(Yicai) July 10 -- After almost a decade of new openings, China's direct banking landscape is shrinking as central China's Hankou Bank became the latest lender to remove its virtual banking-only application to focus on its brick-and-mortar operations along with its main app.

The Wuhan-based commercial lender closed its mobile app for online-only banking yesterday and transferred such virtual business to its principal mobile app, Yicai learned. Direct lenders have no physical outlets nor do they issue physical bank cards but can offer better deposit and loan rates than traditional lenders.

Since China's first direct bank was launched in 2014, the industry once grew to a peak of over 100 such lenders. Hankou Bank’s direct bank app, started in 2016, attracted about 540,000 registered users within the first year with financial assets of over CNY1 billion (USD137.4 million).

After a decade of new online banks, the trend has cooled as even western China's Hami City Commercial Bank announced recently that its direct banking app will be closed on July 11, which adds to a series of nearly 10 shutdowns in the past two years. 

Hankou Bank closed the app due to various factors, such as integrating resources and optimizing services, a source at the financial institution said. As the bank has improved its digital infrastructure in recent years, the app is no longer technologically advanced nor functionally unique, and some users even started to complain that the app is slower than the bank’s general app, the person added.

Direct banks get most of their resources from their parent banks, an industry insider said to Yicai. Still, they have usually not upgraded their customer development capabilities and their functions are highly similar to the parent's main app despite independent operations so in the long run, the general trend is to wind down direct banking apps, the insider added.

Traditional banks started doing direct banking mainly to promote their digital transformation, but once they enhanced their digital capabilities such virtual arms became unnecessary, Su Xiaorui, a fintech expert, said to Yicai.

Most products of virtual lenders are deposits, loans, and wealth management products, which constitute homogeneous competition with the products of their parents, said Liu Yinping, an analyst at the Rong360 Digital Technology Institute. In addition, their advantage in interest rates is not remarkable, Liu added.

For the parents, direct banking is not necessary, Su said, adding that they must evaluate the input-output ratio of such projects, and underwhelming undertakings are naturally shut down.

Editors: Tang Shihua, Emmi Laine