China, the Largest FinTech Market in the World

According to the Pulse of Fintech Q3 2016 report by global audit and advisory firm KPMG,¹ venture capital (VC) funding in Asian financial technology companies increased, reaching US$1.2 billion – outpacing even the USA, where VC investment totalled US$0.9 billion. There are several factors driving this rapid growth. First, population: China has a population that is upwards of 1.3 billion. As a consequence, when addressing the Chinese market, one advantage online companies have is access to voluminous client and prospect data, which traditional financial service companies lack. Alibaba, for example, has more than 420 million customers,² who have provided the company with behavioural data for years. Second, economic advancement: China is first in terms of GDP (purchasing power parity) at over US$20 trillion. Third, the massive adoption of mobile technology: China has almost 1.3 billion³ mobile phone users, many on 3G or 4G networks. In addition, and by 2020, the government plans to invest more than US$320 billion in broadband internet infrastructure, benefiting rural areas that lack established banking networks. Fourth, financial industry liberalization and regulatory acquiescence. Appropriately regulating financial services is challenging. If policies are too lax, investor risk increases. Too stringent, and innovation is stifled. In China, regulations are supporting the FinTech industry. Unlike developed markets where regulations were instituted prior to technologies being invented, Chinese regulators are relatively young and are evolving with FinTech. In an Ernst & Young (EY) report, Douglas Arner and Jànos Barberis wrote: “China is formalizing this harmonious relationship between banks and Fintech players by creating a tiered regulatory regime (…). China is increasingly at the forefront of regulatory developments within Fintech, signaling a dramatic change in the origin of where regulatory standards may emerge from.”⁴

Although regulatory scrutiny is increasing, Chinese officials have thus far been more liberal than in other markets. Although more stringent regulations could temper growth, the trend is towards greater FinTech adoption in China, driven by technology companies. As an example, Yú’é Băo was demand-driven, with Alipay addressing a market need and subsequently managing regulatory concerns. Porter Erisman, former Alibaba Vice President, said: “Our view was always, run ahead, do it, prove to the government that it will in the long run benefit the Chinese economy, and then ask for forgiveness later.” The combination of all these factors created a real catalyst for FinTech adoption and numerous players from various industries have rushed to stake a claim on China’s internet finance sector, with distinctive value propositions: the BAT giants, tech companies and traditional banks.

BAT Giant Tech Players Continue Growth by Moving to Other Markets Such as Banking

China has a uniquely competitive digital landscape dominated by a few digital companies that have established comprehensive multi-licensed financial ecosystems: the BAT (Baidu, Alibaba and Tencent). In China, mobile wallets such as WeChat – provided by Tencent – have seamlessly integrated into people’s everyday lives. Banks often look at disruption in terms of product impact; in other words, how general FinTech (including distributed ledger technology, P2P lending, third-party payments, etc.) will disrupt. In reality, the biggest threats lie in the changing structure of global markets. Currently, most FinTech start-ups pick existing financial verticals – such as lending, investments, payments or currency transfer – and then play within their four walls. Yet, ironically, what consumers and businesses are looking for is less fragmentation of their financial services, not more. When you start looking at the emerging tech players in China and their foray into financial services – Alibaba Group with Alipay and Tencent with WeChat – what’s interesting is that neither company started out as a pure FinTech player or as a bank disrupter. Instead, after mobilizing millions of users through their respective platforms, they realized continued growth could be found by moving laterally into other markets, such as banking (like ApplePay and Facebook Payments in Western countries).

What’s especially interesting about WeChat is that it delivers a nearly full and frictionless financial integration experience into a user’s life, allowing for peer-to-peer (P2P) payments, bank transfers and wealth management alongside food delivery orders, taxi bookings and mobile phone top-ups. All from the palm of your hand. This is the WeChat experience; the ability to connect strangers, split bills, pay rent to a landlord, and all with the virtual human smile of an emoji or avatar at the other end of the transaction. What WeChat and Alipay have achieved through their mobile wallets is what PayPal has been struggling to do for years: seamlessly integrate their offerings into their users’ everyday lives. For some reason, mobile wallets are still clunky and awkward in the West, hampered by a chicken-and-egg problem of usage and acceptance. In developed economies, there’s also the dual problem of widespread card usage, which is still very efficient, especially since the introduction of near-field communication (NFC). In China, card usage lags. It would appear that Chinese consumers find it far more palatable to leapfrog plastic altogether, going from cash to mobile wallet in one fell swoop.

Tech Companies Also Emerge with Specific Value Propositions

Alongside these giants, smaller players have emerged in very different areas. The P2P lending platform Dianrong, the credit decisioning engine Dumiao, the intelligent financial services technology platform Pintec or the online mutual fund distribution business Hongdian Fund are some of the most successful FinTechs in China.

Dianrong is China’s answer to US-based Lending Club – a P2P lending platform providing market-oriented borrowing and lending solutions for domestic and overseas financial services institutions, including banks. Dianrong utilizes information provided by third-party data and credit consulting companies to select assets based on a risk-weighting system. The company has also developed several other products including its e-wallet and its transaction processing system, as well as clearing and settlement services.

Dumiao is a digital consumer lending business that leverages technology and big data to make automated credit decisions. Dumiao’s core product is a credit decision engine that enables high-speed lending decisions without the need for traditional offline human underwriting examination. By leveraging big data to increase the speed and accuracy of credit decisions, Dumiao enables the consumer loan decision to be made in real time at the point of sale, opening up a multitude of new product opportunities that were previously unavailable in the market.

Pintec is an intelligent financial services technology platform that uses big data and digital technologies to provide financial solutions for consumers and small businesses. It provides more advanced investment management services, robo-advisory, digital wealth or digital advisory services, blending investment recommendations from the robo-advisor with some client decision-making, which is especially well suited for Chinese investors who value lower fees and being involved in the process.

Hongdian Fund is an online mutual fund distribution business providing market access for retail investors and B2B partners through API connectivity. The company holds a licence issued by the China Securities Regulatory Commission for the online sale of mutual fund products. As of May 2016, the company has reached agreements with 53 different Chinese fund management companies to market 1645 different mutual fund products on the Hongdian Fund platform.

Traditional Banks are Developing FinTech Solutions In-House or are Acquiring Them

Although the BAT giants and tech companies are leading the initiative, traditional Chinese financial companies are developing FinTech solutions in-house or are acquiring them, enabling them to reach new clients, improve services and increase internal efficiency. Yet, strict regulations and relatively conservative mindsets mean that they are typically followers rather than leaders, at least compared with the BAT giants. That said, institutions such as Ping – an insurance group – are strategically entering the sector through subsidiaries, including Pinganfang, Ping An Puhui and Lufax, an internet-based wealth management platform. Lu.com aims to provide one of the most comprehensive wealth management platforms globally. Its services include providing risk management expertise, financial assets trading information and related consulting services for enterprises, financial services institutions and other qualified investors.

In addition, large commercial banks are acting: for example, China Construction Bank and Industrial and Commercial Bank of China are now building their own e-commerce platforms. Others will inevitably follow. Traditional players also have several strengths that should not be underestimated: a legacy of strategic partnerships, comprehensive product offerings, professional risk-management expertise and physical branches.

The Future of Chinese FinTech

In the coming years, China looks set to continue to dominate the global FinTech industry with a very strong domestic market. Internally, the push and pull factors are clearly in place to catalyse the establishment of a leading digital finance sector. On the push side, capital investment is pouring in and the market is being bolstered by substantial government support for innovation. On the pull side, demand is being driven by underserved SMEs and tech-savvy, often unbanked, consumers keen to access financial services via their mobile phones. Overseas, Chinese FinTech firms will also play an increasingly important role in the global collaborations driving technological innovation. What these companies learn abroad, they will bring back to the domestic market, further fuelling the sector to stay ahead of the rest of the world.