Nearly eight in 10 adults in China now have a bank account, according to the 2014 Global Findex. This represents a 15 percentage point increase since 2011. According to the survey, the number of global unbanked has decreased from 2.5 billion to 2 billion in the past three years, and China’s progress has been a major driver of this change. In fact, the 2014 Findex found that of the world’s 500 million newly banked adults, more than one third (180 million) live in China.
Three positive trends emerge from this data.
1. Rural and poor people constitute many of the “newly banked” adults.
Sixty-six percent of the poorest quintile in China now have a formal account which represents an increase of 28 percentage points over the past three years. The rural population – which includes most of the poor in China - also saw a major increase of 20 percentage points with 74 percent of rural adults formally banked in 2014. Women have significantly benefitted from this growth and are now almost as financially included as men.
2. China is relatively well-positioned on usage of accounts, especially savings.
Use and quality of financial services are crucial. Opening millions of accounts that people don’t use does not solve the problem of financial exclusion. On this front, China is doing relatively well, only eight percent of accounts being dormant. As a point of comparison, 43% of accounts in India remain dormant. Taking this one step further, the Findex reported that 52% of accounts in China are “high use,” meaning that their owners use them for three withdrawals per month or at least one payment or instance of savings in the past 12 months. This statistic contributes to East Asia and the Pacific having the highest ratio of high-use accounts outside the high-income OECD countries.
3. The number of adults making payments from their bank accounts using a mobile phone is growing fast.
Findex shows that 19%of adults with an account in China make payments from their account using their mobile phones. China is ahead of certain high-income OECD economies on this score, including Germany, where just 15 percent of adult account holders make bank transactions on mobile. The rapid growth of mobile phones with over 622 million unique users in 2014 contributes to this trend in mobile phone payments. It is noteworthy that over 80% of Chinese access internet on their mobile phones, which opens great opportunities for mobile banking.
What is driving China’s financial inclusion progress?
There are several possible reasons for China’s recent accomplishments in financial inclusion. Conducive government policies for the expansion of banks and the emergence of new technology-driven models are particularly important.
For example, recent policies have enabled new financial service providers such as microcredit companies and village and township banks to emerge and serve unbanked segments. The Postal and Savings Bank of China has continued its expansion and now serves over 400 million customers. As importantly, government-to person transfers have had a major impact on the number of people who use an account. The Chinese Government now delivers subsidies to beneficiaries through bank accounts. Recipients can visit one of 900,000 bank agents such as mom-and-pop shops and use their card to collect their funds through an electronic point of sale device.
On the technology side, increased Internet access and use has enabled the expansion of hundreds of e-commerce businesses, including Alibaba, which now uses e-commerce data to make small loans to its customers. Technology companies like F-Road have also contributed to increasing usage by enabling millions of low income customers to access their bank account from remote using a SIM card overlay on any kind of phone.
What are the remaining challenges?
But the news from Findex are not all positive for China. The country is second only to India in the total number of unbanked adults. The Findex data can help us profile the 234 million unbanked Chinese adults:
- 55% are women;
- 71% live in rural areas;
- 54% live in the poorest 40% of households;
- About 80% have only an elementary school education or less.
While financial inclusion in China has made great progress in rural areas and with the poor, there is still a long road ahead for these segments.
Another challenge in China is access to formal credit, which remains limited compared with high-income countries, even if it has increased over the past three years. In 2011, seven percent of adults in China borrowed in the past year, compared to 10 percent in 2014. A large proportion of small entrepreneurs, the rural poor, as well as migrant workers find it hard to get the credit they need for their businesses or personal projects.
There is no doubt that if the government of China continues its trajectory of policies and regulation conducive to financial development, the next Findex update in 2017 will reveal even more progress. The highly state-owned banking sector is undergoing significant reforms. For example, the China Banking Regulatory Commission (CBRC) recently granted licenses to new private banks, including two internet banks: WeBank - launched by Tencent - and Mybank - being launched by the Alibaba Ant Financial Group this coming June. These new banks have the potential to accelerate the provision of financial services to the unbanked.
In addition, CBRC is leading the development of a financial inclusion strategy. As part of this effort, it will be important for Chinese policy makers and financial service providers to better understand the needs and behaviors of different population segments that remain unbanked. Given China’s increasing influence in global affairs, its advanced technology solutions for financial inclusion will attract more attention and could set an example for other countries.
Nice overview of the progress and ongoing challenges facing financial inclusion in China. It’s particularly interesting to see that the percentage of bank accounts in “high use” is so large. The qualifications for this designation might not necessarily reflect firm results in the case of China though since it could be the case that programs which put cards in the hands of first time bank users might also require banking activity that distort the interpretation of the measures. This would not necessarily be a bad thing either, but ultimately I would like to see work done that assesses which of these financial activities are being most used and used to meet what need.
While the progress has been monumental for sure, the focus now should be on how the financial institutions themselves (beyond just PSBC) can offer additional services and serve as information hubs to expand bank use while also promoting smart, safe behavioral changes. The tech companies have really revolutionized bank use in cities from what I see, but reaching deeply rural communities will ultimately require other tools if we are to expect progress in the coming years in these regions.
Expanding formal credit to these areas is definitely an important piece to this process. In addition to the e-commerce data-backed lending described, I’ve also heard of more innovative work being done with psycho-metrics to assist in credit evaluation. Increasing numbers of Chinese P2P companies are targeting segments of these populations but much more work to be done by building off of what already exists – agent banking expansions and more.
Well written article!!