Editor’s note: This post was contributed by Jx Tan, Countly Analytics’ Chief Growth Officer (China & APAC). Founded in 2012, Countly’s Open Source framework represents a new category of collaborative technology that answers difficult questions like for innovative companies like Atom Bank based on their users’ in-app behavior and crash data.
China’s internet finance industry is booming. The country leads the world when it comes to total users and market size; financial-technology (or fintech) start-ups are mushrooming, as are company valuations; capital markets are aggressively pursuing the Internet finance industry, and consumer behavior is changing dramatically. By the end of 2015, the market size of the country’s Internet finance sector was more than 12 trillion renminbi ($1.8 trillion), dominated by the payments sector.
I spoke with Chris Skinner, a UK-based commentator on financial markets and author of Digital Bank and Value Web, about the unique opportunities for China’s fast-moving fintech industry, international fintech trends, and how traditional banks & fintech start-ups are exploring new ways to work together.
What are the noteworthy opportunities you see in Chinese fintech?
First of all, we need to acknowledge that China and fintech is starting from a very different position relative to American and Europe who had technology applied to finance for over 60 years. Whereas to a large extent, the technology applied to finance in China has only started 15 to 20 years ago.
Fintech is growing very quickly in China. Half of China’s top 10 unicorns are fintech companies (Ant Financial, Lufax, Jiedaibao, Zhong An Insurance, and JD Finance). In a very short time, Ant Financial has built up a reliable database of individual credit ratings on millions of Chinese who shop on Taobao’s e-commerce platform, enabling it to make small business and individual loans that largely bypass incumbent banks. Jack Ma has always seen Ant Financial as a global player and will continue to position for global expansion.
Of course, there are challenges too. China’s P2P ecosystem has taken a hit over the past year as a lack of transparency has taken its toll.
What are your views on the major differences between Chinese and Western fintech ecosystem?
I guess the Chinese approach to technology in finance has been far less regulated that what we have seen in some of the Western markets. This has been allowing the market to grow without constraints except for products like Bitcoin that are suppressed due to tight regulations. On the hand, you have areas like P2P lending that are not. Now that is changing too as we see more interest in Blockchain technology in China and across the world.
I see only two markets in the world where you can scale rapidly to major growth: US and China. In these markets, you see fintech companies that can grow to millions of users on a national basis very quickly without changing your core product. You don’t have that in Europe or Southeast Asia where differences in domestic regulations means that you have to change your product for every country.
A big difference between China and America is the number of regulations at the state level. You can’t start a new bank in U.S without going through 200 regulatory discussions with different authorities. However, in China, so long as the government gives the go-ahead, banks like Webank and YesBank can be created almost overnight and scale quickly within weeks. For example, Yu’ebao got to 90 billion USD in assets in within 18 months.
Another part of it is that the Chinese consumers have been under-served as the traditional banks focus on the most profitable segments that make up a small part of the Chinese market. With Alibaba and Tencent platforms, these companies can reach out to millions of such consumers and scale very quickly.
To add on, fintech companies worldwide generally seek to grow in two key areas:
- Serve the underserved: This includes customer and business segments that are not adequately served by incumbent banks. For example, such segments include microloans to small businesses
- Enhance existing products: The introduction of fintech technology offers opportunities to disrupt products and processes served by legacy systems and thinking. For example, Blockchain offers transparency and the potential to enhance international trade financing services
Can you share some examples where Western fintech companies are creatively leveraging data to deliver additional customer value?
There are 5 or 6 major innovations areas within fintech:
- Payments: Probably the most exciting area is around Payments. Payments is moving into plug-and-play technologies. You have already seen that with PayPal. Now Stripe is taking on PayPal. Since 2011, Stripe has grown to a US$9.2 billion company within 5 years. This is just for an API that allows merchants to get set up within 10 minutes instead of a couple of days rather than a bank. Look out for Stripe. They have recently received investment from Sumitomo Mitsui Card company. In 2016, they have expanded to Indonesia and Singapore.
- Blockchain: I am bullish on Blockchain. Blockchain is a decentralized ledger or database that keeps a record of all transactions that take place across a peer-to-peer network. This technology will be game-changing as it allows market participants to transfer assets across the Internet without the need for a centralized third party. Apart from international payments, there are other applications such as Trade Financing. Look out for Wave. They manage ownership of trade documents on blockchain eliminating disputes, forgeries, and unnecessary risks. Wave has a collaboration with Barclays Bank and its product helps speed up the time it takes to complete a trade transaction, e.g. letters of credit – from as many as 20 days to just a few hours by eradicating human effort to process a paper trail. Also look out for Everledger, a blockchain-based digital vault that now holds the records of almost 1 million diamonds. Once items are registered on the blockchain, the records are permanent and can’t be changed, providing a clear audit trail to be used by multiple parties throughout the supply chain to prove authenticity and reduce the risk of fraud, theft, and trafficking.
- P2P Lending: The model of P2P lending is very admirable, with algorithms matching lenders with investors with the right risk appetite. In the U.S, P2P lending is now mostly between institutions due to the regulations with regard to securitized lending. As a result, P2P lending is also subject to market forces: in Europe, there are insufficient quality lenders and some P2P platforms have stopped taking deposits. For example, Zopa, a UK P2P platform, has recently tried to diversify its business by targeting to launch a neo-bank in 2018 (or next generation bank or digital-only bank).
- Wealth Management: Roboadvice is already being deployed to target the customers who are just below the private banking tier. However, I am not bullish on roboadvice as this can be offered by existing players like Charles Schwab on top of their services and could be wiped out very quickly. Look out for Charles Schwab Intelligent Platforms, an automated investment advisory service with no advisory fees, no account service fees, and no commissions charged.
In the Chinese context, how can incumbent banks maintain their lead over fintech companies?
The big 4 Chinese banks are not as agile as newcomers like Baidu and Tencent and traditionally not focused on the consumer side of the business. There are some regulatory barriers to prevent fintech companies from entering the consumer space.
I can’t really comment on One Belt, One Road (OBOR) as I don’t know how that is going to play out. Just an immediate view would be that China does have a problem in terms of slowing growth. The Chinese economy has been delivering annual growth rates of 6 to 7% but is this due to real growth or stimulation of demand? To create sustainable growth, OBOR sounds like a key growth strategy.
Another question in my mind is, “What are Chinese banks going to be doing and how will this support the OBOR initiative?”
Incumbent banks are likely to play an important role and support Chinese businesses that are venturing to less developed parts of the world that are commodity producers. So this is where I see the most activity from the big 4 Chinese banks to support global trade. At this moment, incumbent banks have more experience relative to fintech companies to provide trade services and should build upon this lead.
Incumbent banks worldwide are aware of the potentially disruptive effect of Fintech startups. When you look at what incumbent banks have done elsewhere, DBS (Singapore), Barclays (UK) and Sumitomo Mitsui Financial Group (Japan), they have all actively sought to nurture fintech start-ups while enriching their existing service offerings with the resulting innovations. Chinese incumbent banks may wish to consider a similar strategy.
In the Chinese context, what can Chinese fintech companies do better to challenge the traditional banking incumbents? In particular, what can these newcomers do to gain trust from the consumers or provide services that incumbents are unable to provide?
As a first step, Chinese fintech companies can organize themselves as an industry body to lobby policy-makers and raise consumer awareness. In the US, Amazon, Apple, Google, Intuit, and PayPal have formed a Public Policy Coalition known as Financial Innovation Now. This will make it easier for these newcomers to enter new areas of business within the financial industry. I can easily see Baidu, Tencent, and Alibaba doing something similar.
Within the Chinese fintech ecosystem, Alibaba and Tencent have obvious brand and financial advantages over other rivals. With no brand, no customers, and no trust, it is very hard for independent Chinese Fintech startups to achieve critical mass unless their product is hugely compelling. My view is that Chinese versions of newly launched international Fintech products are unlikely to reach this threshold of innovation.
So what can independent Chinese fintech start-ups do? For start-ups with no brand, starting with something like mobo roboadvice sense as what you are doing is to analyze what customers have got and providing information services. Most consumers will be happy to use such tools. More broadly, their strategy will probably be similar to fintech start-ups elsewhere in the world: Serve the underserved, like providing student loans or small loans to businesses. Also, collaborate with traditional banks which will be beneficial to start-ups in terms of acquiring trust and customers.