The development of financial technology (FinTech) in areas such as mobile Internet, cloud computing, big data, search engines, and blockchains has significantly changed the financial industry, forcing traditional banks to transform and upgrade. Citigroup (Citi GPS 2016) researchers predicted that in the next 10 years, FinTech innovation will reduce the number of employees in traditional banks by approximately one-third. Stephen Bird, CEO of Global Consumer Banking at Citigroup, described the current situation in the banking industry as a “stage of extinction,” where banks either swiftly adapt and create new competitive positioning or gradually perish. He said, moreover, that Citigroup is currently fighting for survival. In China, more than 10,000 Internet-based financial enterprises have directly cut into the traditional finance industry, breaking the barriers of traditional financial ecology. Based on their technological advantages, giants such as Baidu, Tencent, and Ali (BAT) have many licenses and are trying to build Internet-based financial empires. Moreover, the Oriental Wealth Co. acquired with TongXin Securities. Meanwhile, traditional financial institutions—such as the Industrial and Commercial Bank of China (ICBC) and the China Construction Bank (CCB), among others—have announced ambitious Internet financial strategies. China CITIC Bank has built a strategic partnership with Baidu as well as a joint venture with BaiXin Bank. Further cooperative partnerships have been established between Beijing Bank and Tencent, Shanghai Pudong Development Bank and China Mobile, and China Merchants Bank and China Unicom.
It is clear, however, that having a large number of P2P companies poses risks to society as well as increased losses for investors. In May 2016, 2,471 problem P2P companies were identified, accounting for 54.1% of all such companies in China. Herd behavior by investors (Ceyhan, Shi and Leskovec 2011; Lee and Lee 2012; Krumme 2009; Herzenstein, Dholakia and Andrews 2011) has led to huge losses. Relaxed regulation has caused many social problems and costs, giving rise to questions and criticism related to Internet finance.
Internet finance companies have different organizational formation processes; they have different shareholders, different organizational structures, and different behaviors. Some receive direct investments from enterprises while others cooperate at the product level. Some invest with small amounts of equity (e.g., the projects Tencent has invested in through the so-called encroachment strategy), others form joint ventures, and still others form through mergers and acquisitions. Some are transferred from traditional finance organizations. Degrees of risk differ among these various organizational formation processes. Some technology companies lack basic risk management when they transition into financial organizations.
The basic logic of the changes in mobile Internet finance can be characterized as follows: Financial products are innovated through mobile Internet. Product innovation spawns a new batch of financial organizations, and new products and organizations induce innovation in the financial system. Such innovation accelerates the legitimacy and standardization of financial institutions, promotes the mobile internalization of traditional financial institutions, and further hastens the innovation of financial products. Thus, the financialization of mobile Internet enterprises and the internalization of traditional financial institutions involve processes that are constantly changing and developing. As such, it is important to study the formation processes of mobile Internet finance.
Currently, there is no consistent terminology for or definition of Internet finance. It has been variously called Internet finance, mobile finance, and digital finance. The most commonly used term is Internet finance. Xie and Zhuanwei (2012) note that the spectrum of Internet finance is defined by two boundaries. The first consists of traditional financial intermediaries and markets, such as commercial banks, securities firms, insurance companies, and stock exchanges. The other corresponds to Walrasian general equilibrium, where neither financial intermediaries nor markets exist. Xie et al. (2015) further suggest that all types of organizational structures that lie within those boundaries embody the impacts of the Internet on finance activities.
The finance industry has been networked since the appearance of the Internet, which has escalated the internal information construction of financial institutions. Institutions have highly developed internal networks between institutions, which include traders, enterprises, and regulators. Such regulators include the CBRC (China Banking Regulatory Commission), CSRC (China Securities Regulatory Commission), and CIRC (China Insurance Regulatory Commission). Before there rise of mobile payment, all financial transactions had to occur over the counter, in fixed places, or in fixed facilities. Now, trade can be conducted anywhere anytime through online transactions. The Internet has networked previously dispersed financial industries. In this way, the mobile Internet allows finance to move. Therefore, the focus of our research is not Internet finance but mobile Internet finance.
Chen et al. (2016) characterize mobile Internet finance as a dynamic process. Integrating mobile Internet platforms and financial instruments generates financial product innovation. The integration of mobile Internet enterprises and financial institutions accelerates the innovation of financial organizations. Moreover, the integration of mobile Internet thinking with the spirit of financial contracts promotes a constantly changing process of financial system innovation. The purpose of such innovation is to establish a fair and value-sharing digital ecosystem. Thus, the development of mobile Internet platforms and financial system innovation present a virtuous circle involving constant change.
Accenture PLC (2014) believes the banks of the future should be “everyday banks.” To succeed in this environment, banks must become indispensable everyday banks positioned to fulfill their customers’ financial and nonfinancial needs. An everyday bank offers a complete customer solution, driving continuous daily interaction. Using digital levers, such a bank develops the entire business model, opening access to new business sources, customers, and profit pools.
This bank convenes a digital ecosystem, assembling existing provider partners and other key players, creating digital connections and establishing equitable value sharing. It reinvents itself as a value aggregator, advice provider, and access facilitator (Fig. 1).
Accenture believes that transformation and upgrade are almost impossible for traditional banks. If that is the case, then what about China’s traditional banks? What is an effective path for China’s traditional banks to transform and upgrade into everyday banks? What difficulties do they face?
One of the present paper authors, who worked in a bank for several years and exchanged viewpoints with other experts in the industry, also considers such transformation and upgrade nearly impossible.
To better understand the development of Internet finance banking in China, this study selected the Industrial and Commercial Bank of China (ICBC) as representative of domestic traditional commercial banks. For comparison, this study selected Citibank, which is among the most successful examples of traditional commercial banks transforming into Internet banks. Thus, this study focuses on the transformation and upgrade of traditional banks into everyday banks through FinTech using a comparative case analysis method. For the main factors responding to FinTech, we selected the strategies, organization, HR allocation, and product innovation adopted by both banks. Through this comparative analysis, we want to identify the difficulties involved in transforming Chinese banks and explore effective paths for upgrades.
ICBC knew about the application of FinTech but was not strategically positioned as a technical leader; Citibank, meanwhile, positioned itself as a leader in FinTech innovation. In the future, it is expected that 50% of its banking employees will become redundant as a result of such IT developments. Through its strategic transformation, Citibank not only upgraded itself but also led such transformation in the whole banking industry. Citibank aimed to transform itself from a victim of FinTech into a revolutionary. In this way, Citibank has far surpassed ICBC in terms of strategic development.
This study proposes an “electric vehicle” strategy model for ICBC’s transformation. This is based on the concept of devising a mobile Internet finance “battery” fitted to the original “bicycle.” The strategy corresponding to this mode is reflected in ICBC’s application of FinTech to traditional businesses, including cloud computing, big data, and mobile payment. The application determines the bank’s role as a follower in terms of systems, organization, and product innovation. Meanwhile, Citibank’s approach is described here as an “airplane mode.” In this model, strategy is the front of the aircraft, an innovative organizational structure and financial support are its wings, and FinTech is the engine. ICBC is just starting to focus on FinTech and might one day be able to become a global banking leader. Citibank, meanwhile, is already a FinTech leader that innovates core technology and raises the bar for technology. As such, ICBC still has a long way to go before it can transform into an everyday bank.
Here, we adopt the concept of “technology power.” We believe that, as a result of FinTech (e.g., big data and cloud computing), technology will become the most important force in the future while traditional administrative power and social resources will become noncore competitive powers. As such, companies that possess special technologies will be able to conduct finance, even if they do not have licenses. Regulators must give them licenses when they become bigger, as with Alipay. Traditional financial institutions such as Citigroup and Goldman Sachs are transforming into technology companies. Likewise, China’s financial institutions must become FinTech creators, leaders, and owners, not just users.
While many studies have investigated Internet finance, few have considered it from the perspective of organizational innovation. Momparler et al. (2013) analyzed American Internet finance companies, with consideration of the service efficiency of traditional commercial banks and other related issues. They argue that Internet finance has the advantages of high efficiency, low costs, and high deposit rates. Faced with the impact of Internet finance, commercial banks should actively improve their business models, establish professional teams, improve their efficiency, and reduce nonperforming loans. Wei Y., Huang X., and Zhang W. (2017) argue that the increasingly extensive application of big data technology will have a profound impact on financial ecology and structure. They argue that commercial banks should embrace big data, gain insight from the data, occupy a core position in the value chain, and lead the digital transformation of traditional models. This not only requires digital transformations in banking strategy, business models, and philosophy but also requires using face-to-face digital interaction to facilitate customer intimacy. Using the perspective of cross-border mergers and acquisitions, Hu Ting et al. (2014) suggest several reform directions for banks, such as becoming data analysts, integrated service providers, synthetic traders, and wealth managers. They argue that banks can achieve strategic transformation and development through cross-border mergers and acquisitions with other financial institutions, as well as logistics companies and other emerging enterprises. Finally, Chen et al. (2016) provide the optimal timing and equilibrium for mobile Internet finance by way of mergers and acquisitions.
The rest of this paper proceeds as follows. "The ICBC Case" section introduces the ICBE case in terms of e-ICBC history, e-ICBC strategy analysis, organizational innovation, HR analysis, and business analysis. "The Citibank Case" section presents the Citibank case. "Major Issues in Traditional Banks’ Transition to Mobile Internet Banking" section considers the major issues in traditional banks transitioning to mobile Internet banking, while "Effective Path for Transition" section proposes effective transition paths for traditional banks.