China’s Online Banks Chase Funds with Flexible Fixed Deposits

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Online banks in China are providing their own form of flexible fixed deposits by transferring income rights to third party financial institutions, in a bid to better attract funds from retail customers.

At least eight online banks have launched new cash management products in China that provide the higher returns of long-term fixed deposits while also permitting advance withdrawals according to a report from National Business Daily.

These banks include Chongqing Fumin Bank (富民银行),  Blue Ocean Bank (蓝海银行) and CITIC aiBank (百信银行), and encompass both private banks and direct banks.

Small and medium-sized lenders in China have been scrambling for alternative means to taps funds such as structured deposits, after asset management rules launched in April removed the implicit guarantees undergirding bank wealth management products, just as a crackdown on shadow banking put pressure on interbank loans.

The terms for the new brand of cash management products are all for either three or five years, with customers permitted to make early withdrawals at any time prior to maturation.

Most of the banks are selling the products via their own mobile apps, or cooperative relationships involving some of China’s online tech giants.

Chongqing Fumin Bank, for example, is selling its “Fuminbao” (富民宝) product via the JD Finance app, while Z-Bank (众邦银行) is using the same platform to sell its “Dang Ri” (当日) series of products.

The advance withdrawal rate is as high as 4.3%, while the rate for withdrawal at maturation runs to as much as 4.875%. According to NBD the minimum investment amount is also extremely small, and in some cases as low as 50 yuan (approx. USD$7.20).

Sales material from the banks indicates that they can provide early withdrawal in tandem with higher returns by transferring the income rights for fixed term deposits to cooperating financial institutions such as trust companies.

A source from Fumin Bank said that when customers make advance withdrawals from the Fuminbao product, the right to income for the remaining term is transferred to a trust company.

The “Lanbaobao” (蓝宝宝) cash management product sold by Blue Ocean Bank provides an average annualised return of 4.875%, yet in the case of early withdrawal income rights to the deposit are transferred to Guotong Trust (国通信托), enabling the customer to obtain both principal and interest, both of which are covered by China’s national deposit insurance system.

A source from CITIC aiBank said that it has engaged in a similar arrangement with a third party financial services institution.

Financial consultancy Rong360 further points out that the reason that these banks are capable of providing investors with these higher returns is because they are all online lenders whose main business involves the provision of small sum, high-interest loans.

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