RETAIL banking looms large in the future for lenders in China as financial deregulation weakens profit growth, but it’s a hard realm for foreign banks to crack because of their relevantly small-scale operations.

By 2020, 40 percent of bank profits on the Chinese mainland will be generated by retail banking, a fourfold increase from the present, according to McKinsey & Co.

Retail banking revenue is expected to surpass 3 trillion yuan (US$488 billion) in 2021, the US consulting firm said in the recently published book “China Retail Banking Innovation Opportunities.”

Fang Xiyuan, associate partner at McKinsey and co-author of the book, said the potential is hot but foreign bankers may struggle to come in from the cold.

“Only the big five state-owned banks and some leading joint stock banks with at least 1,000 branches are truly profitable in retail,” Fang told Shanghai Daily. “Other banks, including all the foreign banks, are sub-scale, and thus it will be very difficult to make profits in this area.”

According to Andrew Cainey, senior executive advisor at consulting firm Strategy&, formerly Booz & Co, extensive branch networks have historically been important, but the growth of digital and Internet banking may undercut the importance of branches in the future.

“Brand and scale are still important,” Cainey said. “It will be harder for smaller foreign banks to build profitable retail businesses. For the largest foreign banks, the mass affluent customer segments in the higher tier cities will be much more attractive.”

Sarah Butler, managing director at Strategy& in China, said success in China will require long-term commitment and patience by foreign banks.

“There are clearly unmet needs for better customer value experience, where many foreign players have strong capabilities,” she said.

So how are major foreign banks in China addressing the new challenges?

HSBC

Among foreign banks operating on the mainland, HSBC currently has the largest branch network, with 160 outlets. Net profit of retail banking at HSBC China turned from a loss of 11.7 million yuan in 2012 to a profit of 94.6 million yuan last year. Retail accounted for 2.6 percent of total net.

The bank launched a million-dollar online wealth management system earlier this month. The new system contains three platforms: a strategic financial platform that evaluates customer needs and risk tolerance, a wealth dashboard to show account balances and purchased products, and a relations manager platform for financial advisers to maintain customer relationships.

Li Feng, head of retail banking and wealth management at HSBC China, told Shanghai Daily that the bank, when first incorporated on the mainland in 2007, used spreadsheets recording client responses to nine questions tailored toward understanding their needs.

“The tool was simple and rough back then, but the concept was the same,” Li said. “It’s about having an insight into your customer. Now we have developed far more advanced systems to assist us.”

The bank divides customer needs into five categories: family protection, education planning, retirement planning, wealth growth and family heritage.

“Insurance plays a vital role in meeting those needs,” said Li, who became the director of HSBC Life Insurance Co this year. “The market here favors investment-linked insurance and single premiums. However, we pursue the traditional practice of letting insurance play a principal role in wealth management to provide financial protection for customers.”

Citibank

Banks on the mainland are limited to selling policies of a maximum three insurers at each branch. HSBC China has partnered with four insurers: HSBC Life Insurance, Allianz China Life, Ping An Life Insurance, and AXA Tianping Property&Casualty Insurance. It works with three partners out of the four in each city. Citibank chose a very different model.

Citibank China recently rolled out its exclusive partnership with Hong Kong-headquartered AIA in a multi-billion deal over 15 years. The partnership grants the life insurer access to Citibank branches in Asia Pacific.

But in China, the deal is a bit more complicated. Citibank China currently operates retail businesses in 13 cities, while AIA has licenses to operate in only six cities. Therefore, the bank will continue to sell other insurers’ policies in areas where AIA doesn’t operate, according to Jonathan Larsen, Citi’s global head of retail banking and head of consumer banking for Asia Pacific.

The lender and the insurer launched a joint life annuity product for couples last month, the first of its kind on the mainland. It is sold exclusively in Citi branches. Larsen said there will be more exclusive products co-designed by the two parties for the local market.

Wealthy and tech-savvy Chinese consumers, segments targeted by Citi, have more complex needs. They want access to financial services around the clock, seamless alignment between physical branches and online platforms, and fair and transparent pricing – but not necessarily the lowest prices, according to McKinsey’s book.

“It’s a simpler model for us to have just one partner so that we can invest more with the partner to provide one-stop shopping experience and stronger digital delivery for our customers,” Larsen said.

Citi is the first and only Western bank that currently issues sole-branded credit cards on the mainland.

Credit cards are a massive market. Last year, their numbers rose 18 percent from 2012 to 391 million, according to the People’s Bank of China. It’s also a highly competitive market dominated by leading Chinese banks. Industrial and Commercial Bank of China, the nation’s biggest bank, holds the unshakable position as the top issuer, with 88 million credit cards. Shanghai Pudong Development Bank had 6.5 million credit card users last year.

Citibank China has never publicly disclosed the number of its credit card holders. However, Simon Chow, the bank’s head of consumer banking, said the bank expects to double issuance this year.

Standard Chartered Bank

Standard Chartered Bank will launch its credit card business next week, becoming the second Western bank to issue sole-branded credit cards on the mainland.

The bank’s 24 percent drop in net profit on the mainland last year to 1.2 billion yuan didn’t dent its intention to pursue growth in its retail business.

It will launch yuan cards with UnionPay and US dollar cards with VISA. The yuan card has a chip of Chinese standard known as PBOC2.0. While the foreign currency card can only be used abroad, because the chip only complies international specification co-developed by Europay, MasterCard and VISA, which is called EMV.

Standard Chartered China partnered with China Pacific Insurance to provide fund protection for card users intent on Internet shopping, where card fraud is common due to security loopholes.

It plans to use the credit card channel to communicate with customers about other retail products.