Exclusive: Regulators Hone In On Banks’ Latest Innovation — Group Savings
As banks scramble to bring in deposits to fund their lending operations and invest in new wealth management products, many are taking a leaf out of the group-buying playbook of many e-commerce platforms, offering higher interest rates and returns to customers who band together and hand over a bigger dollop of money.
Some lenders, such as China Construction Bank Corp. (CCB), China Merchants Bank Co. Ltd., Bank of Shanghai Co. Ltd. and Bank of Dongguan Co. Ltd., have rolled out group savings products, where customers can invite friends to join together to get better interest rates. The more participants and the bigger the total pot of money, the higher the interest rate.
But this latest innovation in the never-ending battle for customer funds has come under scrutiny from some local regulators who have started asking banks to submit data and information about their group-buying products including savings, wealth management and loans, sources with knowledge of the matter told Caixin.
So far, the authorities haven’t given out any specific regulatory instructions as they are at an early stage of researching the subject, a source in the banking industry familiar with the matter told Caixin. The investigations are mostly being carried out in regions in the southeast of the country, other sources said.
CCB told Caixin in April that it was offering four group savings plans: a three-month two-person plan offering 1.54% interest, a six-month two-person plan with 1.82% interest; a one-year three-person plan carrying 2.1% interest and a three-year two-person plan with 3.8% interest. Bank of Shanghai has a three-year five-person savings plan that comes with a 4.125% interest rate if each individual deposits 50,000 yuan ($7,000), Caixin has learned. That compares with a rate of 3.68% if a customer puts the same amount into an individual three-year savings account at the bank.
Some banks have even extended group buying to loans and wealth management businesses. Bank of Nanjing Co. Ltd., for example, rolled out a consumer loan product that charges a lower interest rate the larger the participation, although eligible customers need to hold a pre-approved consumer-loan quota with the bank.
Several industry sources told Caixin that while higher interest-rates for group deposits are fairly standard, wealth management products are different story. Its not clear how wealth management products can guarantee higher returns as they are off-balance sheet businesses and are barred by the new asset management rules from guaranteeing returns, one source told Caixin.
Group buying is an attractive option for banks for several reasons. It can bring in more deposits, a key source of funding for banks’ lending business and it can lower the cost of customer acquisition. It’s also popular among savers because with the one-year benchmark deposit rate standing at 1.5% and the three-year at just 2.75%, while consumer inflation is running at more than 3% since October 2019, they are currently losing out.
“The pattern of group-buying deposits is a marketing model taken from the internet sector, turning clients into marketers who help banks obtain more clients,” Liu Xiaoshu, an economist of Bank of Qingdao Co. Ltd., said. Although it’s innovative, it’s also controversial because by allowing savers to pool their money, it is in effect reducing the threshold for high-interest deposits, Liu said. Under current regulations there is a 200,000 yuan minimum requirement for individuals to buy a large denomination certificate of deposit, a fixed-term fixed-interest savings account.
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