city commercial bank in North China told Caijing that the direct banking sector was once highly anticipated, but it has encountered continuous problems in its subsequent actual development. For instance, when expanding its business, it would compete internally, leading to friction between different business departments. At the same time, there is a lack of corresponding talent and capabilities in later operations, insufficient customer acquisition and business innovation, and poor user experience.

"Most direct banks are actually online sales channels established by banks to keep up with the development trend of digitalization, used to expand their customer base. As banks fully undergo digital transformation, every business link can now be connected with digital channels. The business of direct banks in the past can now be integrated into the bank's business sectors, so there is no longer a need for a separate institution or department to serve as the entry point for the bank's digitalization," Zeng Gang, Director of the Shanghai Finance and Development Lab, told Caijing.

Zeng Gang further pointed out that in the early years, banks, especially local small and medium-sized banks, were keen to layout direct banks because they could break through regulatory restrictions and sell across regions through internet channels. At that time, high-yield financial products such as P2P were the "sharp tools" for some banks to attract customers. With the tightening of regulatory policies later on, the value of the direct banking channel was lost to some extent.

The emergence of the aforementioned series of problems is closely related to the institutional mechanism setting of direct banks. It is reported that most domestic direct banks exist in the form of a first or second-level department of traditional banks, affiliated with the parent bank, and share resources with the parent bank.

In 2018, Luo Yong, then Deputy General Manager of the Online Banking Department of Minsheng Bank (in charge of work), wrote in the magazine "Contemporary Financiers" that most direct banks have not established their own product development teams, nor have they implemented independent cost-benefit accounting. Influenced by the operational philosophy and traditional institutional mechanisms of the parent bank, the autonomy of products and business models in innovation, cooperation, and promotion is not strong, making it difficult to iterate quickly and achieve results. They have no advantage in competition with internet companies' financial services.

At the same time, most direct banks also suffer from a hierarchical management system that leads to a severe loss of market response efficiency and share an assessment mechanism with traditional banks, which contradicts the laws of internet economic development. A bank industry insider who participated in the establishment of a joint-stock bank's direct bank frankly said, "In traditional banks, direct banks are seen as an oddity, like sand, in the eyes of traditional retail, wealth, and corporate, compliance, and operations departments, and it is difficult to survive."

In order to break through the above-mentioned shackles, direct banks with an independent legal entity organization form have emerged. However, so far, only two have been approved to open: in November 2017, the first independent legal entity direct bank in China, Baixing Bank, was established by CITIC Bank and Baidu; four years later, in June 2022, Youhui Wanjia Bank, initiated by Postal Savings Bank, opened.

"Independent legal entity direct banks have higher autonomy and flexibility, and can respond to market and customer needs more quickly. At the same time, they are not restricted by the parent bank's structure and can make independent decisions, which promotes faster financial technology innovation," said economist Pan Helin.However, the path to exploring the independent legal entity direct banking model has not been smooth sailing. Taking Youhui Bank as an example, it is still in a loss-making state. The annual report shows that in 2023, the bank's net profit was -263 million yuan, which is an increase in losses compared to 2022.

BaiXin Bank, in addition to making a profit in 2019, also experienced losses in the first few years after its establishment. It wasn't until 2021 that the bank turned losses into profits, achieving a net profit of 263 million yuan, and then maintained growth in performance. In 2023, BaiXin Bank's net profit was 855 million yuan, a year-on-year increase of 30.25%.

Clearly, the development of independent legal entity direct banks faces significant challenges. As traditional commercial banks' digital transformation gradually moves into the "deep water area," private banks with internet genes such as WeBank and MyBank have entered the market strongly, further compressing the development space for independent legal entity direct banks.

"From the currently observable business samples, direct banks with an independent legal entity model have not yet taken a more mature path, and the future prospects of this model still need to be observed," a banking industry researcher pointed out.

Looking back, direct banks were born during the vigorous development of the domestic internet economy. At that time, they were laid out as a new type of bank operation model and have now gradually exited the historical stage. However, in the view of many industry insiders, as an "innovation experimental field" for traditional banks to connect with the internet, the digital concept carried by direct banks has been integrated into the blood of traditional banks.

Zeng Gang pointed out, "All concepts are in a state of dynamic change. As digital transformation deepens, both connotation and extension will change. What we discuss more now is digital banks and internet banks. From this perspective, direct banks as a form will not disappear."

"Direct banks may not be successful as a product, but the seeds they have sown will never die out in the future," said an industry professional who once participated in the establishment of direct banks.

Although many banking industry professionals have accepted the trend of direct banks disappearing, for those direct banks that are still "holding on," many industry insiders emphasize that only differentiated competition can lead to a "rebirth."

Pan Helin believes that due to the limited total market space, direct banks must particularly avoid homogenized competition and strive for differentiation to expand the industry boundaries. Differentiation comes from specialized products and services, such as serving small and micro enterprises, customizing specific consumer scenarios; or technology-driven new experiences, such as optimizing user experience with big data and artificial intelligence; or opening up cooperation and building ecosystems, cooperating with internet platforms; and strengthening compliance and risk control.

"From the perspective of banks, the most important thing in carrying out direct banking business is to form differentiation and characteristics, and to distinguish it from traditional mobile banking business. At the same time, it is necessary to make good use of the unique advantages of direct banks in breaking through the restrictions of the bank's own accounts and opening up to customers of other banks, to strengthen resource integration and form a brand," Li Guangzi, director of the Banking Research Office of the Financial Research Institute of the Chinese Academy of Social Sciences, told Caijing.