WeBank recently introduced a physical deposit card in collaboration with traditional banks in a bid to expand the scale of what it means to do internet banking in China.
In previous years, this would probably be seen as a smart way to help an internet bank close the competitive gaps with traditional incumbents.
However, these partnerships, which began in December 2020, came in the teeth of a new and ongoing regulatory crackdown on big internet companies, particularly where it concerns fintech.
Class struggle
Putting regulatory risk aside, WeBank, which is part of the Tencent group, has faced the same problems of any “virtual bank”: it is not allowed to offer the most comprehensive suite of services to retail customers.
These so-called Class I accounts, which permit a bank to offer the gamut of deposit and current-account services, is limited to those that onboard clients in person at a branch.
The other types of accounts (Class II and Class III) allow remote onboarding, but place limits on the kinds of services that a bank can offer, as well as restrictions on payment and transfer amounts.
One of the most important services that a Class I account confers is use of ATM machines and cash withdrawals.
Although in tier-1 cities, most people are already mostly cashless, this is not the case in smaller cities. And smartphone penetration in China is only a little over 60 percent of the population, leaving over 500 million people outside of the mobile revolution.
Local partnerships
Starting late last year, therefore, WeBank has announced partnerships with a number of small- and medium-sized banks to allow it to issue physical deposit cards. Its first partners include Tianjin Binhai Rural Commercial Bank and Guangdong Huaxing Bank (which operates in Shenzhen and Zhuhai).
This relationship lets WeBank provide some of the Class I services, without having to build a physical branch network. The partner banks in turn can grow their deposit bases among customers that they’d struggle to attract. WeBank provides the tech, manages the data, and handles risk controls.
However, these partnerships do not allow WeBank to offer Class I accounts: it’s just an intermediary, using its platform to offer a digital banking experience to these users.
There are also lingering questions about which party is ultimately responsible in the event of fraud or other risks around remote onboarding. Until recently, this may not have been an immediate challenge, as business models in China usually operate in a legal gray zone.
Regulatory revisions
But the authorities’ unfolding crackdown on Big Tech, starting with the cancellation of Ant’s blockbuster IPO last year, means all business models have to be reconsidered. Other fintech groups such as JD Digits have opted to postpone IPOs as they suddenly need to reconsider what kind of operations will be welcomed by authorities.
The regulators’ biggest concern with Ant was the enormous degree to which it was leveraging partner banks’ balance sheets to extend loans to consumers and businesses. Ant was generating vast deals, and profits, while keeping its own capital limited to about 2 percent of its overall loan book. Third-party banks bore virtually all the risk.
WeBank isn’t leveraging partners to extend loans. But it is nonetheless using its partnerships to get around its inability to offer Class I accounts, by replicating some of those services, and using its platform – and its incredible trove of data – to connect customers with banks that have little visibility about who their end users are.
Whether this activity attracts regulatory scrutiny will depend less on the letter of the law (which is vague on this question) and more about how financial regulators regard internet companies and their affiliates leveraging traditional financial institutions’ licensed capabilities.
WeBank is a licensed bank, so its new cards model may depend on it convincing authorities that it is sufficiently at arm’s length from Tencent.
Joyce Gao Zhuo contributed to this story.
