WeBank: China’s financial unicorn

WeBank’s CIO Henry Ma

Tencent and Alibaba are the two leaders in Chinese fintech – and therefore global fintech – without financial services being the primary business for either one of them. 

But even if banking and payments are non-core afterthoughts, or methods of streamlining or enhancing other businesses, both houses have become extremely powerful players in the industry.

Tencent brushes with financial services in a variety of ways, but the purest play is WeBank, launched in December 2014 ahead of a pilot programme granting online lending licences to non-bank operators in China in 2015. Tencent is not the only backer of WeBank – others include Baiyeyuan and Liye Group – but the bank is seen very much as a Tencent group company.

WeBank and Alibaba’s MyBank were among the pilots whose aim was to bring private money into the Chinese financial services sector, with a particular focus on getting credit to small and medium-sized businesses – a long-acknowledged weakness of the established banking sector and the big four banks in particular. 

Today, WeBank serves those clients through its WeiYeDai product, and offers micro loans to consumers through another, WeiLiDai.

All four of China’s biggest tech players – Alibaba, Baidu, Tencent and JD.com – have made incursions into financial services; between them they have tentacles in banking, broking, insurance, payments, consumer finance and wealth management. 

In addition to the Alibaba and Tencent-backed internet banks, Baidu is a backer of aiBank, alongside China Citic Bank. But WeBank is, so far, the leader in assets, loans, net profits, return on equity and non-performing loans. 

One sample number: a Rmb154.5 billion ($21.5 billion) deposit base at the end of 2018, up 2,800% on 2017. That’s not bad for an enterprise with no physical branches.

Clearly, the bank has gained critical mass swiftly. It was launched five years ago with Tencent’s backing, and in 2018 reported revenue of Rmb10 billion and net profit of Rmb2.5 billion, a far cry from its first year when it lost Rmb538.8 million in 2015. 

In late 2018, the bank’s valuation passed Rmb147 billion ($21 billion), making it one of the world’s largest unicorns; this is not a public valuation but was gleaned from an auction notice for a minor stake in the company, posted on Taobao.com.

The bank’s CIO, Henry Ma, has said WeBank meets the requirements for public listing, but doesn’t yet feel the need to do it. Ma has also said its NPL ratio is not yet climbing, but could do so fourfold without causing alarm as expansion continues. As of the middle of this year, the NPL ratio is thought to be around the 1% mark.

Ma has also said that the idea is not to compete with the banks, but just to make the world flatter: to link small entrepreneurs with credit using technology. 

It does so, though, without putting too much of its balance sheet on the line; Tencent eventually declined an interview for this piece, but it is understood that only 20% of WeBank’s loans end up on its own balance sheet, with the vast majority syndicated out to local lenders close to the borrowers.

This is, perhaps, the biggest distinction with the Alibaba family of financial services. Tencent businesses such as WeBank tend to depict themselves as middlemen more than Ant Financial does, and this is also considered a politically expedient way of moving ahead, since it avoids the People’s Bank of China having to make any awkward decisions about the scale of influence private-sector fintechs hold in financial services. 

In the Tencent model, it’s still the traditional banks that keep much of the business, and Tencent doesn’t suggest it wants to take that business from them.

There is no question China’s fintech-backed banks benefited in the early days from somewhat benevolent regulation. But more recently, there is a sense that closer attention is being paid. 

In August, WeBank was fined Rmb2 million by the China Banking and Insurance Regulatory Commission for multiple violations, including irregular loan issuance, non-compliance in management appointments and employee misconduct. 

Employees had used consumer loans from the bank to invest in stocks and futures trading, against industry rules. To an extent this reflects renewed scrutiny of banks generally – China Guangfa and Agricultural Bank of China were fined around the same time – but it does cement a sense that WeBank is, finally, being considered very much as a bank.

However, Tencent isn’t just about WeBank. Equally relevant is the ubiquitous nature of WeChat, the messaging app. WeChat is not only a peerless distribution platform – over one billion Chinese use it, a landmark number that became official at the end of 2018 – but also a trove of credit data. Through this, the WeChat Pay digital wallet has topped 900 million active users.

Well before WeBank was launched, Tencent offered financial products – a fund called LiCaiTong dates from January 2014 and was launched with Huaxia Bank on a premise of offering interest rates 16 times higher than that of the PBOC’s one-year deposit rates – and Tencent is behind the scenes in a host of leading fintechs from Gojek in Indonesia to kakaobank in Korea.

Today, WeBank is building the first ever distributed banking system based on cloud computing technologies and the blockchain. Clearly it aims to keep its competitive advantages. 

And it’s not just a domestic story: since October, Chinese tourists have been able to use WeChat Pay to shop in the US using a module to Travelex Pay, mirroring the global utility of Ant Financial/Alibaba’s Alipay app. 

Three million Chinese tourists visited the US in 2016. They spent $33 billion that year, which is, as Barron’s observed, equivalent to New Jersey’s total tax revenue for 2016. 

If you’re going to pick a constituency to serve globally, the Chinese tourist is a pretty good one.