By Alexander Jones, International Banker
The centre of financial technology (or fintech) is migrating eastwards. In November 2016, a report jointly produced by professional-services firm Ernst & Young (EY) and leading Singaporean bank DBS stated in no uncertain terms that China has now leapfrogged ahead of global technology hubs such as Silicon Valley and London to become “the undoubted centre of global fintech innovation and adoption”. Multiple fintech hubs have now emerged in China alone, most prominently in Shanghai, Hangzhou, Beijing and Shenzhen, which has led to EY and DBS concluding that the country now clearly leads the way in fintech and is “revolutionising many aspects of financial services”.
Indeed, many of the figures coming out of the fintech world appear to support the report’s assertions. According to Citigroup analysis, for example, China accounted for more than 50 percent of global fintech investments across the first nine months of 2016, as well as doubling its investment from the same period in 2015. It was also the only major global region during this period in which fintech investments increased—contractions were recorded everywhere else—implying that China is putting more daylight between itself and the rest of the world.
China also dominates the fintech “unicorn” space—those startups valued in excess of $1 billion. The country is home to eight of the world’s 27 unicorns. Although the US houses a greater number of such firms at 14, they are valued at “only” $31 billion and have raised $5.7 billion. At a valuation of nearly $100 billion, and having raised $9.4 billion, China’s eight unicorns completely dwarf their American counterparts. What’s more, the world’s four biggest fintech unicorns are all Chinese—Ant Financial (valued at $60 billion), Lufax ($18.5 billion), JD Finance ($7.0 billion) and Qufenqi ($5.9 billion).
What is behind China’s steep ascent?
According to the July 2016 report from McKinsey “Disruption and Connection: Cracking the Myths of China Internet Finance Innovation”, a handful of key reasons underpin China’s startling appetite for fintech. Firstly, the sector has been well supported by the country’s regulatory framework. Premier Li Keqiang has repeatedly made calls in favour of online finance within the annual “Report on the Work of the Government”, such as stating that he wants “to seek a healthy development road under the backing of proper regulatory coordination and supervisory mechanism”. This inclusive, tolerant regulatory environment has helped to foster a culture of innovation and entrepreneurship among China’s tech crowd, in addition to encouraging the larger existing corporations to become more innovative themselves and further explore potential applications of digital finance. Indeed, the fact that the government has officially published guiding opinions and policies for Internet finance also provides a useful degree of clarity to China’s new start-ups in relation to what they can and can’t do.
Secondly, China’s population appears to be increasingly open to using online finance, with evidence mounting that they are eager to incorporate the support provided by various fintech services into many different aspects of their lives, including online banking, payments, transfers, crowdfunding, investing and shopping. Indeed, e-commerce in China is estimated to be a RMB 16 trillion market, and is now transforming the consumption habits of a rapidly growing number of Chinese people. McKinsey has calculated that since 2011, the Internet economy in China has grown by more than 50 percent, and now constitutes a hefty 7 percent of China’s gross domestic product (GDP); in comparison, it’s only 4 to 5 percent for the US, Japan and Germany. In addition, it is estimated that approximately 40 percent of Chinese consumers are using new payment methods, dwarfing the 4 percent recorded in Singapore, while 35 percent use fintech to access insurance products, compared to just 1 to 2 percent in Southeast Asia. Smartphones and social media continue to become increasingly ingrained into Chinese consumer culture, with more than 30 percent of the population currently using digital methods (such as mobile phones and tablets) to make payments. An online investment culture has also taken off, with Internet-based wealth management and trading estimated to be drawing in around 100 million users.
A deep-seated mismatch has also emerged in recent years between the population’s strongly expanding demand for financial products and the limited solutions being provided to them by traditional financial-services institutions. As such, distinct market segments are now grossly underserved by such institutions. Banks often set their minimum threshold at RMB 50 thousand when offering wealth-management products, a level that China’s low-income households (who comprise nearly 50 percent of the total population) can ill afford. In addition, a significant one in five adults in China does not have access to formal banking services, whilst only 8.1 commercial bank branches and 55 ATMs per 100,000 people are in circulation. In the US and Canada, those figures are substantially higher, at 28.2 branches and 222 ATMs; and are at 28 branches and 81 ATMs on average in Europe. This markedly underbanked segment of China’s society, therefore, continues to opt with more enthusiasm for the inclusive financial solutions being offered by digital finance companies. China’s rural migrant workers, who work in urban areas and who number a sizeable 277 million, are just one example of a segment of China’s population who are increasingly moving towards online finance, often as a way to send their remittances back to their rural homes in an efficient and inexpensive manner.
China’s relatively high banking-sector profitability levels continue to enable them to embark on more risky “tech-ventures”, which is another crucial factor driving the country’s fintech boom. Comparing the return-on-equity figures of China’s biggest banks, which tend to average around 15 to 20 percent, with the sub-10 percent routinely experienced by US banks and the sub-5 percent that is now the norm in much of Europe, China’s higher profitability allows its banking sector to devote more resources towards developing its technological capabilities, and making riskier investments in digitisation.
Other than consumers, China’s smaller-end businesses are also responsible for a significant portion of fintech growth in the country. According to the EY and DBS report, small and medium-sized enterprises (SMEs) receive only 20 to 25 percent of the total loans disbursed by banks, in spite of the fact that they account for 60 percent of GDP and 80 percent of urban employment, and they also contribute a hefty 50 percent of China’s total fiscal and tax revenues. Given their often opaque or non-existent financial histories, moreover, SMEs also tend to receive unfavourable terms from banks, with loans sometimes being twice as expensive as that offered to larger corporations. As such, SMEs are now moving in increasing numbers into the fintech arena in order to obtain better finance solutions for their specific business needs.
The “holy trinity” of Chinese fintech
A significant chunk of China’s fintech success in recent years can be credited to Baidu, Alibaba and Tencent. Collectively referred to as BAT, the three tech giants control an intimidating share of China’s e-commerce landscape, as well as online messaging and Internet search platforms. They also control approximately half of the Chinese third-party payments market; whereas their US equivalents—Alphabet, Apple, Facebook and Amazon—control a mere 2 percent, as per recent analysis by Citigroup. Alipay from Alibaba is easily the most popular in China and covers almost 80 percent of the country’s total mobile payments; while Tencent’s flagship application has a customer base of more than 500 million people, who use the app for daily chatting, payments and wealth management.
Through numerous subsidiaries, both in China and now increasingly all over Asia, BAT’s global fintech presence only looks set to become more visible. Alibaba intends to generate more than half of its revenues from overseas, and last April it acquired a controlling holding in Southeast Asia’s e-commerce giant Lazada Group for approximately $1 billion. Alibaba also collaborated with Foxconn and SoftBank in the previous year to put $500 million into India’s leading e-commerce platform Snapdeal, as well as investing nearly $700 million into India’s largest mobile wallet, Paytm, during the same year. BAT members are also aggressively investing in some of the most exciting technologies, which are expected to play crucial roles in the financial-services offerings of tomorrow, such as blockchain and artificial intelligence.
Payments dominate China’s fintech landscape.
China’s fintech boom can be traced to explosive growth in a selection of key specific sectors. Payments/e-wallets is the dominant sector at present, with China having 380 million people shopping online via their phones, as well as nearly 200 million people using their phones as a wallet for in-store payments. Alipay (of Alibaba’s Ant Financial) and Tencent’s Tenpay are the sector’s clear market leaders, and they are capitalising on the growing trend of people in China preferring to use their mobile phones to manage their funds, instead of having to visit their bank branches.
The popularity of online banking is also exploding, with both China’s tech companies and its existing banks making a foray into this world, often in joint initiatives. Baidu provides just one such example, having partnered with CITIC Bank in order to provide online financial products, including co-branded credit cards. Alibaba, meanwhile, launched MyBank in 2015 in order to provide smaller loans to the aforementioned underbanked as well as a personal fund that promises to beat the returns offered by banks. Tencent opened China’s first major online bank at the start of 2015—WeBank can be easily accessed by the 846 million active users of Tencent’s WeChat, as well as the 877 million users on its instant-messaging software QQ.
P2P (peer-to-peer) lending also deserves a mention, with China almost exclusively leading Asia’s growth in platforms designed to deliver credit to individuals and SMEs. According to a 2016 report from Cambridge Centre for Alternative Finance (CCAF), China accounts for 99 percent of the total P2P transaction volume in the Asia-Pacific region, and is also the world’s largest P2P market, valued at $101.7 billion in 2015. It is estimated that more than 4,000 P2P lenders operate in China today compared to just 50 providers only five years ago.
Analysts expect China to continue leading fintech in 2017 and beyond. According to Citigroup, China’s rapid digitalisation, coupled with the unabated rise of its middle class, will push more people towards online finance in the face of a decline in traditional financial institutions that will continue to experience increasing competition from “entrepreneurial e-commerce and social media ecosystems”. While much of the rest of the world has focused on fostering a broadly competitive fintech environment, moreover, China’s digital culture is significantly more collaborative, which is now seemingly reaping benefits for the country. In early January, for instance, a consortium of major Chinese state-owned companies established the $1.5 billion Asia FinTech Merger and Acquisition Fund of Funds, primarily to ensure that each specific sector within China’s fintech industry is able to operate with sufficient capital. Such sectors include artificial intelligence, mobile payments and blockchain technology. Indeed, China’s blockchain market itself provides an appropriate illustration of such collaborative power, with the consortium ChinaLedger now seeking to provide an industry-wide foundation for blockchain-based startups to receive support.
It is also worth emphasising that while the rest of the world would do well to take notes on the meteoric rise of China’s fintech scene, replicating such growth and development will be close to impossible for many regions, especially the West. China is building its fintech dominance on a combination of favourable supportive factors that simply don’t exist elsewhere at present. Rapid urbanisation, an underbanked population, underserved SMEs, a supportive regulatory environment and a boom in e-commerce and mobile penetration are all combining to create ideal conditions for accelerated expansion in online finance. Many of such factors are non-existent in other countries.
Nevertheless, China’s dominance in fintech is now there for all to see. As the country continues to experience significant growth, urbanisation and digitisation over the next few years, it would not be surprising if this dominance continues to grow ever more imposing. As such, one should begin looking to the East, rather than the West, to access many of the world’s latest and most exciting technology offerings.