Key FinTech trends in China

A while ago I have taken a look at the FinTech market in China. The key point one must stress here is that China is often forgotten when thinking about FinTech, but in fact it should be recognised as one of the leaders in this space – in the last years Chinese FinTech investments had the largest share of global investment in the named sector. Obviously, if such exponential growth will continue, China will become the dominant superpower. That having in mind, it is important to know what trends are shaping Chinese FinTech sector.

China can become the dominant superpower in FinTech.

Competition vs. Collaboration

FinTech firms, such as online-only banks like MYbank and WeBank with well-run lending processes and innovative credit rating assessments, have widened financial access for a large segment of the population often ignored by Chinese banks. This resulting remarkable leapfrog of retail customers from cash into mobile payments has had awful consequences for traditional banks. Diagram below estimates an opportunity loss of about $22.8 billion in card fees alone last year. More importantly, that may rise to an estimated $60 billion by 2020.

Also, diverting payments away from incumbents deprives them of the customer data and consumption patterns critical for them to develop any competitive advantages, including pricing and customised services. Payment transactions disintermediation also cuts traditional banks off from relationships with merchants and retail customers, with the potential to spill over to affect other backbone business lines, such as loans, deposits and investments.

However, one can see that in addition to competing or working on their own FinTech innovation, commercial banks have also responded by collaborating with FinTech firms to launch digital initiatives. For instance, the Postal Savings Bank of China (PSBC), China’s largest lender by branch network with 40,000 branches, is strengthening its cooperation with Ant Financial and Tencent in internet and mobile finance. As a starting point, PSBC is partnering with Ant’s MYbank to improve the speed and convenience of its account opening process. Through such collaboration, incumbent banks will be able to reach a new segment of unbanked customers, which would not have been possible without the user and merchant information, and the online banking capabilities of the large e-commerce players.

Rising Regulatory Attention

The legacy regulatory environment in China has been beneficial to non-financial services players thriving in areas such as micro-finance and mutual funds.

Since 2015 a more prominent regulatory approach has become apparent. In the P2P sector nearly one-third of all online financing platforms in China ran into financial difficulties by the end of 2015, and almost 1,600 P2P lenders (around 40%) exited the market by April 2016. Given this mounting crisis in P2P lending, People’s Bank of China (PBOC) introduced a series of rules and regulations to oversee P2P lending and online payments in China.

Among others, these rules imposed credit limits, and prohibited pooling and lending of funds by P2P platforms. They also required a principal guarantee by the platform, and debt securitisation to mitigate lenders’ credit risks. High profile scandals, such as Ezubao’s Ponzi scheme disguised as a P2P platform, also prompted the government to establish a task force to crackdown on fraudulent P2P lenders. The National Internet Finance Association, run by the central bank and with 400 member traditional financial and internet finance companies, was established to regulate Chinese FinTech firms and control risks in the sector.

Nevertheless, China’s P2P regulations remain relatively less arduous than those in developed markets, such as Singapore and the UK, as can be seen in the diagram above. For instance, Chinese P2P platforms are simply required to register themselves with the local financial authorities and do not need to be licensed or have minimum capital requirements. While local regulators are attempting to stay aligned with industry developments, they are still cognizant of needing to allow for the continued ease of establishment and expansion of FinTech firms in China.

Value Chain

Major Chinese FinTech firms are aggressively creating all-encompassing platforms. Ant Financial, for example, seeks to embed its services into customers’ daily life to raise the percentage of users with multiple products, in the process boosting customer stickiness and generating ever more comprehensive customer data. Ant Financial is building an ecosystem that goes way beyond financial services to incorporate transportation, dining, medical services, and much more. This has already reaped initial successes as measured by speed of customer acquisition, with the period for a financial product within the Ant ecosystem to reach 100 million users reducing from 31 months for insurance, down to 20 months for Yu’e Bao, then 11 months for Sesame Credit.

Tencent, meanwhile, has started testing new tools for businesses to build sub-apps within WeChat that can make services even simpler to use while staying within WeChat. In effect, these could upgrade WeChat’s app into an operating system within an operating system. WeChat could become a one-stop app that substitutes a number of existing apps and/or integrate new, innovative functions on its own platforms, so users would seldom have to leave to use other mobile apps.

FinTech in China is being further boosted by the participation of players from outside the financial and tech industries bringing along industry experience and customer data. Retail and real estate players, such as Gome, Suning and Wanda, are venturing into the FinTech arena, banking on their strong offline presence and in-depth industry knowledge to provide exclusive advantage. For example, retail giants like Gome and Suning are familiar with the financing requirements of both the upstream and downstream components of the retail supply chain, allowing them to develop customised financial goods to fit the requirements of participants within their supply chain.

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For more insights read reports by EY and UBS.