Over the past five years, China has emerged as the global leader in B2C FinTech, not only from an innovation perspective but in terms of adoption as well. China’s large tech firms and FinTech start-ups have transformed entire industries, from payments to peer-to-peer (P2P) lending. But can China also shape the future of the wealth management industry, capturing the mass affluent segment? And can the Chinese model be exported successfully, with innovation from China reshaping how things are done worldwide?

The Wealth Management Opportunity in China: From HNWIs to the Mass Affluent

China is on track to soon become one of the world’s largest markets of high-net-worth individuals (HNWIs). In 2015, China was estimated to have 2 million HNWIs; this is projected to double by 2020. During that period, China’s personal investable assets are expected to increase from CNY 113 trillion to CNY 200 trillion (about US$16 trillion to US$29 trillion). Both domestic and global private banks have been trying to capture this opportunity by focusing heavily on both the HNW and ultra-high-net-worth (UHNW) markets.

But increasingly, they have also begun to target the mass affluent segment, the more than 15 million Chinese consumers with investable assets of between US$100,000 and US$1 million. These are the lesser-known winners of China’s economic boom, who’ve climbed into the upper middle class. The World Economic Forum reports that China will see 100 million upper middle class and affluent households by 2020.

As it grows, that customer base wants and needs to be served differently from the traditional private banking model. It is in this area that many of the new entrants, including large tech firms and FinTech start-ups, have been operating.

Numerous robo-advisory offerings have emerged that aim to service these mass affluent customers. These tools can help users navigate their risk preferences and shape their portfolio quickly and efficiently, without the need for a human investment advisor. The number of Chinese consumers using robo-advisory services to manage their investments is expected to reach nearly 80 million by 2021, according to market research firm Statista.¹ That’s compared with less than 2 million such users in 2016.

The Chinese Tech Dragons

Large tech firms such as Ant Financial and Tencent have emerged as important players in the financial services ecosystem in China. Ant Financial boasts more than 450 million active users and is partly owned by Alibaba. Ant Financial operates a money-market fund, Yu’e Bao, which has become the largest money-market fund in the world. Its estimated US$165 billion of assets under management comes from just over 260 million users. Ant Financial is expanding aggressively worldwide and acquired MoneyGram for US$1.2 billion in 2017.

Tencent is also expanding rapidly into financial services. With its 700 million + active monthly users, it plays a critical role in the lives of Chinese citizens. For example, Tencent processed more than 46 billion red packet gift transfers during Chinese New Year week in January 2017 – replacing the traditional red envelope normally passed from person to person by hand. On its platforms, users can conveniently buy anything from mutual funds to insurance products. Similarly to Ant Financial, it is expanding globally – most recently with investments in Tesla.

While these large tech firms still focus mainly on the vast retail market, they are increasingly looking at the wealth management space. For example, Ant Financial launched its wealth management platform, Ant Fortune, while Tencent launched Licaitong to offer segmented and personalized financial products to this increasingly growing mass affluent segment.

Established Chinese FinTechs

In addition to the large tech players, many FinTechs have established themselves as dominant players that are increasingly focusing on this mass affluent segment.

For example, Lufax began as a P2P player in 2012, but now offers a suite of financial products aimed at the mass affluent segment. Lufax sells a large number of fixed-income, money-market and mutual funds and insurance products sourced from domestic financial institutions to its 25 million + registered users, who can buy products via mobile phones and online accounts. CreditEase is another example of a FinTech that also began in P2P lending but which has since expanded into wealth management by focusing on the HNW and mass affluent segments. It offers a wide range of products and services for onshore and offshore investment in areas such as fixed income, private equity, capital markets, hedge funds, real estate and insurance, as well as investment immigration and international education.

Why So Successful?

These new players, from the large tech players to the emerging FinTechs, have been successful for a number of reasons.

• They focus on unmet needs

• These tech firms have focused on areas where there was a gap in the market. For example, alternative lending offerings originally took off in China as a source of capital for start-ups and small businesses. The traditional state-owned banks preferred to lend to large, state-owned enterprises, neglecting smaller players and leaving a void that FinTech players stepped in to fill. The same is now arguably happening with the mass affluent segment.

• They are data-driven and can innovate fast

• These tech players are not financial services incumbents who just happen to have a good digital channel. They are firms that are data-driven, digital native and mobile first, applying those advantages to the delivery of financial services. This allows them to fully leverage the data they have towards better pricing of risk, evaluation of creditworthiness and product development. It also confers an advantage in user experience design, with delivery mechanisms that provide products in convenient and easy ways.
• They have mastered partnerships and platform models
• Instead of themselves becoming financial institutions, these tech firms have often opted for an open ecosystem approach whereby they work with various financial institutions to offer a range of products, providing choice and transparency to their customers. For example, Ant Financial does not see itself as a bank but rather as a financial services provider, a platform that can offer hundreds of different funds for its clients to choose from, as investment opportunities.

• They understand and master market adoption habits

• These tech firms have leveraged the digital savviness of Chinese consumers. China leapt into mobile products and services, and its consumers have consistently been seen as being ahead of other countries in the use of new technology. For example, China is estimated to have over 730 million internet users, with 95% of them accessing services through their phones. This has allowed these tech firms to quickly deploy new solutions.

• They have a favourable regulatory framework

• In order for innovation to flourish, regulations must not be excessive and regulators may have to be pragmatic and practical. China is often described as a big sandbox, with regulators allowing new technologies to emerge, carefully monitoring them and intervening only when they need to or when critical mass has been reached. For example, the P2P sector was able to flourish without many regulatory constraints. Regulators intervened only once the industry had grown, putting in place guidelines and legal frameworks to govern its use; the size of loans made through P2P lenders was capped, and lenders were forced to use custodian banks to reduce counterparty risk.

Can the Same Happen in the West?

The big question is always whether large tech players in the West – such as Facebook, Amazon, Google or Uber – could enter the mass affluent wealth management space as their Chinese counterparts have done. Facebook, for example, in addition to its numerous regulatory licences across the USA, obtained its financial services licence from the Central Bank of Ireland in November 2016. While the focus in the short term seems to be on facilitating payments between its 1 billion plus users of Facebook Messenger, could Facebook enter the mass affluent wealth management sector one day?

Amazon is already offering many financial products, but mainly to its merchants in the form of small business loans. Since 2012, Amazon has offered loans ranging from US$1000 to US$600,000, mainly for merchants who want to invest in inventory to sell their wares on Amazon’s marketplace. If customers are happy buying all their daily necessities on Amazon, wouldn’t they be open to buying investment products as well? And with an ever-increasing number of US households using Amazon’s Echo, couldn’t they ask Alexa for investment advice?

Is Data the Differentiator?

These large tech firms arguably have as much data on their customers as their Chinese counterparts. The question is whether they will expand further into providing financial services to the mass affluent. For many, this would be seen as a natural expansion of their business. And they would in many cases have an edge compared with traditional wealth management firms. For example, Facebook probably has a better idea not only of the background and education of an individual, but also of his or her life goals, aspirations and upcoming projects; this vastly exceeds what is generally known by incumbent banks. For example, Facebook could offer wealth planning solutions or life insurance products to a new father who announces the birth of his child to his Facebook network.

The same advantages could in theory apply from a compliance and regulatory perspective as well. Tech firms are more likely to have a grasp on the identity and behaviour patterns of their users by triangulating various pieces of data. This may be more accurate than the “know your customer” processes currently in place at traditional banks, which rely on passport photocopies and multiple-page questionnaires.

Conclusion

While the developments taking place in China to capture the mass affluent segment have been quite remarkable, it will be interesting to see if and how these models are replicated in other countries. The large tech firms and FinTech start-ups have an opportunity to capture this mass affluent segment, and what is happening in China may give a blueprint for how tech firms in the West can address this market.