Foreign banks have not attained their forecasted market position in China and have only held steady at about 2% market share in the last five years. In particular, their market share dipped during the financial crisis.

In a new report, Foreign Banks in China: Partnerships with Chinese Banks and Acquisitions Remain Key, Celent examines the asset size, market share, opportunities, challenges, entry strategies, and customer segmentation of foreign banks.

There are many challenges for foreign banks; foremost among them is competition from Chinese banks. The second greatest challenge is the regulatory environment, but, this is becoming more favorable for foreign banks. Brand recognition is low, and consumers view foreign banks as far behind Chinese banks in terms of reliability, brand awareness, branch network, service quality, and compatibility. Chinese consumers are also not very aware of the innovations in products and services of foreign banks.

Seventy-percent of foreign banks have expressed their intention to acquire Chinese banks, in particular small Chinese banks, over the next three years. As for customer segmentation, foreign banks mainly target high-end retail customers and corporate customers who require complex financial products and overseas financial services.

"Banks from different regions are very diverse. For instance, Japanese banks essentially provide corporate services for Japanese clients in China," says Hua Zhang, analyst with Celent’s Asia Financial Services group and author of the report. “Taiwanese banks take a very different approach, focusing on personal financial services.”