CORE BANKING SOLUTIONS FOR SMALL AND MIDSIZE BANKS IN CHINA 2013 UPDATE

1. CORE BANKING SOLUTIONS FOR SMALL AND MIDSIZE BANKS IN CHINA 2013 UPDATE JANUARY 2014 Hua Zhang Analyst, Asian Financial Services group hzhang@celent.com A recording of today's webinar and a copy of the presentation will be available to Celent clients on our website at http://celent.com/user/login.

2. The Four Major State-owned Commercial Banks Section 1

3. New Core Systems at China’s State-Owned Banks Source: Celent

4. BoCBank of China • In late October 2011, the BoC’s new core business system went live. The BoC signed a commercial contract with TCS in November 2006 to deploy the BaNCS core banking system. The new core banking system helped the BoC solve its problems with previous multiple core banking systems and non-standardized data. • Before the new core system went live, the BoC’s information technology infrastructure was unable to keep up with the rapidly developing business. The old core business systems were also not unified, and there were six different versions. At the same time, data concentration was low and the old core business system was spread across five regional information centers in North, East, South, Northeast, and Southwest China. • The customer-centric system is a breakthrough technological innovation: its core business system philosophy is “having the customer at the heart of operations.” With business processes and systems supporting the transformation, the BoC was able to construct a customer-centric system.

5. ICBCIndustrial and Commercial Bank of China • Construction of the ICBC’s fourth-generation core system began in 2008 and went live in 2012. This system helps the ICBC strengthen risk management and enhance the integration of its domestic and foreign core business systems: • The fourth generation core system enhances system construction in emerging business areas such as mobile banking, IC card, financial marketing, private banking, precious metals, investment banking and cash management etc. • The same set of core systems is used worldwide: the globalization of ICBC works to have the ability to utilize a single set of core systems to provide the same services to customers around the world.

6. ABCAgricultural Bank of China • Customer-centric: In the BoEing system, every customer and account can have one or more accounts managers. The accounts manager is the main person responsible for the maintenance of customer information. The manager is in charge of liaising with customers, carrying out personalized marketing and collecting customer feedback with regard to banking products and services. • Product Factory Model: The BoEing system is based on the product factory model; it abstracts and sub-divides the bank’s existing product features into several components and parameters, establishing a unified product catalog for the entire bank. • Price Innovation:BoEingis better able to provide flexibility in product pricing, thereby effectively responding to developments in interest rate liberalization and the growing requirement of service fees:

7. CCBChina Construction Bank • CCB’s new generation core system went live in 2013. The main improvements made by CCB’s new generation core system include: • In the area of information technology, the system enhances electronic banking, financial social security card, cash management, pension operations, and other strategic business developments. • Strengthens risk management capabilities, and increases the level of operational risk management.

8. Joint-stock Commercial Banks Section 2

9. Joint-stock Banks Source: Celent

10. Minsheng • Almost all of the bank’s operations have undergone process optimization and reengineering. • Uses SOA framework in technology: Each product system is relatively independent and also independent from the accounting system. This is beneficial for product logic and handling, and more new product lines can be set up in a shorter time. For example, it took only 45 days in total for the “deposit and loan all-in-one card” to develop from a proposal to its official launch. This process used to take 120 days. • Response to interest rate liberalization: • A lean core system: implemented separation of transaction and accounts, of the transactions system and the core, of customer history information and core transactions, as well as separation of payments and product. • Customer-centric: Minsheng Bank’s previous core system was account-centric. Besides supporting daily transactions, the new core system is able to do consumer marketing, consumer analysis, and pricing. • Banking processes: the new core system does process optimization from all three platforms — front, back, and middle. The front end mainly focuses on customer attrition and lowering marketing costs; and the middle platform seeks to achieve process-oriented risk control.

11. Ping An • Supports the business scale and rapid growth in the number of customers: Satisfies the diverse product demands of consumers, enhances customer service, operational support, and risk management capabilities. • Adopts an open platform:The adoption of an open platform is a requirement for Ping An Bank’s strategic transformation and Ping An Group’s consolidated financial strategy. A system with an open platform is better able to support the rapid expansion of the business, for example, the number of branches supported will be ten times greater than before and it will be able to support more than 100,000 ATMs and billions of accounts. • Customer-centric: Helps the bank in promoting cross-selling and integrated financial services. • Product innovation: After the implementation of the new system, the business users are able to directly configure product parameters at the system’s parameter center according to the need, so as to define a new product.

12. Developments in Main Vendors Section 3

13. New Core System Implementations by Main Vendors in 2011–2013 Source: Celent

14. New Trends of Core Systems Section 4

15. Internet Finance • The rapid development of technology has also brought great challenges to the banking business. Cloud computing, Big Data, mobile Internet, social media, and other commercial forces are challenging and even subverting the traditional business models of banking such as P2P lending, mobile banking, product pricing based on customers’ Internet information, and other commercial models. • Nowadays, some traditional internet businesses have begun to enter the financial sector. For example, companies such as Alibaba and Tencent are able to provide banking services such as payment, credit, and financial management. Furthermore, the bad debt loan rate provided by these enterprises is lower, their loan approval process is faster, and their cost of lending is even lower than banks. Meanwhile, some banks are also developing services for the Internet. China Merchants Bank is one such example.

16. Interest Rate Liberalization • Interest rate liberalization will increase the volatility of interest rates. Banks will begin to set prices for all customers and businesses. Banks have to increase their level of detail management and enhance efficiency and risk control. • Several banks have upgraded or adopted a new core system in order to deal with the changes in the market. For example, China Minsheng Bank introduced a product factory design concept which is able to release new, interest rate-related products into the market more quickly.

17. Small Loans and Microloans • Small loans and microloans are a new type of business specially dealing with providing small, unsecured loans to microenterprises or individuals. In the past, the risks of such businesses were too high, and the costs involved in the approval process were too great for commercial banks. Now, with more sophisticated risk assessment tools and more liberal lending rates, the small and microlending business has become a possibility. • For example, Zhejiang Tailong Commercial Bank and Baoshang Bank specialize in this field. The core banking systems of these two banks further emphasize the use of new methods to perform pricing for customers. For example, assessing customer risk by using community-based management and having the client managers make onsite adjustments. • Actually, Tailong Commercial Bank’s business model has led to a less than 1% bad debt rate. This is far below the average 3.3% that other commercial banks face.

18. Small and Medium banks Join Together to Construct Core Systems • There are more than 100 city commercial banks in China. The IT construction in most of these banks is relatively weak. They usually merge or acquire another city commercial bank to become larger and then use the unified IT platform; or, in the case of the Shandong Alliance of City Commercial Banks, where every bank is different and thus not suitable for mergers, the banks operate independently but use a unified IT platform. • The alliance formed by 15 city commercial banks in Shandong created a “single-system, multibank” core banking system that provides middle and back end services such as information system operational platforms, data operation and maintenance, payments settlement and business operational platform services, financial product development, and information and consulting services for small and medium-size banks in the region. • This is the first time China’s regional small and medium-size banks collaborated to implement a core system.

19. Conclusions Section 5

20. Conclusions • The new core banking systems recently implemented in China are all focused on supporting process transformation at the bank. • At the front end, the new systems at Chinese banks support process reengineering to facilitate marketing and sales. A continuous process and modeling approach enables it to conduct standardized and orderly marketing activities and respond quickly to customer needs. • In the middle platform, the systems support process-oriented risk controls and specialized factory tasks. The special features of process-oriented risk controls are using Basel II’s approach based on internal ratings to conduct risk assessments and conducting quantitative risk management and pricing. • At the back end, the new systems provide comprehensive support for systems, successfully separating transactions and accounting, thereby avoiding the impact of changes in business processes on accounting rules. This increases the overall stability of the system.

21. Thank you! My contact information: Hua Zhanghzhang@celent.com My business development colleague: Marie Aquino maquino@celent.com A recording of today's webinar and a copy of the presentation will be available to Celent clients on our website at http://celent.com/user/login.