Tsinghua Financial Review: Survey on Digital Transformation of Chinese Commercial Banks

Text/Joint Research Group of Financial Technology Development and Research Committee of China Internet Finance Association and Outlook Think Tank

At the 13th G20 Summit held in November 2018, General Secretary Xi Jinping pointed out that the digital transformation of the world economy is an irresistible trend, and the new industrial revolution will profoundly reshape human society. At present, promoting digital transformation has become an important choice for the financial industry of various countries to improve service quality and their own competitiveness. In order to adapt to the development of financial technology and enhance the ability to serve the real economy, my country's commercial banks have carried out many beneficial practices in digital transformation and financial technology innovation. Some digital transformation measures have achieved good results, but overall they are still in the development stage, especially the majority of small and medium-sized banks have constraints in transformation resources, technological capabilities, etc., and lack experience in transformation direction and path selection. In August 2019, the People's Bank of China issued and implemented the "Financial Technology (FinTech) Development Plan (2019-2021)", which clarified the guiding ideology, basic principles, development goals, key tasks and safeguards for the development of my country's financial technology, encouraged and supported licensed financial institutions including commercial banks to develop financial technology under the premise of compliance with laws and regulations, marking that financial technology innovation and digital transformation have entered a new historical development stage.

In order to gain a comprehensive and in-depth understanding of the latest situation of the digital transformation of my country's commercial banks, the Financial Technology Development and Research Committee of the China Internet Finance Association and the Outlook Think Tank formed a joint research team to conduct a special investigation and research, and constructed a self-assessment model for the digital capabilities of Chinese commercial banks, including six areas and 26 specific elements: strategic planning, organizational culture, business processes, technological innovation, data governance, and ecological cooperation. The total score of the digital capability self-assessment was set at 5 points, and a digital capability self-assessment questionnaire survey was conducted for 51 commercial banks of various types (hereinafter referred to as the surveyed banks). On-site visits and surveys were also conducted on more than 10 representative commercial banks and financial technology companies. The latest status of the digital transformation of my country's commercial banks was summarized and compared with leading international banks. The challenges faced in promoting digital transformation were analyzed, and countermeasures and suggestions for regulating and guiding digital transformation were put forward.

Self-assessment results of digital capabilities of Chinese commercial banks

From the overall situation, there is still much room for improvement in the digital capabilities of the surveyed banks

The average self-assessment score of the digital capabilities of the surveyed banks was 3.01 points, and about half of the surveyed banks scored below 3 points. There were certain differences in the digital capabilities of the six fields. The self-assessment scores of digital capabilities in strategic planning (3.47 points) and business processes (3.27 points) were relatively high, and the self-assessment score of technological innovation (2.45 points) was relatively low. The self-assessment scores in other fields were, from high to low, data governance (3.03 points), organizational culture (2.97 points), and ecological cooperation (2.88 points).

From the perspective of bank types, the digital capabilities of different types of surveyed banks vary significantly.

The average self-assessment score of the digital capabilities of state-owned large commercial banks was 3.31 points, and the average self-assessment score of joint-stock commercial banks was 3.45 points. The six areas were relatively balanced overall. The average self-assessment score of city commercial banks was 2.83 points, and there was room for improvement in technological innovation and ecological cooperation. The average self-assessment score of rural commercial banks was 2.49 points, and there was room for improvement in technological innovation, data governance and ecological cooperation. The average self-assessment score of new Internet banks was 3.87 points, and the development of the six areas was relatively mature and overall relatively balanced. Private banks (excluding new Internet banks) [New Internet banks refer to a type of new type of banks that put service places online, do not open branches, and conduct business entirely through Internet channels. In practice, my country's new Internet banks mainly include purely Internet-based private banks and independent legal person direct sales banks. Private banks (excluding new Internet banks) refer to other private banks except new Internet banks. ] The average self-assessment score was 2.99 points, and there was room for improvement in the development of the six areas, and the performance of technological innovation, business processes and organizational culture was relatively weak.

From the business perspective, the digital capabilities of retail business and risk management are relatively high.

From the perspective of business types, the self-assessment scores of digital capabilities of the main business types of the surveyed banks were all above 2.8 points. The self-assessment scores of payment and remittance (3.5 points) and personal credit (3.5 points) were relatively high. The other business areas were ranked from high to low in terms of self-assessment scores, namely personal financial management (3.38 points), corporate credit (3.14 points), asset management (2.97 points) and bill business (2.86 points).

From the perspective of business links, the self-assessment scores of digital capabilities of the main business links of the surveyed banks were all above 3 points, with risk management (3.4 points) having a relatively high self-assessment score. The other main business links, in order of self-assessment scores from high to low, are service operations (3.31 points), transaction processing (3.31 points), product research and development (3.25 points) and channel customer acquisition (3.09 points).

From the perspective of transformation measures, consensus has been basically reached on key transformation measures such as ecology, talent, and data.

First, the surveyed banks attach great importance to multiple initiatives in the fields of business processes, technological innovation and data governance, and have generally carried out practical exploration. These initiatives mainly include: using application programming interfaces (APIs) and software development kits (SDKs) to carry out cross-border cooperation, increase investment in innovative technical talents and R&D, establish an Internet financial platform to integrate financial and pan-financial scenarios, establish a unified big data platform for the entire bank, set up an independent financial technology department, carry out distributed architecture transformation and cloud-based systems, etc.

Second, although the surveyed banks attach importance to some measures in the areas of strategic planning, organizational culture and ecological cooperation, only a few surveyed banks have implemented them due to the difficulty of reform and the long implementation time. These measures mainly include: reforming the assessment system to match the digital assessment mechanism, establishing bank-level middle office capabilities and PaaS platforms, setting up financial technology subsidiaries, building a sound independent software vendor (ISV) to carry out ecological cooperation, and reforming the salary system to match the needs of digital talents.

In terms of resource investment, the surveyed banks have different levels of resource investment, but overall there is still a lot of room for improvement.

Looking at the proportion of IT investment to total revenue in 2018, only 13 surveyed banks had a ratio of more than 5%, mainly including new Internet banks, joint-stock commercial banks and city commercial banks. The proportion of IT investment to total revenue of most surveyed banks was below 5%.

In terms of the proportion of IT employees to total employees, only 6 surveyed banks have a ratio greater than 30%, mainly including new Internet banks, city commercial banks and private banks (excluding new Internet banks). The ratio of 30 surveyed banks is less than 5%, mainly including various commercial banks except new Internet banks. The ratio of 9 surveyed banks is between 5% and 10%, and the ratio of 5 surveyed banks is between 10% and 30%.

From the perspective of technology application, big data is widely used, while blockchain and the Internet of Things are in the ascendant.

From the overall application situation, big data and biometrics are widely used in the surveyed banks, accounting for 98% and 96% of all surveyed banks respectively. The application of blockchain and Internet of Things technology accounts for a relatively small proportion, but many banks have begun to explore their application. State-owned large commercial banks and new Internet banks are relatively active in applying emerging technologies, while rural commercial banks and private banks (excluding new Internet banks) have relatively few applications of emerging technologies.

From the perspective of specific business scenarios, big data and biometrics are widely used, and have been relatively widely used in scenarios such as personal lending, microfinance, payment settlement, credit assessment, and regulatory compliance. Cloud computing is relatively widely used, and has been used in scenarios such as information security, personal lending, and payment settlement. Artificial intelligence is widely used in scenarios such as personal lending, payment settlement, and wealth management. The application of blockchain technology is in its early stages, and has begun to move from proof of concept to commercial practice in scenarios such as supply chain finance. The Internet of Things has been explored and applied in scenarios such as supply chain finance and trade finance.

Comparative analysis of digital transformation between Chinese commercial banks and leading international banks

The survey shows that the digital transformation of my country's commercial banks is basically on the same starting line as international peers, but in terms of financial technology layout, cooperation and openness, technological investment, talent reserves, etc., there is still a certain gap between my country's commercial banks and leading international banks.

Leading international banks have more diverse ways of deploying financial technology. Most leading international banks have adopted diversified methods such as innovation funds, equity investment, and innovation laboratories to deploy financial technology. McKinsey (2018) found through a survey of 100 leading banks in the world that more than 50% of banks have established cooperative relationships with financial technology companies, and about 1/3 of banks have deployed financial technology in the form of venture capital or private equity. For example, Citibank has deployed financial technology by setting up Innovations Lab and Citi Ventures Fund. The association's survey shows that domestic banks mainly deploy financial technology through innovation laboratories, cooperative outsourcing, and other methods.

The ecological cooperation of leading international banks is more open. Leading international banks are actively building an open, cooperative and win-win financial service ecosystem. According to a McKinsey (2019) survey, among the top 100 commercial banks in the world by assets, 79% of them cooperate with fintech companies and open data services to ecological partners through APIs. For example, leading international banks such as BBVA, ING, DBS, Citibank and Royal Bank of Scotland have established API platforms to provide interface services to third-party institutions such as fintech companies. The association's survey shows that 65% of the surveyed banks have established open banks to cooperate with partners.

Leading international banks have made relatively large investments in technology. They invest a certain percentage of their profits and operating income in technology fields such as mobile services, machine learning, big data technology, digital banking, cybersecurity, and product development. McKinsey (2018) survey shows that leading international banks invest 17% to 20% of their pre-tax profits in financial technology. For example, JPMorgan Chase's technology investment accounted for 10.5% of its operating income in 2018. The association's survey shows that 60% of the surveyed banks' technology investment accounts for less than 3% of their pre-tax profits.

Leading international banks have relatively large reserves of technology talents. Leading international banks focus on the introduction and training of technology talents and increase the proportion of technology personnel. For example, JPMorgan Chase has about 50,000 technical personnel, accounting for about 20% of the total employees, of which about 60% are engaged in technical work such as development and software engineering, and continue to recruit technical personnel in machine learning, UI design, API development, etc., to continuously strengthen the reserve of technical talents. Goldman Sachs' technical personnel account for 25% of the total employees. The association's survey shows that about 60% of the surveyed banks have a technical personnel ratio of less than 5%.

Risks and challenges faced by China's commercial banks in digital transformation

Main risks: Digital transformation has not changed the risk attributes of finance, but may bring new changes to traditional banking risks, and may also bring new risks.

Operational risk: The relationship between commercial banks and financial technology companies has evolved from a relatively simple outsourcing partnership to a multi-faceted and multi-type interactive relationship involving business, accounts, data, technology, infrastructure, etc., which may lead to the indirect transmission of the operational risks of the partners to the banks.

Market risk: The new financial products and business models generated in the process of cooperation between commercial banks and other financial institutions and financial technology companies are relatively more complex, and market risks are more hidden. Once problems arise, chain reactions may occur. In the digital age, market risk models rely more on artificial intelligence and big data, model construction is more complex, model verification is more difficult, and output results are difficult to interpret, resulting in uncertainty in model application.

In terms of credit risk: the ecological cooperation model generated during the digital transformation process may cause some banks to over-rely on cooperative institutions such as loan assistance and traffic diversion. Banks will outsource core links such as credit review and risk control and become a mere provider of lending funds, weakening their own credit risk management capabilities.

In terms of technical risks: During the digital transformation of commercial banks, network applications will penetrate into various financial scenarios, making banking systems more vulnerable to network threats and increasing the difficulty of data security and privacy protection. Some banks may blindly pursue the application of emerging technologies without rigorous testing and risk assessment, resulting in problems such as misaligned technology selection and frequent security incidents.

In terms of reputation risk: During the digital transformation process, the division of labor among banks has become increasingly market-oriented, professional, and refined, the trend of financial ecological platformization has become increasingly obvious, and the boundaries between financial attributes and technological attributes have become blurred, making the legal relationship and responsibility identification between commercial banks and their partners more complicated. Problems with either party may have a negative impact on the bank's reputation.

Main challenges: Although my country's commercial banks have explored and practiced in promoting digital transformation, they still face some challenges in terms of institutional mechanisms, data governance, standards and norms, and ecological operations.

In terms of system and mechanism: The surveyed banks (accounting for 76% of all surveyed banks, the same below) generally believe that strategic planning is very important for digital transformation, but most of the surveyed banks face challenges in the process of specific implementation, such as lack of supporting systems and processes (76%), difficulty in cross-departmental and cross-line coordination (73%), and insufficient innovative technical talents (73%).

In terms of data governance: most surveyed banks have taken measures such as establishing big data platforms (75%) and introducing external data sources (80%). The vast majority of surveyed banks (96%) believe that it is necessary to focus on preventing data security risks, but only some surveyed banks have taken data governance measures such as setting up data management departments (49%) and establishing unified data standards (53%). At the same time, most surveyed banks face challenges such as low data quality (71%) and lack of data mining capabilities (59%).

In terms of standards and specifications: Most surveyed banks have applied technologies such as big data (98%), biometrics (96%), and artificial intelligence (78%) to business scenarios. However, there is still a certain gap between the supply of standards and specifications for the application of emerging technologies in the financial field and the growing application demand of commercial banks' digital transformation.

In terms of ecological operation: Most surveyed banks have taken measures such as establishing Internet financial platforms (75%) and open banking platforms (65%) to actively strengthen ecological cooperation, but most surveyed banks (71%) stated that their ecosystem operation capabilities are insufficient, and nearly half (47%) of the surveyed banks stated that data sharing and privacy protection are lacking.

Countermeasures and Suggestions

At the regulatory policy level. First, guide commercial banks to establish a correct value orientation. Guide commercial banks to realize that the digital transformation of the economy and finance is an inevitable trend, and strengthen the cultivation of digital thinking and financial technology innovation awareness. Guide commercial banks to adhere to serving the real economy and people's lives, conscientiously implement the requirements of financial supply-side structural reform, and earnestly implement the "Financial Technology (FinTech) Development Plan (2019-2021)" and other policy documents. Combined with their own development positioning and capabilities, actively and steadily promote digital transformation, formulate and implement digital strategies that are in line with their own development positioning in response to the shortcomings in their own business services, and better meet the people's growing financial needs. Digital transformation cannot be used as an excuse to expand blindly, move away from the real economy and move towards the virtual economy, or operate beyond the scope and region.

Second, establish and improve the system and mechanism that adapts to digital transformation. Further improve the regulatory rules system for digital banks and financial technology in key areas such as technology application, network security, information protection, API, and business outsourcing. Urge commercial banks to implement the requirements of the "Guidelines on Data Governance of Banking Financial Institutions", strengthen data quality management, continuously improve data governance capabilities, and effectively balance data value mining and customer privacy protection. Improve the application level of regulatory technology, learn from international experience such as regulatory sandboxes, build a digital regulatory model, explore the integration of technology-driven advantages throughout the entire chain of bank supervision before, during, and after the event, and rely on innovative regulatory mechanisms such as financial technology application pilots to establish a fault-tolerant trial-and-error space for valuable financial technology innovation.

Third, urge and strengthen the comprehensive risk management of digital transformation. Guide commercial banks to establish and improve a comprehensive risk management system and governance structure covering all aspects of business, network, technology, data, etc., clarify the risk management responsibilities of the board of directors and senior management, and establish an appropriate assessment and accountability mechanism. Require commercial banks to include cooperation with third-party institutions in the comprehensive risk management framework, and do a good job in due diligence, list management, risk monitoring and exit management of partners. Require commercial banks to strictly implement the principle of independent risk control, reasonably allocate responsibilities and powers of risk model development, testing, review, monitoring and evaluation, optimization, exit and other links with third-party institutions, independently carry out customer access, risk assessment, loan approval, post-loan management and other work, and shall not outsource core business links such as loan "three checks" and risk control to cooperative institutions.

Fourth, we will strengthen the protection of financial consumers. We will regulate and guide the development of financial technology products and the operation of digital services through comprehensive means such as financial technology product certification and financial app filing, and promptly investigate and deal with improper behaviors that infringe upon the legitimate rights and interests of financial consumers. We will guide commercial banks to establish the concept of responsible finance, integrate financial consumer protection into digital transformation strategies and corporate governance, effectively assume the main responsibility for consumer protection, build independent business consultation and complaint handling channels, and study and formulate risk warnings, information disclosure, financial knowledge popularization, advance payment, insurance compensation and other measures to protect the property, privacy and data security of financial consumers from the source, and avoid the unreasonable transfer of risk costs of digital transformation and financial technology innovation to financial consumers.

Industry self-discipline level. First, build a multi-party cooperation and communication platform for government, industry, academia, research and application. Take advantage of being close to the market and integrating resources, gather the power of government, industry, academia, research and application in the field of commercial bank digital transformation, establish a technology research and development and application alliance, guide multi-party cooperation to build an ecosystem, promote the timely transformation and sharing of financial technology innovation results, and jointly solve the common technical problems, business pain points and mechanism obstacles faced by commercial banks in digital transformation. Increase business exchanges and training in digital transformation technology application, technological innovation, risk prevention and control, and effectively cultivate compound professional talents, and continuously consolidate the intellectual support for the digital transformation of commercial banks.

Second, promote the construction of the financial technology standard system. Give full play to the flexible and rapid characteristics of industry association group standards, take technical security, risk prevention and control, and consumer protection as the entry point, and follow the principle of "urgent use first, commonality first, and maturity first" to enrich the supply of technical standards for artificial intelligence, big data, cloud computing, blockchain, etc. in the financial industry, improve business specifications such as digital services, product innovation, and outsourcing cooperation, and actively develop national standards and financial industry standards that meet market and innovation needs in areas where group standards are mature in practice, bottom-line financial security, and areas involving the basic rights and interests of financial consumers, so as to provide higher-level, standardized and unified standard support for commercial banks' digital transformation and financial technology innovation.

Third, strengthen infrastructure construction. Give full play to the role of industry self-discipline, take the lead in organizing industry forces under the guidance of financial management departments, focus on self-discipline management functions such as financial technology services and financial technology capability sharing, promote self-discipline work such as information disclosure, statistical monitoring, information sharing, and digital financial infrastructure, build a safe, controllable, and sustainable financial ecology, and enhance the digital service capabilities of commercial banks, especially small and medium-sized banks.

At the level of practitioners. First, establish and improve the system and mechanism. Change the traditional business philosophy, attach importance to the leading role of financial technology, shape the digital thinking consciousness from top to bottom, combine the actual development of the company and its resource endowment, study and formulate a timetable and roadmap for digital transformation, and effectively ensure the implementation of digital transformation. Actively promote the adjustment and optimization of management models and organizational structures, and explore the use of platforms and mechanisms such as financial technology subsidiaries, joint project teams, innovation laboratories, and innovation divisions to properly solve mechanism problems such as insufficient innovation tolerance. In combination with the strategic planning and actual needs of digital transformation, increase the recruitment of digital talents and the training of compound talents, explore assessment methods and salary systems that meet the needs of digital transformation, provide rapid promotion channels for outstanding technical talents, and consolidate the intellectual support for digital transformation.

Second, strengthen data governance. Establish a data governance framework covering the board of directors, the board of supervisors, senior management and relevant departments, clarify the job responsibilities of all parties, formulate data governance charters, special measures and work rules, and consolidate the guarantee mechanism of data governance. Optimize data infrastructure, coordinate and plan the overall data architecture, open up data integration and application channels, break down data barriers between different departments, resolve information islands, formulate full-process standard specifications for data collection, processing, and use, reduce the cost of data sharing and communication, and lay the foundation for achieving standardized sharing and efficient application of data. Under the premise of effectively protecting personal privacy, commercial secrets and sensitive data, improve data collection on own customer behavior, account characteristics, financial services, etc., strengthen cooperation with third-party institutions such as credit reporting, taxation, government affairs, customs, etc. under the premise of user authorization, and continuously enrich data sources. Do a good job in data classification and hierarchical storage management, desensitize the original information through feature extraction, tokenization and other technologies, and safely isolate and disperse the sensitive information with high correlation to reduce the risk of data leakage. Establish a standardized data sharing and use mechanism to ensure that data users only provide desensitized calculation results to the outside world without collecting or sharing original data, under the premise of compliance with laws and regulations and ensuring security. Ensure that data is used exclusively and to the minimum required according to business needs, and shall not be retained without permission to prevent data from being misused and abused.

Third, promote the layout and application of financial technology and the transformation of traditional architecture. Accelerate the layout of financial technology and the construction of information systems. Small and medium-sized banks can cooperate with third-party institutions to consolidate the basic service capabilities of information systems, steadily promote the layout of financial technology, and alleviate problems such as insufficient human resources and lack of technical strength. Large banks can increase investment in innovative technologies and improve the application and research and development capabilities of cutting-edge financial technology through self-research or cooperative research and development. Promote the research and deployment of innovative technologies such as artificial intelligence, blockchain, big data, and cloud computing, accurately grasp the advantages and disadvantages of various technologies and suitable application scenarios, strengthen the application of relatively mature technologies in specific offline and online business processes and scenarios, optimize business processes, and improve service quality and customer experience. Under the premise of ensuring system stability and compliance with regulatory requirements, explore the use of new technology development models such as integrated development and operation (DevOps), strengthen information sharing and integrated collaboration in operation and maintenance, development, security, and risk management, promote the transformation of distributed architecture in accordance with the idea of ​​"large and medium platforms, small applications", realize the integration and deconstruction of financial services and module encapsulation, and provide easy-to-use technical infrastructure services to the outside world through means such as APIs and SDKs.

Fourth, enhance the open cooperation and ecological operation capabilities. Comprehensively judge the industry prospects, market size and demand pain points, clarify their own capabilities and advantages from the aspects of core customer groups, business advantages and operational capabilities, and choose life consumption, production and operation, government services and other scenarios through self-construction, equity investment, cooperation and franchising. Large banks with strong comprehensive capabilities can use the industrial layout and branch channels of the bank or its affiliated group to create an ecosystem covering multiple industries and control traffic entrances and business scenarios. Small and medium-sized banks can participate in the ecosystem dominated by Internet platforms, obtain traffic in subdivided fields according to their own advantages, enhance customer accumulation channels and reduce operating costs. Strengthen coordination and communication between ecological partners, cooperate to establish a set of collaborative working mechanisms for prior authorization, in-process tracking and post-event remediation, clarify the risk responsibility boundaries, improve emergency remedial measures and accountability systems, and continuously improve the ecological operation and risk prevention and control capabilities of all parties. Establish a dynamic evaluation mechanism for ecological scenario applications and cooperation platforms, dynamically adjust and optimize business processes and cooperation plans according to actual conditions, and work together to create a good financial ecological system that promotes mutual progress and benefits and shares.

Members of the joint research team: Xiao Xiang, Nie Ou, Yang Bin, Liu Xuguang, Ding Yangyang, Su Li, Wang Ping, Li Gen, Tang Yuesheng, Wu Dan, Zhang Guodong, Sun Qian, Shen Qinyi, Liu Qiuna. Research guidance: Yang Nong, Xia Yu. This article was published in the April 2020 issue of Tsinghua Financial Review