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Top 10 China Financial Technology Trends for 2011
A look at the key technologies and trends that will define the Chinese Financial Technology market in 2011

Kapronasia Research China Fundamentals series Title: Top 10 China Financial Technology Trends for 2011 ID: KPCFS0284 Author: Elsa Yan, Zennon Kapron Date: January 2011

Contents
Forward Trend One: Mobile Banking Trend Two: Online Banking Trend Three: Business Intelligence Trend Four: Service Oriented Architecture (SOA) Trend Five: Virtualization Trend Six: Core Banking Trend Seven: IT Risk Management Trend Eight: Cloud Computing Trend Nine: Banking Security Trend Ten: Disaster Recovery Final Thoughts / Recommendations 1 2 3 5 6 7 8 9 10 11 12 13

Forward

In 2010, China once again took its place as one the fastest growing economy in the world After ‘suffering’ from high single digit growth for a few years, China’s GDP in 2010 was over 10% once again. A key part of this growth story is of course the Chinese financial services sector, which is destined to play an even important role not just in the domestic market, but in the global financial arena as several large banks and financial institutions start to expand overseas. Domestically, an increasingly sophisticated customer-base is pushing Chinese financial institutions to change the way they interact with their customers as competition increases With an increasingly fickle customer base in China and an incredibly competitive market, banks are expanding abroad and face challenges with a IT infrastructure that was barely sufficient for China, much less international markets Technology is seen as a key part of the solution for these challenges, enabling financial institutions to lower costs and enable business growth and development, 2011 should be an interesting year for technology vendors as investment continues to increase Then, what benefits can global financial technology vendors reap from the rapid development of local financial services sector and where should they focus? These are the questions that this report intends to answer. It is the first of its kind looking specifically at Chinese Financial Technology and the key trends and drivers that will shape the industry in 2011 We have detailed each of the trends that we see as being key going forward and give you an idea of how to tap into each of these trends We hope you enjoy reading this report as much as we enjoyed writing it

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Trend One: Mobile Banking
Mobile Banking is set to grow as more banking applications are moved onto a mobile platform and consumers adopt newer richer mobile devices. However, safety and security remain the biggest concerns among consumers before they readily embrace mobile banking

The launch of 3G in China has ushered in a complete change in the way that customers interact with their banks; the mobile phone has increasingly become a key integrated platform for combining telecommunication and financial applications for Chinese consumers China Mobile banking is helping banks significantly expand their business outlets and reduce transaction cost especially in the lesser developed areas of China Meanwhile, mobile banking is driving mobile operators’ revenues and bringing greater convenience to consumers The Market According to China’s Ministry of Industry and Information Technology, the number of mobile users in China reached 780 million by March 2010 22% of these users, or 174 million, are mobile internet users A recent survey conducted by Nielsen and released by the Chinese government shows that over 80% of Chinese consumers would prefer that their other forms of non-cash payment such as transportation and banking cards be integrated into their mobile phone Driven by a further development of 3G networks and the forthcoming 4G networks, China’s mobile banking market is expected to accelerate its pace of development in the coming years, with its market potential predicting to exceed RMB 100 billion by 2012 In August 2009, the Industrial and Commerce Bank of China (ICBC), the world’s largest bank by assets, became the first domestic bank to introduce what ICBC has branded the “Mobile Banking (WAP) 3G” service The service not only offers basic banking services like account inquiry and remittance by transfer, but is the first in China to offer domestic investment and financial functions such as payment, repayment by credit

card, instalment, funding and gold trade The introduction of ICBC’s Mobile Banking (WAP) 3G is a clear indication of what’s to come and that banks are embracing mobile banking on a large scale Partner Up In 2010, competition in the mobile banking space among major banks and operators intensified. In China, mobile operators are not allowed to offer full banking services to their customers directly, hence they need to collaborate with banks in order to offer mobile banking services to their customers This need has pushed partnerships established to facilitate the market growth and has also led to cross-investment between telcos and financial institutions. In May, China Mobile, the world’s largest mobile company by subscribers, took a 20% stake for Shanghai Pudong Development Bank (SPDB) for around US$5 9 billion The strategic alliance between the two parties is expected to give both a competitive edge in developing a more robust mobile banking business model and technology Similarly, in August, another major operator, China Unicom, joined hands with China Merchants Bank to deepen cooperation in mobile payment and mobile banking and push Mobile Banking (WAP) 3G services In the wake of the recent launch of Apple’s iPhone 4 in China, the two parties jointly launched “Merchant Bank Mobile Experience Services”, under which multiple banking related applications have been made available for iPhone users to download, which has resulted in greater product awareness and uptake

Page 2 Kapronasia Top 10 2011 Chinese Financial Technology Trends January 2011

trend One: mobile Banking Continued

Concurrently, China Unicom and The Agricultural Bank of China (ABC) signed a strategic cooperation agreement The companies will collaborate on e-commerce, mobile banking, mobile payments, and related value-added services With the new services, China Unicom customers will be able to store a prepaid account on their mobile phone and top the account up over-the-air by transferring funds from an ABC account Coming into Focus Perceived as a more convenient and competitive mode of service delivery, mobile banking has been drawing greater attention and resources from all of China’s major banks, some of which have already extended their banking services to nearly every mobile platform In November, Bank of Communications introduced iPad mobile banking application, through which iPad users are able to access both basic account services and more complicated wealth management offerings Users can also enjoy “Non-card” financial services and the forthcoming enterprise mobile financial services However, despite the increasing popularity of mobile banking, safety remains the biggest concern among ordinary Chinese consumers

They worry that the money in their bank account will be gone if their mobile phones are lost The low willingness to use or trust on mobile banking among local consumers will continue to drive banks to improve the security of the mobile banking channel in order to convince more consumers to tap into this new banking channel Looking forward to 2011 In 2011, mobile banking will continue to increase in importance and popularity, driven by increasing mobile phone penetration as well as aggressive marketing by domestic major banks While price will remain a key tactic for the banks to win and keep customers, service offerings and security measures will be key competitive differentiators Branding will also play a more important role in retaining and enhancing customer loyalty, hence, more banks will be likely to launch mobile banking exclusive brands for the sake of differentiation Given the attractive market potential for mobile banking, we are expecting to have more tie-up initiatives between banks and mobile operators, with more ambitious investments in technology platforms and market promotions Thus, China’s mobile banking market is expected to become increasingly competitive and dynamic in the next few years

Trend Two: Online Banking
Online banking in China is growing rapidly, driven largely by the increasing popularity of online personal wealth management; and it is expected to grow faster, underpinned by its cost efficiency and ever increasing value-added services. In the last decade, the development of online banking in China has largely gone through three phases In the initial stage, which began in 2000, online banking mainly served the purpose of “purchasing” and consuming digital entertainment (mainly online gaming), which needs relatively simple payment methods; this led to nearly homogenous competition with all providers offering a very similar value proposition The second stage, starting from 2006, featured online services that were more customized for various industries, resulting in greater differentiation among payment suppliers The current stage, which started in early 2010, the banking industry has begun focusing on offering very specific value-added services for example, online wealth management, which was in need of a more mature, reliable and safe online mode, has been developing rapidly also supported by an

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trend two: Online Banking Continued

explosive growth in internet penetration and more aggressive online promotion by banks, securities firms, insurance companies and fund houses; online wealth management in China made huge strides in 2010 Online Riches Leading the popularity of online wealth management is the rapid development of wealth management specific banking services. As this has developed, more and more higher net worth users are starting to manage their wealth online This has prompted major banks to increasingly move their personal wealth management business online, with an aim of reaching a broader customer base and improving service standards China Merchants Bank for instance, through their “i-financial planning” website, allows the banks customers to not only purchase various wealth management product lines and over 700 funds, they can also invest in a range of diversified products such as gold, foreign currency and treasury bonds It is reported that the total value of wealth management products sold through online banking by China Merchant Bank has already exceeded that generated through bank counters, surpassing RMB 50 billion in 2010 Its “U Bao” online exclusive wealth management products, which the bank launched in June, generated over RMB 10 billion within a short period of four months According to the bank, there are more than 1,000 financial planners present in the “i-financial planning” online community, which provides professional financial planning advice and banking services to its online customers In addition, its “i-financial planning” website has also bridged a gap for those second- or third-tier cities where there is often significant wealth, but very little wealth management infrastructure Its customers in these cities can easily open account via online and carry out various wealth management related transactions

Getting Funding Another nascent example of the increasing usage of online banking is direct fund sales Currently, the online direct fund sales account for only 5% of the total fund sales in China, as opposed to over 60% in some developed countries However, industry players believe that once online direct fund sales mature, there will be a huge demand for online payment and settlement instruments from both fund houses and their agency companies In April 2010, China Asset Management Company secured an approval from China Securities Regulatory Commission to initiate online direct sales, which has now already become the firm’s primary distribution channel for fund products Following in its footsteps, we expect that over 80% of domestic fund companies encompassing more than 300 domestic funds will be moving online in the coming years, covering almost 90% of banking customers who will enjoy a truly one-stop fund trading services Looking forward to 2011 Thanks to convenience, low cost and higher safety, online banking is expected to grow faster, with a higher popularity than ever with Chinese financial institutions and investors in 2011. The increasingly advanced internet technology will provide banks with more opportunities to interact with their customers, who can request customized services. By addressing these specific customer needs, banks can significantly improve customer relationships and experience In addition, given its low-cost advantage and abundant information resources, online banking is expected to offer more innovative and value-added banking services such as company credit appraisal, personal financial planning advisory and expert investment analysis, which will further enhance the role of bank as an information intermediary As Chinese banks are vying for embracing online banking, technology vendors will also benefit from this boom, such as network solution providers and independent software vendors focused on this space

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Trend Three: Business Intelligence
Ludelum nonituiure, unte anulvis o vignatus, ales in vivivereo, quere tus consus; ne a opubli in Demand for business intelligence (BI) is rapidly increasing, thanks to richer set of applications; small and ducere, ve, viverfic te ad fac tem. movivitis, mus et pericul iamquam omnox nique poenitis sil medium banks are playing catch-up and actively adopting BI solutions vemquonsu it C. Ast vertem, nique omnique rcerum publi cumenat iusquius conte itelleg ilius.

BI in China is mainly used in the financial services, telecommunication, manufacturing, healthcare and retailing sectors As an instrument to enhance an enterprise’s intelligence and competitiveness, although previously not heavily used, BI has been getting more and more attention from Chinese companies especially in the financial services sector Getting Smarter According to ChinaBI, an information website dedicated to business intelligence, the total value of China’s BI market reached RMB2 6 billion in 2009, up by 18%, accounting for about 8% of the overall enterprise management software sales Thanks to a faster economic recovery in 2010, the demand for BI in China is expected to surge for the next five years. The Chinese financial services sector is one of the earliest BI adopters In the early 2000s, many local financial institutions were very focused on consolidating back-end data warehouses Traditionally banks were very much managed on a province by province basis, and data was spread throughout without having a consolidated single source of information Bringing it together Today, nearly all of the banks in China have a consolidated data-warehouse and fairly complete business processing systems With that foundation of data and systems in place, banks are now starting to figure out how to utilize all of that data; BI is seen as a key enabler This new outlook has rapidly increased demand for risk management and BI systems BI is no longer only used by manager’s decision-making;

it also is being more widely used at the branch operations level, particularly in the area of credit evaluation and decision making Apart from major commercial banks, local small and medium banks have also begun to spark an active demand for BI, as they keep growing in business portfolio and geographic expansion The adoption of BI provides Chinese banks with better solutions to improve their financial auditing and risk control, and thus the overall risk management capabilities In addition, BI also helps banks to integrate their enterprise resources and implement cost control, profitability analysis and performance evaluation, meanwhile, enhance customer relationship through developing valueadded service etc SAP is one of the market leaders globally in BI and has also established itself in the Chinese market SAP has provided a wide range of business analytic solutions to a number of domestic and foreign banks in the Chinese market including China Development Bank, ICBC, CCB, BoCom, Mingsheng Bank, Guangdong Development Bank, Bank of Chongqing, HSBC and Hang Seng Bank. Looking forward to 2011 As China’s economy continues to grow, we expect that the demand for BI in the local financial sector will remain strong in 2011 and financial institutions will be increasingly demanding more sophisticated and intelligent solutions In the context of enterprise’s business strategy and process, BI is expected to integrate different business systems through “gateway” technologies, and provide more personalized one-stop services such as business decision-making, data mining and business intelligence With the advancement

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trend three: Business intelligence Continued

of 3G wireless mobile technology, mobile BI is expected to grow in popularity, as users can realize dynamic management through data exchange and obtaining analysis report anywhere and anytime Due to high cost and complexity of developing traditional BI tools, likely we will see local small and medium sized banks opt for software

as a service (SaaS) models for their initial implemenations given the model’s quicker implementation and lower cost Hence, SaaS BI is expected to become another focus of development and competition for major BI manufacturers in the coming years

Trend Four: Service Oriented Architecture (SOA)
SOA is accelerating in development underpinned by the global players’ push into China and increased government support; the fast-changing landscape of Chinese banking sector expects more local banks to adopt SOA framework to stay competitive and compliant

Due to increased market competition, the development cycle of new products and new IT systems in the Chinese financial services sector have shortened greatly IT staff are under pressure to reduce difficulties and risks involved in system development, to ensure the timely implementation of systems The emergence of SOA provides IT departments with a better solution to help speed up system development and accommodate constant system changes made by banks in a more flexible manner. Driven by a growing push of SOA solutions by domestic software vendors and system integrators, SOA sales have grown rapidly in the local market According to CCW Research, a Beijing-based Chinese IT market research firm, the total value of SOA related software services market in China reached RMB 1 billion in 2009, up by 28% from the previous year Still a ways to go Albeit still a relatively underdeveloped market, nearly almost all the global leading software companies have begun to push forward the development and application of SOA in China:

Microsoft spent US$7 billion on a SOA research and development (R&D) in 2009 and Oracle launched SOA Suite 11g with Oracle Service Bus in the mid of 2010 The Chinese government has also pledged support for the development of SOA As early as December 22, 2009, China established SOA standard work committee and has made significant progress in SOA R&D since then. In May 2010, the Committee of ISO/IEC JTC 1 SC 38 Distributed Application Platforms & Services held its first plenary meeting in Beijing, when Chinaadvocated SOA International Standard “New Work Item Proposal” was officially passed. The move symbolized that the standardization work promoted by China in the SOA area has gained widespread recognition and acceptance among international community and China’s SOA related industry is expected to embark on a fast track in the coming years Looking forward to 2011 In 2011, three major focuses will drive the uptake for SOA in the Chinese banking sector: increasing international expansion by domestic commercial

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trend Four: service Oriented architecture Continued

banks, a more customer-centric approach to business and better risk management and control These focuses will prompt more Chinese commercial banks to actively pursue “process banking” based on an SOA framework in 2011, which will become key source of competitiveness

for banks to win in the future market competitions and better comply with the increasingly tightening government regulations

Trend Five: Virtualization
Virtualization technology will grow even in popularity, benefiting from its green and cost effective nature; virtual desktop and server applications will lead the way With nearly all of China’s major banks completing data warehouse consolidation and application integration projects in the recent few years, financial institutions’ data centers have gone from being a liability to an asset Although the data center in the past has effectively supported bank’s business development and product innovation, it has been the source of problems The data center issues in China are not unlike those in the west: Disparate systems have lead to numerous non-integrated applications and data, poor resource sharing, and underutilization of an ever-increasing number of servers This has all led to higher maintenance and operating cost as well as environmental issues To address these issues, virtualization technology was introduced by Chinese major banks in an effort to build virtual IT environment and pursue “green banking” In many aspects, virtualization represents the best type of technology to help solve these type of data center problems Starting to use An example of a bank that has benefited greatly by the adoption of virtualization technology is China Development Bank By moving a dozen of applications that were originally operating on a number of in a handful of servers to only four HP Superdome servers, the bank has realized dynamic allocation and united management of its IT resources with HP’s VSE (Virtual Server Environment) solution Another example is Bank of East Asia’s China subsidiary which, after going through a series of stages, from desktop virtualization, application virtualization to server virtualization has built a complete virtual data center including a virtual private cloud Apart from the banking sector, local insurance industry has also begun experimenting with virtualization technology, led by China Pacific Insurance Group, the second largest domestic property insurer Currently, 95% of servers in its data center are operated on the virtual platform Looking forward to 2011 In 2011, IT infrastructure will face tremendous challenges as local financial institutions struggle to deal with increasing data and application requirements as banks further diversify their businesses and customize product offerings This challenge, coupled with the demand from banks and insurers for mature, localized and complete virtualization technology solutions will provide ample opportunities for the application of virtualization technology We expect that Chinese banks will continue to prioritize and focus on virtual applications on both the desktop and server side, in order to better meet their demand for faster future business expansion and product launches
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Trend Six: Core Banking
Ludelum nonituiure, unte anulvis o vignatus, ales in vivivereo, quere tus consus; ne a opubli in Core banking remains a focus by Chinese banks; small and medium banks will be increasingly ducere, ve, viverfic te ad fac tem. movivitis, mus et pericul iamquam omnox nique poenitis sil targeted as they advance in geographic expansion and business innovation vemquonsu it C. Ast vertem, nique omnique rcerum publi cumenat iusquius conte itelleg ilius.

In recent years, China’s banking sector has gone through rapid changes, driven by deepening financial reforms, growing presence of foreign banks and quickly evolving customer demand. With intensified competition, there is a new wave of investment in core banking systems among Chinese banks, in a hope to sharpen their technology edge and stay ahead of the competition In 2010, core banking system remained an IT focus for many banks Many either upgraded their existing core systems or built their next-generation core systems with a view to meet their future business needs and reengineer their existing business processes This trend was particularly evident among small and medium sized Chinese banks Smaller but better opportunities Compared to large commercial banks, many small and medium banks lag behind in core banking technology largely due to being a newer segment of the market and not benefitting from as much government support as their larger counterparts Therefore, it has been imperative for them to upgrade or overhaul their core banking, which is becoming more crucial for their business development and expansion Given the fragmented nature of small and medium banks, the potential for the core banking market is very attractive, hence they are increasingly being targeted by both domestic and international vendors In September 2010, the largest city commercial bank in the middle and west part of China, the Bank of Chengdu, from Sichuan province, selected China Digital to provide its new-generation core

banking system The Beijing-based China Digital is China’s largest core banking provider and will supply the Bank of Chengdu with its own developed ModelB@nk core banking solution The solution is expected to provide overall support for the bank’s existing core banking business and also meet the demand for its business innovation and development in the next five years. With more local banks opting for completely new core banking systems, some banks also saw their core banking projects go live in 2010; in April, Shenzhen Rural Commercial Bank successfully brought its core banking online, which was developed and implemented by US-based Fiserv and China Digital respectively Looking forward to 2011 Driven by the rapid business expansion and customer-centric product demand, we expect to see more of small and medium banks speed up their investment in core banking systems in 2011 For foreign vendors, localization is key to crack the market Compared to their foreign counterparts, domestic players own local market know how and have a good customer relationship and a higher degree of trust from their customers, which is important for customers when they consider longterm ‘vendor risk management’ Local vendors also enjoy higher industry reputations, have deeper track records in project implementation and larger customer bases Therefore, it is crucial for foreign core banking players to find and partner with local vendors to quickly win deals.

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Trend Seven: IT Risk Management
Ludelum nonituiure, unte anulvis o vignatus, ales in vivivereo, quere tus consus; ne a opubli in IT risk management is being prioritized as result of the tightening regulatory environment; increasing ducere, ve, viverfic te ad fac tem. movivitis, mus et pericul iamquam omnox nique poenitis sil investments will be made to enhance banks’ risk management capability vemquonsu it C. Ast vertem, nique omnique rcerum publi cumenat iusquius conte itelleg ilius.

Non performing loans (NPLs) in the early 2000s were a key issue for banks and with the increased lending in the past few years, the spectre is once again looming. Conversely, liquidity is often somewhat unpredictable in China with reserve ratios that change with little notice - banks need to understand their risk exposure at any point in time to not only control risk, but indeed expand their business Understanding risk Despite the fact that the leading Chinese banks such as ICBC, CCB, BOC, and BoCom have consistently ranked as the world’s top ten banks by market capitalization in the past few years, the development of risk management capability among Chinese banks is still at an infancy stage Many banks have taken a ‘if it hasn’t broken – it won’t, so why do we need to put something in place in case it does’ attitude This has formed a striking contrast with global foreign banks, which have already developed a complete suite of risk management systems, including risk identification, alert, decision-making, prevention and the entire process monitoring system The global financial crisis that took hold in late 2008 has dealt a blow to the global financial market and pressed Chinese regulators to work on improving risk management capability of local banks Especially with the rollout of Basel III in September 2010, risk management has emerged to be a top priority for People’s Bank of China, in its effort to tighten supervision on local banking sector and push local banks to integrate faster into the global banking system

Stimulating yet risky During the economic downturn, China’s commercial banks played a pivotal role in supporting Chinese government to implement a massive RMB 4 trillion stimulus program A large portion of this stimulus was injected into the economy through an aggressive government supported lending program which has lead to increasing credit risk in many of the major banks This increase has further increased the need for local commercial lenders to step up efforts to build up sound IT infrastructure to improve their overall risk management capability The drive to upgrade risk management systems and processes is being driven by joint stock commercial banks such as China Merchant Bank and CITIC Bank These banks have initiated IT risk management system schemes, which include framework formulation, organization, policy, strategy, standards, process and methodology with regard to IT risk management To support these policies and procedures, they have also introduced related software and services from external IT vendors Smaller starters Following in the footsteps of larger banks, local small and medium banks have also started focusing on building their own risk management information systems With a growing business portfolio and increased market competition, small and medium banks are facing many restraints and difficulty, due to lack of sufficient manpower and information, which cripples their ability to compete with large rivals

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trend seven: risk management Continued

As a result, more small and medium banks have begun to attach a greater importance in IT investment and rely on IT to realize their fast geographic expansion, new product launch and widening of distribution channels Through strengthening IT innovation, these banks are able to effectively reduce their credit and operating risks

Looking forward to 2011 In 2011, we expect that Chinese banks will put more efforts to enhance their risk management controls and infrastructure by leveraging multiple IT technologies One key focus area will be IT risk; banks need to better collect and analyze IT security logs and monitor the state of its information risk Local banks are also expected to develop auditing tools, in a bid to improve its ‘afterthe-event’ monitoring mechanisms

Trend Eight: Cloud Computing
Cloud computing is still relatively new in China, however, it is ramping up rapidly as customer understanding grows; small and medium banks are moving faster in terms of cloud adoption Cloud computing has become a huge buzz word in the IT world. Since its inception, it has quickly swept across various different industries In the financial service sector, cloud computing can help financial institutions to enhance data safety, share technological resources, improve service quality, and lower operating cost - all of which can be translated into sources of competitive advantage for companies Cloudy outlook While more and more foreign banks are contemplating migration of their IT infrastructure onto the cloud, China’s banks are still hesitant to embrace the technology, mainly out of a concern for safety Nevertheless, the low cost and powerful computing capability associated with cloud still remain very attractive to these banks, indicating a positive prospect for cloud computing in the local financial market, although the large-scale application of cloud computing among local major banks might have a long way to go Small and agile In comparison to the larger banks, the application of cloud computing is often very clear for small and medium sized local banks Owing to lack of funds and manpower, these banks are keener on exploring new and innovative IT technology and solutions to assist them to leapfrog their bigger peers amid the increasing market competition For example, one of the biggest obstacles that village and township banks, part of China’s grassroots rural banking institutions, are facing, is how to build their IT systems in a faster and more cost effective manner; cloud computing fits this need perfectly Major domestic IT players have already lined up to meet the rising demand from small and medium banks Digital China has opened a data center in Xi’an, the capital of Shannxi province where systems are accessed via the relatively simple telnet protocol Banks with limited IT infrastructure can install terminals and immediately obtain all the necessary IT support systems and maintenance services, thus helping these banks commence operation within a much shorter time frame Jinzhong City Commercial Bank, from Shanxi province, also deployed its entire bank card system in the Digital China data center, which can provide services such as transaction, management and account checking for the cards business In doing so, the bank is able to better focus on improving services and product offering for its cardholders, without worrying about potential

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trend eight: Cloud Computing Continued

payment issues among various parties This model has set a good example for other regional small and medium banks to follow in future Government involvement As cloud computing has been evolving in China, it has also caught high level government attention In October 2010, The Ministry of Industry and Information Technology and The National Development and Reform Commission published a note supporting innovation in cloud and set up innovation centres in five cities: Beijing, Shanghai, Shenzhen, Hangzhou and Wuxi, paving the way to promote cloud in the related industries Looking forward to 2011 In 2011, we expect that the development of cloud computing in local financial sector will continue to gain momentum, driven by a greater

understanding of the technology itself An increasing number of Chinese major banks will be pursuing cloud computing for the sake of cost efficiency and easier management; public cloud will gain further acceptance among local small and medium banks thanks to its flexibility and lower cost, and outsourcing will become a growing trend for these banks will be increasingly using external companies to host the environment for them While local firms enjoy competitive edge in established customer relationships and operational experience, foreign vendors will be increasingly preferred by Chinese customers for their advanced product offerings

Trend Nine: Banking Security
Banking security monitoring systems are growing in sophistication; networking, intelligence, highdefinition and integration are expected to define the market Banking security monitoring systems are mainly comprised of network and automatic teller machine (ATM) monitoring systems Currently, except for Bank of China, the banking security monitoring systems in the majority of Chinese banks need to be upgraded or revamped Statistics show that the number of ATMs in China surged by 27% to reach 245,000 in 2009 and that number is projected to keep growing at 20-30% in the next few years The fast penetration of ATMs in local banks is thus anticipated to drive a rapid growing demand for ATM monitoring systems Keeping an eye out With extensive branch networks, Chinese major banks are seeking to build remote networking monitoring systems, which feature better safety, higher-efficiency and advanced intelligence. With this system, banks can achieve trans-regional centralized monitoring with a long-distance transmission of images and pictures The attractive potential of networking monitoring market has promoted domestic and foreign security manufacturers to develop related products such as network cameras and video servers These products have been increasingly well received by the market due to their growing intelligence and superior networking functionality Looking forward to 2011 In 2011, we expect that the technologic focus of local banking security monitoring system market will be increasingly emphasized on digital, networking, intelligent and comprehensive solutions In particular, intelligent video technology will hold great potentials in the local banking sector, among which face recognition technology is expected to play a key role in the banks
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Trend Ten: Disaster Recovery
Ludelum nonituiure, unte anulvis o vignatus, ales in vivivereo, quere tus consus; ne a opubli in Disaster recovery systems have drawn increasing attention from financial companies and ducere, ve, viverfic te ad fac tem. movivitis, mus et pericul iamquam omnox nique poenitis sil regulators; outsourcing services are expected to thrive vemquonsu it C. Ast vertem, nique omnique rcerum publi cumenat iusquius conte itelleg ilius.

In recent years, as Chinese banks have been working on data consolidation at the national level, the data centres have increasingly become more important and therefore a key consideration for banks’ disaster recovery plans To prevent and solve these risks and ensure data security of financial institutions, more local banks have started attaching greater importance on building secure and robust disaster recovery systems According to IDC’s report “China Business Continuity and Disaster Recovery Market Forecast, 2008-2013, data disaster recovery service and business continuity in China is expected to become the fastest growing segment in the local IT service market during 2008-2013, with a CAGR of 52%. And the firm predicts that the total investment in disaster recovery market in China is likely to exceed RMB 10 billion by 2010 A standard recovery The importance of disaster recovery systems has promoted Chinese government to formulate a series of industry standards in this field. In June 2009, China Banking Regulatory Commission issued a new guideline on IT Risk Management of Commercial Bank, which has set a higher standard for the information security and business continuity of the entire life cycle of banking IT With a higher importance being attached to effective disaster recovery by the Chinese authorities, some major domestic manufacturers

have been seen allocating more resources to develop disaster recovery related products such as backup, storage and data security systems Nevertheless, the local market for disaster recovery system is still dominated by global players represented by IBM, HP, Symantec and EMC Looking forward to 2011 In 2011, we expect that local small and medium sized banks will lead the demand for disaster recovery systems, particularly for joint stock commercial banks and city commercial banks, as they seek national expansions in the next phase With increased operating risks, banks have begun to put more value on the benefits brought by disaster recovery systems, which will be key to ensure consecutive business operation and improve risk management capability This trend is also likely to be seen in local insurance and securities sector, where more small and medium sized insurers, securities firms and fund companies will invest disaster recovery systems Compared to self-built disaster recovery centers, outsourcing services on disaster recovery will be much more popular among these companies, as the latter can provide lower paidup investments, shorter construction period and higher service standards

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Final Thoughts / Recommendations

In 2011, Chinese banks and financial institutions will continue to mature and expand both in terms of business footprint and breadth of service. Kapronasia expects financial technology investment to follow suit as institutions both seek to get the most out of their current IT systems as well as invest in new technology to support future business growth Key for any financial technology vendor coming into the Chinese market is having a clear understanding of the market opportunity and how to tap into it We have seen countless technology companies come into the market with very little forethought to how to move forward; they tend to waste an incredible amount of resources, both human and financial, pursuing strategies that may work in the west, but don’t work here Established foreign vendors in the Chinese market will still need to focus on developing a track record and differentiating their products and services Domestic product and service offerings, while still largely behind the standards of those from the west, are maturing quickly enabling domestic players to expand into global markets, often on the coattails of domestic financial industry customers who are also expanding abroad In either case, a clear understanding of the current and future needs of the overall economy, industry and your specific sub-segment should guide your investment decisions and market focuses The Chinese Financial Technology market will remain one of the largest and most dynamic in the world in 2011, but will also be one of the most challenging!

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