With a $500 million fund and another RMB fund with the same amount, CreditEase Fintech Investment Fund is investing in fintech companies, mostly participating in B and C rounds.
When CreditEase looks into a fintech startup, it starts with the startup’s geographic location, and whether the market offers multiple exit opportunities. CreditEase says they look for the product market fit and invests in the company after thorough due diligence. The startup should have deep expertise in the finance area and use technology to solve problems in this area. After the investment, the firm helps them grow.
We talked with Anju Patwardhan, Managing Director at CreditEase (宜信) China about CreditEase’s global fintech investment fund, their blockchain fund of funds, ICOs, and global fintech trends.
1. What do you think of recent developments in blockchain?
Investments in crypto currencies don’t align with our long term investment area. However, we like the underlying technology. It still has issues with it, such as scalability, private key storage and retrieval challenges, and regulatory approval.
The biggest challenge is scalability. If you look in to payment space, the global Visa/Mastercard networks can handle about 40,000 ~ 50,000 transactions per second. Ripple network can process 1,500 transactions per second. And blockchain can process about 1,000 transactions every eight minutes, or seven transactions per second. That’s it. You need to get massive scalability before this technology can be used in payment solutions, and there has to be a solution that solves for scale and high volume.
The second problem is the energy consumption. Even at the current volumes of about 1,000 transactions every eight minutes, it consumes more energy than it takes to run the entire Visa network. I was reading in New York Times that if the blockchain could be scaled to reach the transaction number of Visa, the energy requirement will be equivalent of 5,000 nuclear reactors, or the entire energy consumption in the world. And we are only talking about one payment network i.e. Visa, not even Mastercard or WeChat Pay. The technology is exciting, but people don’t realize it doesn’t scale for commercial applications today. We do see there are some applications we like about the blockchain and related technologies, and we are interested in investing the sector in the future if the valuation should be logical.
2. What do you think of China’s AI industry?
If you look at the status closely, in using machine learning, AI, and GPU (Graphic Processing Unit), four years ago the largest user was Yahoo, followed by Baidu and Alipay. And last year it was Tencent. In terms of using AI for big data processing, China is the leader right now.
In AI, we are seeing the use of machine learning for credit scoring and fraud detection. We are starting to see chatbots in conversational AI for fintech using Amazon Echo or using Apple Siri or other similar tools. Many US banks are starting to adopt that. Even in China, many are starting to adopt that. We made an investment in a Singaporean company Active.AI which adopts chatbot customer service and sales. They are now connecting to Whatsapp and WeChat and are already partnering with banks available in eight countries. Other companies use AI for fraud detection and credit scoring purpose.
3. How do you see the global fintech investment overall?
If you see fintech investment, it’s not declining. They are going up YoY. Until 2014, or even 2015, 75% of all fintech investments were happening in B2C payments and marketplace lending sector. There were very little investments happening in other financial services. What has changed in the last two years is that there is less investment going into those two areas and a lot more investment in wealth management, insurance tech, B2B payments, reg tech, capital markets and SME ecosystem. In our portfolio, only 30% is in lending and payments, and 70% is in other areas, including investments in companies such as NAV, Marqeta, Addepar, Ellevest, Trumid, Funding Circle, Upgrade, Fundbox, Fair, and others.
4. Have you seen any successful cases of blockchain technology adopted by financial institutions?
There are many financial institutions doing experiments with blockchain. However, as far as I know, there hasn’t been any really large application of blockchain technology in production because of scalability issues. There are several applications being built on Ethereum too in a private distributed system in areas such as smart contracts.
Other large application of cryptography I‘ve seen is in Estonia. They have put all their national health records into a similar technology. So they have connected consumer, pharmacy, hospital, and doctors. Consumers get to decide which data the doctor gets to see and what they cannot see. They call it blockchain but it is not linked to any currency. It’s a good way to think about it. Some other countries are also thinking of using advanced cryptography but without the crypto-currency link. There are about five to six countries which are exploring related technologies to launch a digital version of their fiat currency. Singapore did a pilot a few months ago.
As for ICOs, I think there are two parts. One is the use of underlying technology to streamline the process, which is good and another is to bypass the security regulations which is not good. Some countries banned ICOs, as it should be regulated. Regulators in countries like the US are going to issue guidance soon.