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Daily briefing - 29 July 2019

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Midway through 2018, it became clear that an inexorable shift was happening in the banking world, as funding started to flow in larger and larger amounts to small businesses, based on an incredible breakthrough in the movement of information between parties. By accepting online and offline digital payments, and maintaining a real-time flow of information to their bank, small businesses not only found themselves taking a loan for the first time, but taking several, even over the course of a single day. Many in the western world were oblivious to this shift because the bank in question was a miniature bank of 300 employees, serving mostly farmers and small businesses using Alibaba's platforms. And, anything Amazon can do, Jack Ma can do better. China's approach to privacy is different to the west, where we convince ourselves that we're free from personal surveillance. "As Mybank and its peers crunch reams of new data from payment systems, social media and other sources, they're growing more comfortable with smaller borrowers that they previously shunned in favor of state-owned giants," reports Bloomberg, which is finally catching up on this news. "For China's $13 trillion economy, which expanded at its weakest pace since at least 1992 last quarter, the implications could be profound. Non-state firms - mostly small businesses - account for about 60% of growth, employ 80% of workers, and have been disproportionately squeezed by a more than two-year government crackdown on shadow lenders." Not only that, but Mybank has been sharing its technology with other lenders. The country's second largest bank, Construction Bank, now offers a speedy app that is boosting its business lending. "The nation's second-largest lender unveiled a mobile app in September that can process loan applications for as much as 5 million yuan in two minutes. Construction Bank boosted its small-business lending by 51% last year, more than twice as fast as the industry. The bank charges an average interest rate of 5.3% for one-year loans, slightly above the 4.35% benchmark lending rate, and says defaults have held at a minuscule 0.3%." How long before American small businesses start borrowing on the Alibaba platform? Sorry, what's that? It's already possible?

Over at the FT, journalists are scratching their heads trying to figure out what Citi should do as it falls behind its main US rival. Surely the success of operators such as Mybank cannot explain Citi's pulling back from Asian markets. Can it? Of course it can. Citi's clunky technology, like American cars, might appear cool to Americans but to the rest of the world it's nothing special at all. The FT devotes its big read today to Citi as its investors struggle to get rid of the bad parts. "Yet even after epic rounds of post-crisis divestments, Citi remains an unusual collection of businesses, some dominant, others subscale and in need of investment, and many with little strategic connection to one another," writes Robert Armstrong from New York. "It begs the question of whether it is time to sell some, and double down on others." Indeed, the story is about Citi's strategic priorities: Citi was lashed together in the great deregulatory spree of the 1980s and 1990s, growing into a "global bank" with retail, corporate and investment wings and a world-leading treasury operation. Citi also emerged as the leader of the credit card industry, nationally and internationally. "Citi's strongest consumer business is credit cards: it is the largest card issuer globally, measured by loans, and second-biggest in the US market. Yet the business has underperformed expectations, as the US card industry fell into a rewards war, but it is again building momentum: profit grew 8 per cent to $1.7bn in the first half of this year." As we report in our Digital Finance Research & Advisory Service, the virtualisation of credit cards is happening fast. Citi's strategy is to partner with new platform players such as Grab. It looks like a good move.

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