In less
than half a decade, China’s financial technology (FinTech) sector
has seen phenomenal growth, surpassing the US as the number one
destination for venture capital investment, and transforming the
lives of many of its 1.3 billion-strong population.
Tumbling costs of handsets
from smartphone makers such as Xiaomi and Huawei are putting the
power of FinTech into the hands of China’s hundreds of millions of
farmers and rural workers, not to mention the burgeoning urban middle
class.
By extending digital banking,
insurance and wealth management services to previously
Chinese citizens have embraced digital payments much more enthusiastically than their counterparts in the West
underserviced
communities, FinTech companies are helping to spread the fruits of
the nation’s decades-long economic boom beyond its coastal fringes
and big cities – a key policy objective of the central government and
core to meeting its goals of financial inclusion. The spread of financial
services into previously untapped domestic markets shows the extent
to which Chinese companies such as Alibaba affiliate Ant Financial
and Tencent have aggressively filled the service gap in the world’s
most populous nation.
In doing so, China has
leapfrogged the developed world, aided by light-handed regulation,
ready access to capital and, crucially, a consumer base that is more
receptive to the digital transition than any other in the world.
Digital lure
More
than eight in 10 Chinese say they now use at least one
non-traditional online financial service provider; around double the
uptake in developed economies such as the US and Japan.
Peer-to-peer
lending has also grown rapidly, with the outstanding loan balance for
online platforms rocketing from 31 billion yuan (US$4.64 billion) in
January 2014 to 856 billion yuan (US$130.66 billion) in January 2017,
according to data published by consultancy firm Oliver Wyman.
Chinese
citizens have embraced digital payments much more enthusiastically
than their counterparts in the West, with many feeling as comfortable
using their mobile phones to make high value purchases of items such
as cars as they are buying coffee at a cafe, according to John
Patrick Mullin, a Community Partner at Shanghai’s FinTech
Connector, an online group to link entrepreneurs with thought-leader
in the financial services space.
Serendipitous circumstance
It’s
this combination of circumstances that has enabled the explosive
growth of China FinTech sector, which according to Deloitte last year
attracted US$7.7 billion in venture capital investment, 44% of the
global total and significantly more than the US$6.2 billion that went
to the US.
The
speed of China’s transition to digital financial platforms is in
part down to simple good timing and its late-mover advantage.
Online
payments systems such as Alibaba Group’s Alipay and Tencent’s
WePay came onto the market at the same time as the world was
undergoing an explosion in Internet connectivity and smartphone
ownership. With 695 million mobile Internet users, the Chinese have
quickly grown accustomed to using the devices across all aspects of
their lives. “They didn’t mind giving up some privacy. It’s all
part of what they have been doing already,” Mullin says.
FinTech
providers have also been pushing against an open door thanks to the
dominance of the nation’s big state-owned banks, which have
traditionally seen their mission as one of servicing the needs of
other state-owned companies. That has left a large portion of the
country underbanked, especially individual consumers and small and
medium-sized companies, Mullin says. He estimates that only about a
fifth of all loans are to consumers.
SME currency challenge
Take
Mofei Chen, the Shenzhen-based founder of Money Bazaar, a
peer-to-peer foreign currency exchange platform. Chen studied at Cass
Business School in London and worked briefly as a proprietary trader,
where he experienced first-hand the favourable terms on which
professional speculators could access currency markets. During his
time in the UK, both as a student and trying his hand running an
Amazon business importing goods from China, he also learned the hard
way how expensive those same currency markets are for small
businesses, entrepreneurs and ordinary citizens.
“You
have to be a really big international account for the banks to give
you a good rate. When someone exchanges money for real reasons they
are charged very high rates,” he says, “but speculative traders
pay only one or two basis points – 100 basis points make up one
percentage point – between the bid and ask.” His sense of the
unfairness in the current system is one of the primary reasons he set
up Money Bazaar.
The P2P
system mimics a trading platform by matching bids between buyers and
sellers of foreign currency. A Chinese student who wants to pay
university fees overseas can match their need for the foreign
currency with a buyer – say, a UK-based Amazon trader who wants to
pay for Chinese goods in yuan – without having to pay the spread
demanded by banks or traditional forex platforms. Money Bazaar takes
a flat 0.15% fee. Most users “don’t want to make any profit, they
just want to change money at the lowest cost,” he says.
Most
Chinese FinTech firms are funded by domestic state-owned banks and
private investors, and existing government restrictions on foreign
investment continues to hamper overseas investors seeking exposure to
the FinTech arena.
Excluded investors
Limits
on foreign ownership of China’s traditional banks and mobile phone
companies has also restricted access to FinTech alternatives too,
with overseas investors excluded from the fundraising for Tencent’s
WeBank, for example.
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Zennon
Kapron of Shanghai-based independent research and consultancy firm
KapronAsia, points too to the fact that overseas investors find it
hard to offer Chinese FinTech companies anything that they can’t
already find in a domestic market awash with capital, technological
skills and a vast consumer market.
Meanwhile,
China’s big FinTech players are building their user ecosystems
abroad. Alibaba Group has stakes in Paytm, India’s largest mobile
commerce company and Ascend Money in Thailand, while Ant Financial
took a 60% stake in Taiwan’s Cathay Insurance and is also seeking
US regulatory approval for its $1.2 billion acquisition of MoneyGram.
Tencent
invested in Kik and Hike Messenger, Canadian and Indian apps seeking
to become the WeChats of their respective markets.
Playing the waiting game
However,
as cash-rich and ambitious Chinese FinTech firms look to expand
overseas to limit their reliance on the domestic market and fuel
further growth, opportunities exist for foreign investors to partner
with Chinese firms and provide financing and local knowledge to
facilitate expansion into international markets.
It’s
not just start-ups that are playing a patient waiting game: The same
is true for global banks too, according to Loic Senechal, Head of
Transaction Banking China at BNP Paribas.
“Corporate
customers require a greater level of comfort in terms of a new
system’s reliability, security and compliance than most consumers,”
he says. “They also need certainty over the legal landscape
governing FinTech.”
The
good news is that China’s government has demonstrated its
determination to build the regulatory framework businesses need to
give them the confidence to make the jump into the rapidly changing
world of digital finance, Senechal says.
In
addition to the regulatory framework needed to support the sector,
the government must manage a skills shortage that could limit
expansion. According to the 2017 Hays Asia Salary Guide, some 70% of
employers complained that they did not have enough trained staff to
achieve their business objectives.
Other
firms pointed to a lack of sufficient investment in training of new
software developers specializing in big data analytics and augmented
and virtual reality, suggesting this could act as a brake on future
growth.
A new generation of FinTech entrepreneurs are innovating the sector
The lack
of financial expertise inside the tech industry is a barrier to
expansion, says Zhang Jianliang, CEO of Rongzhijia, a
peer-to-peer lending start-up based in Shanghai, which uses big
data to match individual borrowers with licensed lenders, providing
other services such as risk control and post-loan supervision.
“Instead of absorbing
talent from the traditional finance industry, we have preferred to
recruit talent from within FinTech over the past 10 years,” he
says.
Insurance innovation
It’s not only
the banking and currency sector taking advantage of China’s FinTech
innovation.
Visitors to Beijing airport
can see first-hand Baidu Inc.’s prowess at artificial intelligence
as they’re scanned by the tech giant’s new facial recognition
system there. It’s unlikely, though, that the company’s robots
fielding questions from passengers will know the answer to the
biggest bugbear of Chinese aviation: How to fix the world’s worst
record of delayed flights.
Another technology company,
though, can at least help compensate for hours waiting around the
departure hall. Zhong An, China’s first all-online insurer, offers
flight-delay insurance, calculated by using real-time weather
reports, historical performance and other data. Ping An and PICC, two
traditional insurers, are using telematics data analysis to improve
how they price car insurance.
Consultancy Oliver Wyman
predicts annual premiums from what it calls “ecosystem-oriented
innovation” – such as flight-delay insurance – will reach 202
billion renminbi (US$31 billion) by 2020; policies based on wearable
devices or telemetrics will generate 197 billion renminbi.
Threat or opportunity?
As recently as last year,
traditional insurance companies had viewed FinTech as more of a
threat than an opportunity, according to PwC’s Global Fintech
Survey, with 74% seeing it as a disruptive challenge to their
businesses. This year’s report found a majority – 52% – now put
disruption at the heart of their business strategy, and that 45% have
teamed up with InsurTech innovators, up from 28% in 2016.
Surging rates of growth in
China’s insurance industry have attracted the attention of big
technology companies as well as FinTech start-ups and investors. That
has been facilitated by government and regulators keen to see more of
the population and businesses get protection.
China’s huge mobile payments market dwarfs even that of the US
“China’s regulators
encourage innovation when there is a public policy benefit,” says
Janos Barberis, founder of Hong Kong-based FinTech accelerator
SuperCharger and one of Institutional Investor’s top-35 global
FinTech leaders.
But regulators have recently
tightened their oversight to curtail growing risks to the financial
system: the China Insurance Regulatory Commission banned sales of
short-term, high-yield life-insurance policies that it says are
really high-risk investment products, and promised sanctions against
those that flout rules.
The most to gain
Of the traditional financial
services industries, insurance has perhaps the most to gain from the
next wave of FinTech disruption. That’s because it’s likely to be
driven by several mutually reinforcing technologies that include
artificial intelligence and machine learning, the Internet of Things
and big data – all of which are areas in which Chinese technology
companies contend for global leadership.
China is in the top three
globally in terms of venture capital investment into AI and machine
learning, big data and wearables, according to McKinsey &
Company. Since 2014, Baidu, Alibaba and Tencent – collectively known
as BAT – have also been pushing the boundaries of computing
efficiency. Alibaba can process payments at three times the rate of
the leading US payments system.
The emerging technologies
also all have the potential to radically impact insurers’ costs,
human resources, sales and product lines.
Assessing risk through data
Travel and shopping, leisure
activities, driving habits, employment and other information gleaned
from consumers’ data, for example, can help InsurTech companies
make better assessments of risks attached to a policyholder – or that
same person’s risk appetite for investment. Technology that can
customize, market, distribute and automate the entire transaction
process – and that can do so at scale – should lift sales and cut
costs.
“Being able to develop
relationships with technology ecosystems is a must in order to gain
access to consumer data and develop insurance products that meet
their needs,” says Cliff Sheng, Partner
and Head of Financial Services, Greater China at
Oliver Wyman.
“Early access, smooth
business cooperation, and top-level relationships can help to
establish dominance. One example is Zhong An working with [online
retailer] Taobao early on to gain access to its e-commerce ecosystem,
and then introducing shipping return insurance.”
Sights set overseas
The partnership approach also
offers opportunities for China’s InsurTech players to expand
overseas and for foreigners to participate in the Chinese market:
Alibaba and France’s AXA agreed to a global distribution deal at
the end of July; Tencent has taken a 20% stake in the Hong Kong unit
of British insurer Aviva.
Peer-to-peer lending has seen an almost 30-fold increase since 2014
In China, Baidu has tied up
with China Life and Taiping, while another example of the ecosystem
model is Zhong An. Since Ping An, Tencent and Alibaba established the
company in 2013, it has sold more than 7.2 billion policies to more
than 492 million customers. Shoppers on Alibaba buying shipping
return insurance account for about half of Zhong An’s business.
“Core insurance business
functions — from customer service to distribution and underwriting
— will rely heavily on a complex network of digital partners,
reaching far beyond the walls of a single organization,” according
to consultancy firm Accenture.
Cashless is king
China’s
Fintech dominance is underpinned by the powerful role of digital
payments in the contemporary marketplace.
From
high street merchants to some of the most modest street-side food
stalls selling quick bites, everyone accepts mobile payments. No
other nation has so quickly adapted and embraced mobile payments
trend.
China has embraced mobile payments more than any other nation in the world
The
value of mobile payments jumped 33.8% to 39.24 trillion yuan – or
just over US$6 trillion – in the second quarter from a year earlier,
on the back of a 40.5% surge in volumes to 8.6 billion transactions,
central bank data shows.
It’s
a powerful indication of just how far FinTech applications have
penetrated the nation’s payments system.
“It is easy to see how powerful and pervasive WeChat has become as a mobile payment platform — every mantou [steamed bun] seller on the street has a battered smartphone taped to their cart with a QR code,” says Ross O’Brien, technology practice leader at consultancy firm Intercedent Asia.
A
recent survey by Tencent University, a research arm affiliated to the
Shenzhen-based company, found 40% of Chinese regularly carry around
less than 100 renminbi (US$15) in cash, with a single note lasting
for up to a month. Eighty-six percent said they would be unconcerned
about having no cash at all because of the prevalence of mobile
payments. In
fact, China’s national figures create a false impression as they
average penetration across what remains a vast and extremely varied
nation. In rural areas, which account for 30% of all mobile Internet
users, mobile payment penetration is just 17%, the Tencent survey
found. A McKinsey & Company study last year found 35% of
consumers in the Shanghai city cluster had purchased clothing online
in the preceding six months, compared with just 4% in the Chengdu
city cluster.
“There’s
great opportunities to expand among young people or in rural areas,”
adds Rongzhijia’s Jianliang. “More youngsters have adopted the
borrow-to-buy lifestyle, while alleviating poverty and developing
rural areas is the government’s long-term strategy.”
Overseas growth strategy
Having
conquered the domestic market, China’s mobile payments giants are
seeking growth from markets overseas. To repeat their domestic
success, however, they face a number of hurdles.
“The
practical limitation is the fact that China’s financial and
technology ecosystem is largely, and mostly by its own design, in a
hermetically-sealed parallel universe,” says O’Brien. “Without
global adoption, inter-operability or financial connectivity, its
impact outside China’s borders will be negligible,” he says,
pointing to the fact that while Tencent controls about half of
China’s mobile data traffic, less than 10% of its more than 900
million active users are overseas.
Having conquered the domestic market, China’s mobile payments giants are seeking growth from markets overseas
For
now, China’s FinTech players are seeking to ride on the tidal wave
of Chinese people traveling overseas for work, leisure and education.
Chinese tourists are expected to make 127 million trips overseas this
year, according to Travel China Guide, with almost 30% making their
choice of destination on the opportunities to shop. In
December last year, BNP Paribas sealed a deal with Alibaba to process
payments by Alipay users in France – with a view to expanding the
service in other European countries.
The
sheer weight of consumer demand is likely to push merchants into
accepting Chinese payments services, says Steve Worthington, a
professor at Swinburne University of Technology in Melbourne.
China’s
FinTech companies are also targeting other developing nations –
especially in Asia – where the same driving force of large
underbanked populations offers the chance to scale up their already
proven business model, he believes.
Digital payments backbone
This widespread use of
digital payments is the backbone of China’s FinTech sector,
providing a treasure trove of insightful buyer data, which can be
repurposed for a wide variety of commercial purposes, such as
marketing, product development and advertizing.
In short, control of the data
from the digital payments space offers the potential to spread into
alternative FinTech arenas, for example lending, where user data can
be utilized to create credit ratings.
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One arena as yet
underexplored in China’s FinTech space is the potential of
blockchain technology. The government has sought to help kickstart
blockchain adoption and the private sector has taken the hint, with
the formation of a series of consortiums such as the Qianhai
International Blockchain Ecosphere Alliance and Financial Blockchain
Shenzhen Consortium seeking to explore how to manage deployment of
the technology.
FinTech and banks: Friend or foe?
Although
Chinese FinTech is growing rapidly, its size is still dwarfed by the
traditional financial sector, where bank assets topped more than
US$30 trillion at the end of 2016. While lending by Chinese FinTechs
in 2015 hit US$52.4 billion, this was only a fraction of the US$3
trillion offered by registered banks during the same period.
However,
the potential for the FinTech sector means that banks are alive to
the threat that open banking may pose to their dominant position in
the market.
Faced
with a choice of competition or collaboration, Chinese banks and
FinTechs are opting for collaboration.
With
its critical position in the Chinese FinTech ecosystem, Alibaba Group
Holding’s Ant Financial Services Group, which controls four-fifths
of all mobile payments and almost two-thirds of all Chinese online
payments, has set the tone for relations between FinTechs and banks.
Its
payments division Alipay has signed partnership deals with all of
China’s 19 national banks, including the Industrial and Commercial
Bank of China, Bank of China and Agricultural Bank of China.
Meanwhile,
other banks are seeking to sponsor new FinTech start-ups, a
relationship that can benefit both parties. One example is the
FinTech Innovation Lab Asia-Pacific, which was launched in 2014 and
is backed by a host of financial institutions, such as China CITIC
Bank International and the China Construction Bank (Asia).
Boosting financial inclusion
China’s
government sees in FinTech a means to prod the nation’s financial
firms to lift their game, as well as to fix some of the weaknesses in
the system.
“[The
FinTechs] have provided economic empowerment and financial inclusion
to a tremendous slice of the Chinese popoulation, and that is
something that the government recognizes and appreciates,” adds
Jianliang, from Rongzhijia.
Wu
Xiaoling, a member of the National People’s Congress Standing
Committee – a senior lawmaker – said that the big banks need to
take advantage of technology to improve the financial inclusion of
the population. A lack of accurate data on addresses, incomes and
defaults left more than 60% of Chinese people “credit invisible”
in 2015, according to consultancy Oliver Wyman.
Adoption of mobile payments by millennials has underpinned the rapid growth of the sector
In
2015, the People’s Bank of China (PBOC) authorized eight privately
owned companies, such as Ant Financial’s Sesame Credit, to provide
consumer credit information services. These firms build their
proprietary databases from a mix of Internet data – for example,
credit, e-commerce, social media, and mobile payments data – and
data from financial institutions, such as banks and peer-to-peer
platforms.
Prodded
by the central government, the five biggest state owned banks had
launched their own inclusive financial arms by the end of July and in
August Tencent began testing its own credit scoring system to rival
Sesame Credit. With their massive user bases – together they have
more individual and corporate customers than the country’s entire
population – the two companies have access to an unrivalled set of
data.
The
growth of FinTech services also offers a welcome alternative to the
nation’s 30 trillion renminbi shadow banking market, says Mullin.
At the
same time, banks are realizing that their legacy systems haven’t
yet found all the solutions to clients’ needs: The system of global
trade, for example, remains paper-based. Technology companies that
feel they can provide new ways to meet those demands should be part
of the solution, continues BNP Paribas’s Senechal. Tencent, for
example, has teamed up with China Construction Bank for its credit
scoring service.
A bridge to build
The
future, then, is likely to be one in which traditional financial
firms and FinTech companies find ways to collaborate as much as they
still compete with one another, Senechal says.
“There
is a bridge to build between banks and these new FinTech players. The
question in this environment is how to control the flow,” he says.
“It will come: the path will be fast.”
As
FinTech grows in importance and scale, a new wave of regulation
stands to level the playing field between FinTech firms and
traditional financial service providers, says Senechal.
One
recent example is the ruling that, from the middle of August, online
payments providers, such as Tencent and Alibaba Group, must use the
same clearing system as banks and other financial intermediaries. For
the first time, all players must follow the same regulations. “The
landscape has changed,” says Senechal.
Banks will be the leaders in their new partnership with FinTechs
High-profile
cases involving FinTech companies that have hit consumers have also
led to tighter oversight. Peer-to-peer lender Ezubao raised more than
1.5 billion renminbi during an 18-month period but turned out to be a
Ponzi scheme and is China’s biggest-ever financial fraud. That and
other cases led regulators to restrict P2P platforms from making
guarantees on investment returns, securitizing assets and raising
equity in initial public offerings.
Changing picture
By May
last year, China had identified 2,471 problem P2P companies, more
than half of the total number of such firms in the country, according
to Zhuming Chen from Sun
Yat-sen Business School.
The
regulatory picture is also changing globally as technology companies
such as Apple Inc. and Amazon.com Inc. also present a growing
challenge to incumbents – many of which are in countries where
stringent consumer and privacy protection combines with protectionism
to further complicate the prospects for expansion.
Familiarity
and expertize in dealing with complex regulatory frameworks across
multiple jurisdictions will be especially crucial as Chinese
companies try to expand overseas, Senechal explains.
So too
will the challenge of overcoming some of the cultural and social
complexities of consumers in different markets. In Australia, for
example, the transition to digital payments has been virtually
non-existent, adds Worthington, from the Swinburne University of
Technology. Tap-and-go card payments have shown strong rates of
adoption, while mobile payments remain stuck at around 1% of
transactions.
To
crack into that market, China’s players need to overcome the lack
of connections with the global financial system, adds O’Brien, from
Intercedent Asia.
Foreign investments and tie-ups
Tencent’s
WeChat unit is estimated to control 30% of China’s mobile data
traffic, he says. But of the more than 900 million active WeChat
users, less than 10% are outside of China.
“China’s
insular credit card and banking system makes it nearly impossible to
use WeChat’s payment system without a domestic Chinese bank account,”
O’Brien says.
In more
developed markets, the infrastructure is better and systems and
practices are already in place. That creates a higher barrier to
entry, continues Mullin.
The ubiquity of mobile phone payments has led to a dramatic drop off in the use of cash
One way
China’s FinTech firms aim to fix that is through investments in
foreign firms, as well as through tie-ups with global partners.
Wooed by venture capital
In
2016, China’s three giant tech companies Baidu, Alibaba and
Tencent accounted for 42% of all venture-capital investment in
China, according to McKinsey & Company. That compares with only a
5% share by Amazon, Facebook, Google and Netflix in US investment.
Outside
China, BAT companies made 35 deals, compared with 20 by the top three
US Internet firms. China’s share of VC investments was 14%.
China’s
financial industry is on the brink of a remarkable and rapid
overhaul.
The
sector holds enormous potential to transform not just China’s
financial system but internationally, with Chinese innovation
reshaping and reforging the global marketplace for financial
services.
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