In August 2016, financial technology (FinTech) was included in the 13th Five-year Plan on National Scientific and Technological Innovation by China’s State Council. Driven by this plan, a number of commercial banks announced FinTech innovation strategies based on new IT technologies, such as Big Data, cloud computing, blockchain, Artificial Intelligence (AI), and mobile Internet, in an aim to build a financial ecosystem that integrates various financial instruments and tools.
With the impact of new financial regulations, negative interest rates, penalties, and unstable markets, the global banking community is experiencing a severe winter at present. A slowdown in net profit growth and downsizing are common across the industry. How can China’s banks deal with this complicated and volatile situation and grasp the opportunity to achieve steady growth through digital transformation? We interviewed Lv Zhongtao, General Manager of the IT Department of Industrial and Commercial Bank of China Limited (ICBC), to learn how he would answer this question. We hope that his ideas can provide insights into the technical progress and current trends of China’s banking industry.
As one of the largest banks in the world, ICBC has many branches in China and has become one of the largest Internet banks. As such, each of ICBC’s key initiatives attracts attention from the industry.
Huawei: From Internet finance to FinTech, the financial industry has been deeply integrating the Internet and high-tech with their services in recent years. Some people even assert that FinTech will play an important role in disrupting and changing traditional banking. Do you agree with this idea? In your opinion, how does the rise of FinTech affect the banking industry?
Lv Zhongtao: The essence of Internet finance and FinTech is finance. They represent the extension and innovation of finance in concepts, processes, and business with the aid of the Internet, Big Data, and other technologies. According to the current development status, Internet finance enterprises and FinTech are making innovations only in some segmented financial domains. Currently, those enterprises cannot overturn or replace traditional financial institutions. The integration and innovation of the financial industry and FinTech is a process of symbiotic development.
FinTech has grown rapidly in recent years. Although its applications in multiple financial domains are still at the exploration or start stage, their new business models and technical methods are impacting and changing the banking industry, which is worth attention. The banking industry should pay high attention to those impacts and changes and conduct continuous innovation to reduce operating costs and improve financial service efficiency and customer experience.
New technologies can be applied to various enterprises, including emerging FinTech enterprises and traditional commercial banks. At present, traditional commercial banks are increasing the use of new technologies and striving to capitalize on those technologies to innovate services and improve customer service quality and efficiency. In the future, traditional commercial banks will use their longstanding expertise and advantages in banking service logic to actively apply new technologies to FinTech business innovation. Financial services for customers will be mainly provided by traditional financial enterprises and supplemented by emerging FinTech enterprises, creating an inclusive finance ecosystem.
Huawei: At present, emerging FinTech enterprises are gradually shaking up the banking industry’s well-established operational models. What users require of traditional financial services has dramatically changed. They now hope to obtain personal financial services anytime and anywhere along with customized financial products. Facing such pressure, many banks are embracing digital transformation as a viable solution. What do you think of the digital transformation of the banking industry? In your opinion, what are the key elements and difficulties? How can banks overcome these difficulties?
Lv Zhongtao: The application of new technologies, such as the Internet and Big Data, has changed customers’ lives and consumption patterns. Customers’ behavior and requirements of financial services are more diverse and personalized. Obtaining financial services through digital channels has become a megatrend. The banking industry should follow the latest business and customer development trends; improve research and application of new technologies, such as Big Data, AI, blockchain, the Internet of Things (IoT), and cloud computing; and actively accelerate digital transformation. In doing so, they can provide customers with intelligent, comprehensive, and differentiated services that can be accessed anywhere and anytime.
ICBC realised the importance of digital transformation early and initiated IT-based bank construction in 2013. We have focused on the research and application of new technologies, such as mobile Internet, Big Data, cloud computing, AI, blockchain, the IoT, and biometric recognition, and achieved significant progress in some fields. From this process, we believe that the key elements and difficulties of digital transformation lie in the innovative integration of new technologies and business scenarios.
Technology is neutral. To unlock the full potential of new technologies, the key is business scenario innovation. Across the world, the lists of Forbes FinTech 50 and FinTech 100 released by KPMG and other institutions focus on FinTech enterprises’ business innovation in segmented market domains. The emergence of new technologies unlocks possibilities for business innovation. Therefore, the core of digital transformation is improving the integration of business and technology, studying business scenarios and innovations based on the features of new technologies, and promoting the transformation of business operation concepts and management paradigms based on digital transformation.
Huawei: For advocates of traditional banking, FinTech has yet to generate success stories that can be referenced. What improvements has ICBC achieved? How can those improvements facilitate banks’ business, product, and service innovation?
Lv Zhongtao: In the past two years, we have been focusing on our e-ICBC strategy. Specifically, we have fully explored customer requirements and increased research and application innovation in various banking business domains with FinTech. We have achieved significant innovation results in the following fields:
In 2006, ICBC started construction of a data warehouse. After years of development, a Big Data system covers multiple technologies, such as TD, Hadoop, MPP DB, and streaming data processing, and supports quasi-real-time and batch processing of structured and unstructured data. In regards to business application, we have applied Big Data systematically in multiple domains, such as customer precision marketing, risk prevention and control, performance appraisal, and operations management, and achieved remarkable results.
In the second half of 2014, ICBC began planning the construction of a cloud platform based on open industry standards and ICBC’s actual R&D and O&M requirements. Currently, IaaS has been used in the R&D test environment and successfully supported the flexible supply of computing, storage, and network resources. PaaS has been trialed in some popular services, such as commemorative coin reservation and quick payment, improving elastic scalability of the system. In terms of SaaS, ICBC provided e-Security, an external risk information service platform, for other commercial banks through an API. ICBC has also worked with cities to build Smart Wuxi and other Smart City services by offering financial services for paying daily bills.
ICBC has applied AI in the following domains. In the anti-fraud domain, ICBC used a neural network model to prevent fraud in 2015. This model could determine the fraud risk of each eBanking transaction in real time, effectively avoiding customers’ capital loss. In the customer service domain, in 2016, ICBC released “ICBC Smart”, a next-generation smart robot. This robot supports intelligent context-based interaction and flexible transfer to manual services, relieving agents’ workloads. In addition, in 2016, ICBC also set up an AI research team which focused on studying the theoretical system related to AI and verified the application of AI in credit risk control and other domains.
ICBC has paid close attention to the technology tracking and study of blockchain. In early 2016, ICBC set up a blockchain research team and conducted technical exchanges with a number of universities and companies in the industry to better understand the latest blockchain technology. At present, ICBC has constructed the prototype of a financial product transaction platform based on blockchain and tested this system inside a bank. The prototype uses the alliance chain mode to provide customers with point-to-point financial asset transfer and transaction services based on the traditional market making model.
ICBC implemented biometric recognition early. As early as 2013, ICBC branches were supporting fingerprint authorization and identity authentication for bank tellers. Individual mobile banking will support fingerprint log in soon. Facial recognition was piloted in the auxiliary review process of smart branches in 2016.
ICBC has applied the IoT in business operations and intelligent equipment. In 2014, ICBC developed a physical goods and cash operations management system which used RFID to achieve batch processing and accurate control of cash boxes entering and exiting a bank’s vault. In 2016, ICBC explored the application of the IoT in intelligent equipment. ATMs were equipped with electronic password locks to support intelligent perception of unlocking and locking status, achieving remote network control and management.
In 2015, ICBC achieved encrypted transmission of backup data between local equipment rooms in the Beijing and Shanghai branches. ICBC will complete construction of the Beijing-Shanghai backbone network for quantum communications, which will enable encrypted transmission of backup data across regions. ICBC will become the first financial institution in China to build an encrypted channel for quantum communications and transmission of production data. This event marks the first application of quantum encryption technology in the financial services industry.
On July 15, 2016, China Banking Regulatory Commission (CBRC) published Guiding Opinions on Regulating the 13th Five-year Plan for the Development of Information Technology in the Banking Sector in China (Exposure Draft) on their official website. This document specified that the banking industry and financial institutions should follow the State Council’s Opinions on Promoting the Innovation and Development of Cloud Computing and Fostering New Types of Operation in the Information Industry, conduct cloud computing architecture planning, set cloud computing standards, jointly build an industry cloud platform, and actively transform architectures. To support enterprises in business innovation, banks are gradually migrating service systems from the traditional closed architecture to an open cloud computing architecture. Cloud computing has even been applied to key services. ICBC will promote research on technologies related to cloud computing and the construction of cloud computing data centers, and migrating banking service applications to the cloud.
Huawei: The IT system and architecture of the traditional banking industry are complicated. To support banks’ digital transformation, we will need to adjust the traditional architecture and build a new IT architecture. Would you like to share any experience about this process?
Lv Zhongtao: After years of continuous technical innovation, ICBC has built a centralized and unified IT architecture across the world. This new architecture is a result of our rich experience in multiple architecture optimization projects, such as Project 9991, Project 1031, and the Three Data Centers in Two Cities project. This new IT architecture can meet ICBC’s requirements for product innovation and operations management development. Facing changes because of digital transformation and other new situations and development trends, ICBC initiated an IT architecture transformation in 2014. ICBC aimed to build a future-proof new technical framework by fully leveraging a distributed framework, cloud computing, and other new technologies, and integrating the open platform cluster system with mainframes. This new framework features openness, large capacity, high scalability, controllable costs, security, stability, and easy R&D, facilitating the digital transformation of banking services. We believe that, after years of development, each financial institution has their own business model and system architecture, and therefore they face different challenges. The application of new technologies cannot be simply copied or imitated. Instead, enterprises should apply technologies based on their specific needs to maximize the value of the technologies.”
Huawei: What changes does cloud computing bring to ICBC? What is the plan for ICBC in the future?
Lv Zhongtao: ICBC is promoting a “centralized + distributed” architecture as the core of its IT architecture transformation. Cloud computing provides key support for the construction and O&M of the distributed system. At present, we have tested cloud computing in services with a large elasticity in volume, such as commemorative coin reservation and quick payment, improving the elastic scalability capabilities of the system. In the future, we will expand the use of the cloud platform and promote IaaS and PaaS in Internet finance services with a large elasticity in volume, such as e-Commerce, e-Connection, and e-Bank. The application can unlock the potential of cloud computing in fast resource supply, fast software deployment, flexible scalability of process capabilities, and highly automated O&M management.
In September 2015, China released Action Outline for Promoting Big Data Development and offered a top-layer design and overall plan for fully promoting Big Data development and application in China. Banks’ capabilities to grasp, mine, analyze, and apply Big Data are key to accurate customer recognition, value acquisition, and risk prevention and control.
Huawei: Data has long been regarded as the most valuable asset of a bank. The application of Big Data can help the banking industry provide the core capability of risk control and assist banks in optimizing service processes, innovating business models, and improving service capabilities. What is your opinion? What plan does ICBC have for Big Data construction?
Lv Zhongtao: The banking industry is a typical data-driven industry. ICBC studied and applied Big Data early. In 2006, we started constructing our data warehouse. After years of construction, we have developed a comprehensive Big Data processing system which supports quasi-real-time and batch processing of structured and unstructured data. This system has been applied in multiple domains, such as customer precision marketing, risk prevention and control, and operations management, and achieved remarkable results.
In the customer marketing domain, we have built a precision marketing model to target customers based on various analysis, mining tools, and Big Data. This model distributes target customer lists to various channels, such as e-Connection, which achieves closed-loop management of marketing processes and meets the service needs of customer precision marketing.
In the risk management domain, we have built a comprehensive system based on our data warehouse, corporate information database, and other systems, that covers credit risk management, market risk management, operations risk management, and country risk management. We have also applied related risk quantification results to the entire service process and risk control domains, such as credit approval and risk warning. In the operations management domain, we have built a performance appraisal indicator library based on Big Data information assets, covering all aspects of bank-wide operations management and reflecting our management concepts and orientation. We have a full picture of each branch’s performance, each department’s resource consumption, each employee’s value output, each product’s cost, and each customer’s business contribution. As such, we have found a new way to generate benefits from precision management and to speed up growth driven by management innovation.
In the future, ICBC will continue to study and apply Big Data. First, we will build an efficient, open, heterogeneous, and elastic Big Data platform based on a distributed database, Hadoop, and streaming technologies to achieve comprehensive analysis and quick sharing of information. This will further improve our Big Data processing capability. Second, we will introduce external data based on internal data. By cooperating with government functional departments, banks across the world, international organizations, and information service providers, we will obtain external data about market, risk, credit, tax, and court decisions to improve our Big Data analytics and application accuracy in the service domains. Third, we will strengthen Big Data service applications centering on enterprise-level data application system construction to fully utilize information.
In the future, banks will face severe challenges brought by highly competitive FinTech companies and Internet giants. FinTech will become the major aspect of banks’ technical work. What impacts does the development of blockchain and AI have on commercial banks?
Huawei: It is reported that FED has set up a working group to fully analyze the benefits of FinTech innovation, especially blockchain technology. A research report will be published later this year. Many foreign banks are actively participating in blockchain application innovation through various means. Some banks in China are also exploring this topic. What do you think of the changes blockchain has brought to the banking industry? Have ICBC conducted research into blockchain technology?
Lv Zhongtao: Recently, blockchain has attracted increasing attention from various parties. Financial institutions across the world are actively exploring blockchain. Internationally, R3 works with more than 60 financial institutions, such as Credit Suisse, Citibank, and HSBC, on the application of blockchain in the financial services industry. In China, blockchain alliances have sprung up. China’s banking industry is paying close attention to blockchain and increasing R&D and testing of blockchain. The People’s Bank of China has taken the lead in studying the issuance and organizational operations of digital currency. Some financial institutions, such as Sunshine Insurance, have trialed blockchain in a number of services.
ICBC has paid close attention to the technology tracking and study of blockchain. In early 2016, ICBC set up a blockchain research team and conducted technical exchanges with a number of universities and companies in the industry to better understand the latest blockchain technology. At present, ICBC has constructed the prototype of a financial product transaction platform based on blockchain and trialed this system inside a bank. The prototype plans to use the alliance chain mode to provide customers with point-to-point financial asset transfer and transaction services based on the traditional market making model.
Huawei: Intelligence is one of the main features of the future banking developments. New business models are emerging, such as intelligent consulting and robo-advisor. In your opinion, what is the future of applying AI in the banking industry? What will future smart banks be like?
Lv Zhongtao: AI has gone through three waves since the concept was coined in 1956. In recent years, with the maturing of Big Data and the breakthrough in distributed computing capability, AI has come to the third wave and has been used in more domains. The financial services industry is testing the applications of technologies related to AI in different ways.
In the future, AI will be widely used in the banking industry. AI can bring a new revolution to customer marketing services, financial product design, risk management and control, and operations decision-making management. In the customer marketing services domain, AI can enable intelligent product recommendations and precision marketing by simulating customers’ behavior. Some account managers may be replaced with intelligent machines and response systems, providing friendly, comprehensive, and efficient customer services.
In the financial product design domain, we use machine learning technology to design differentiated financial products that can meet customers’ expectations based on numerous structured and unstructured data and tens of thousands of tag-based customer profiles. We can also optimize products by improving learning technology. For example, according to customers’ differentiated requirements of risks and benefits, we can build quantitative models with self-extraction of features and classification algorithm, providing intelligent support for investment decision-making and creating a robo-advisor.
In the risk control domain, we use deep learning to improve the anti-fraud system for the entire process, including financial product application and transaction. For instance, to fight against telecommunications fraud, we can accurately intercept the transfer and remittance transactions of fraudulent accounts through intelligent anti-fraud monitoring systems to guarantee capital security. For credit risk prevention, we can detect the complicated, associated network of customers’ credit relationships in a multi-dimensional manner and construct a transmission model of default risks to identify the risk transmission path in advance. In the operation decision-making domain, we use semantic analysis, dynamic probability graphs, and game theory tools to predict the probability and time of incidents. This provides comprehensive, intelligent, and rational decision-making support for management. As an example, for the impact of political, economic, and social incidents on banking services, we can provide the basis for related analysis and propose measures or suggestions based on intelligent recognition and reasoning.
Huawei: In which areas does ICBC cooperate with Huawei? What is your expectation of Huawei? What does joint innovation bring to ICBC from a strategic perspective?
Lv Zhongtao: At present, ICBC and Huawei are conducting joint innovations in multiple areas, such as cloud computing and distributed database. Joint innovation is a win-win process for both parties. ICBC can further apply advanced technologies in its IT system to support business innovation and Huawei can obtain a better understanding of the financial services industry to accelerate product maturity and improve product competitiveness.
I hope that both parties will increase cooperation and joint innovation, and make the best use of each party’s advantages to achieve mutual benefits. In addition, I hope that Huawei can invest more in new technologies, open more technologies to ICBC, and improve knowledge transfer.