WeBank applies blockchain technology to its micro loan business

When Chinese regulators opened the banking sector in 2014 and allowed banking entities to be owned 100% privately, it coincided with a couple of other macro factors such as the openness of the regulators to all financial experimentation to flourish in particular in emerging technologies such as artificial intelligence, blockchain, and cloud computing. One of the companies to take advantage of this opportunity is WeBank.

“WeBank, the first privately-owned commercial bank in China, obtained its financial licence from the Shenzhen Banking Regulatory Bureau in December 2014. The company was initiated by the leading shareholder, Tencent, and other two large shareholders, namely Shenzhen Baiyeyuan, an investment holding company specialising in the pharmaceutical industry, and Shenzhen Liye Group, which focuses on financial and industrial investments. We launched the first product, a micro loan product in May 2015, and this was very successful. A lot of that has to do because we could leverage on Tencent’s open source technology, a robust database, and the security that matched a lot of the requirements we had in building WeBank,” said Henry Ma, Chief Information Officer, WeBank.

According to its latest annual report, WeBank grew its assets to $8.3billion (RMB52 billion) between 2014 and 2016. In 2016, the bank turned profitable after operating for 12 months. Its net interest income contributed the largest share to total earnings at 78%. Furthermore, the quality of its asset book stood at 0.32% at the end of 2016. 
With more than 38 million customers, WeBank is also larger than Alibaba’s MyBank. It is ranked among the best digital banks in the Asia Pacific, Middle East and Africa in The Asian Banker Annual Best Digital Banks and FI ranking. 

Retail customers that take out a micro loan do not have to own a current account which is a type II account under Chinese regulations. This means the bank is not allowed to have a physical branch, which is not part of their business model, as they do own a sizeable digital retail base. WeBank’s core retail product segments are mainly wealth and micro loans, and not into insurance, payments or offering a credit card. 
For its microlending product, the bank works closely with the WeChat platform, though WeBank has to compete for access with other third party financial products.

Apply blockchain technology to solve business issues
Since WeBank borrows its funds from the interbank market , one key strategic lever WeBank aimed at was to make the process of doing business with them as transparent and efficient as possible.

WeBank has been running real-life blockchain applications on top of its underlying platform called blockchain open source (BCOS), which is developed in house. The bank knew first hand that to make a successful blockchain platform, it had to be open source to create trust among partners. 

“The most important point in regards to the distributed ledger is how you leverage this technology for applications or real business products. In our case, how to reduce friction with our banking partners because of the specific micro loan product we have. We borrowed the syndication idea from corporate lending and applied it to the micro lending scenario. So, whenever a customer borrows, we split in real-time our returns with our partners. Traditionally this arrangement was done through batch drop at the end of the day. A text file was manually created that contains all the transactions for the day was subsequently shared with our partner institutions. Once they receive the file, they do the reconciliation, clearing and settlement,” Ma explained.

When WeBank started to build this consortium , the objective was to record the entire process is on the shared ledger, which appears on both sides not as a discreet file but as a constant streaming of information, which was a crucial capability.

“When you work with your partners, you want to work with transparency and utmost usability - this is how trust is built,” he said.

Forming platform as a service 
WeBank has increasingly exported its platform and technologies as a service to other banks in the Chinese market. 
“We have a platform called ‘WePower’ where we package it up as software development tools, allowing our partner banks to embed capabilities in their own apps. In wealth management, we built the infrastructure to link up with all these product partners such as fund houses which we opened to smaller Chinese banks,” he stated.

WeBank’s clients are based in China’s city commercial and agricultural banks, mainly the tier 3 and 4 segments. These clients want to grow their markets and have a large, loyal and stable customer base but don’t have the needed technical expertise and manpower. 

Ma also sees the trend moving forward having core banking based solutions for these smaller banks. “From the very beginning when we build products, we already have the mind set to build a core banking platform. In some cases, it is the syndication, facial recognition or authentication, cloud or AI. In other cases, our partners can rent the entire platform and we operate it for them.” 

Essentially WeBank wants to become the connecting platform in a B2B2C business model. “At the one end we have the unbanked and underbanked individuals like small micro enterprises. On the other hand, the bigger customers like the internet platforms. We think by working with them we can leverage the capabilities we have such as risk management, not just the platform but also product design,” he explained. 

“A lot of those financial institutions and banks have capital and good financial products and in this era they don’t know how to get their assets to the customers. So we really want to be the bridge of these different players in the market,” Ma added.

Agile operating model
An important aspect of applying WeBank’s technology is the cost structure it derives from its proprietary platform. “The average IT operating cost per account per year is only 1/10 of the major banks in China. This is why we can lend our money very competitively in the market. It’s a volume business because our marginal cost is very low. In addition, all business staff must have a technology background forgoing the business tech translation issues.

Technology product managers come up with the specifications, create the requirements and built the system and basic functionalities, and once the business team has some idea what the product should look like, everything else will be incremental requirements,” Ma explained

Webank found this an agile structure making a direct impact on the development cycle. “The fastest turnaround time for a new product was 11 days in 2017, from the moment the business team had an idea to commercial launch. We are very proud of this.”

WeBank aims at expanding beyond its initial business-to-customer (B2C) model by offering emerging technologies to mid sized and smaller commercial banks in China. The company is not alone in this quest. Most technology companies from Greater China aim to provide a solid infrastructure as a service foundation for other banks. Should they succeed selling their technology to a wider customer base in the region and globally, the ones that need to worry about are tradional IT companies.