With the doors long closed to foreign financial organizations now poised to open, Chinese banks are scrambling to bolster their competitiveness - in large measure by improving their technology.
The selection of Beijing as the site of the 2008 Summer Olympics, plus China's acceptance last year into the World Trade Organization, are just two of the factors fueling technology spending by Chinese banks, which have historically been insular by Western standards. Last year they spent about $4.5 billion on technology, but they will spend more than twice that - $10.5 billion - in 2005, Celent Communications LLC, a Boston-based technology research and consulting firm, said in a report this month.
By contrast, Celent estimated that U.S. banks would spend about $34 billion on technology this year.
The Chinese banks "know the time frame is fixed," said Henry T. Tsuei, the president of First Data Corp.'s card and merchant processing operations in North Asia. "They've got to improve the overall level of service, and a lot of that improvement will be technology-driven."
Under the terms of its agreement to join the WTO, China is scheduled to open its doors to foreign banks in stages through the end of 2006. Though the government's continued restrictions on what foreign banks may do there will continue to tilt the playing field, the spottiness of Chinese banks' technology will be a countervailing force, experts say.
Speaking from Omaha this week just days before leaving for China to lead First Data's new office there, Mr. Tsuei said that some Chinese banks offer Internet service as good as any in the world.
However, according to Neil Katkov, a Tokyo-based analyst for Celent and the author of the report, "Bank Technology in China," banks there use many incompatible and inefficient computer systems built with Cobol and other outdated programming languages.
Moreover, 31% of Chinese bank branches - primarily in rural areas - have no information technology infrastructure at all, Mr. Katkov found.
Of $10.5 billion that Chinese banks are expected to spend on technology in 2005, $7.4 billion will be spent on hardware, $1.3 billion on software, and $1.8 billion on services, Celent forecasts.
The four state-owned banks that dominate the market have 69% of the deposits and 59% of the 232,000 branches, according to the consulting firm. These banks account for 47% of the bank technology spending going on now, the report says.
The next tier of banks, which are owned by shareholders, are more forward-looking with regard to technology and are making a disproportionately large investment in computers and telecommunication, according to the report.
And there is little that these as well as the largest banks aren't spending on. Celent says Chinese banks are working to consolidate their core processing systems, automate branches, set up data warehouses, and improve their networks and remote delivery channels. The size of the country and number of branches in China add to the challenge.
Mr. Katkov noted that there is a "motley array of IT solutions" for information processing at Chinese branches.
"Large systems at nationwide and regional headquarters and processing centers are split between mainframes (usually IBM) and smaller, server-based systems," he wrote. "Branches and processing centers in major cities generally utilize server-based systems. Communication between branches is often substandard, as it is routed through ordinary telecom lines that are inadequate for high transaction volumes.
"As a result, interprovincial transactions (as well as reporting to the nationwide headquarters) have traditionally been performed by hand, a very labor-intensive task considering the scale involved," Mr. Katkov wrote.
At first glance, these problems, combined with the scheduled increase to market access, suggest a big opportunity for foreign banks in China. However, tech spending in anticipation of foreign competition may provide as much of an opportunity, if not more so, for systems vendors, consultants, and servicing companies.
James B. Shanahan, a former cards and payments consultant who recently returned to the United States after a year and a half in China, said that, even though business leaders there are not crazy about paying the fees that Western consultants charge, they are eager for help in installing new systems and integrating them with existing technology.
"The Western companies that are able to do that and follow through with on-the-ground support will really be the big winners," said Mr. Shanahan, a former principal at Business Dynamics Consulting Inc. in Newark, Del. "There's a mad race to get into fighting shape. This is across industries. The guy in the street knows about it, because it's in the papers."
First Data is about to open an office in Shanghai, to be headed by Mr. Tsuei, offering outsourcing of a variety of payments services. According to Mr. Shanahan, the company is making just the right move. "That kind of business will be very successful over the long term."
Mr. Tsuei said that he has been part of contract negotiations with IT managers at Chinese banks over the last several months. They are well-prepared and rigorous in their evaluation process, he said.
"The prospects for [technology investments] being well managed are much stronger than they are to be mismanaged," he said.
In an e-mail interview, Mr. Katkov said that China's banks are more vulnerable to foreign competition in corporate banking than they are in retail, "because their service offerings are simply not as sophisticated as those of the major global banks in almost any area you can think of - foreign exchange, trade finance, cash management, commercial lending, and structured finance."
Mr. Shanahan takes the opposite view. Chinese consumers are often very receptive to foreign companies, but longstanding relationships count more heavily to corporate customers, he said.
Both he and Mr. Katkov said they do not expect Chinese banks to cede a big share of their market to foreign newcomers.
