Financial times are changing, and they’re changing faster in China than in other other country. Today, China’s embrace of the FinTech sector and what it has to offer to traditional finance companies is a testament to just how far they’ve come. With a value of US$2.2 trillion, China is essentially leading the world in FinTech.
How on earth did this happen?
Timing is everything
To truly understand the rise of FinTech in China you need to know that it has more internet users than any other country in the world. And thanks to these 700 million consumers, a storm was a-brewing. Backwards banking systems and a quickly growing middle-class demanding better services created a perfect storm that enabled the FinTech sector to grow in China. With the growing wealth of the nation, the lack of places to invest in, and ambitious entrepreneurs struggling to get startup loans, technology, easily and rapidly, filled the gap.
In addition, state-owned banks were too slow to respond–they’d never been challenged on the processes before. This left the gates wide open for hungry entrepreneurs and companies. And not all of them had experience in e-commerce, however, many of them had a good idea and a passion to change things for the better, particularly the dated banking systems that a large part of the Chinese people was tiring of.
It also helps that China is the world’s biggest market for digital payments. I’m talking about half of the world’s total digital payments where online lending holds a hefty three-quarters of the global market. And they’re in it to win it. Last year, Chinese FinTech companies took out 4 out of 5 of the world’s most innovative FinTech firms.
Let’s take a look at the three areas that FinTech is disrupting in China.
Up until recently China, as with many other Asian countries, was largely a cash-society. But as the internet took off Chinese consumers have always embraced online shopping making them early adopters of digital payments. Shifting to digital payments was easy thanks to the use and rise of smartphones. These days over 90% of Chinese access the internet via their mobile devices.
This kind of mobile access gave savvy FinTech companies like Alipay, WeChat (Tencent) and Baidu the opportunity to develop mobile wallets. It’s this thriving competitive scene that allows Chinese companies to spark such game-changing innovations and being able to send money to one another as easy as it is to send a selfie.
And the people are into it. For 425 million Chinese their phones are their wallets. Just last year more than $5.5 trillion dollars were made through mobile payments. This is more than 50 times the size of the American market. Alipay alone recently hit a record 1 billion transactions in a single day. Just compare their peak of 120,000 transactions per second to Visa’s capacity of 24,000 to fully grasp the opportunity here.
2. Online lending
One of the biggest problems in banking in China is that it’s close to impossible to get a loan if you’re not a state-owned company. State-owned banks dominate the financial system and don’t have the best systems for assessing credit-risks making them reluctant to back startups. FinTech stepped in through E-commerce once again allowing online shopping platforms to develop loan services. These companies then use their customers’ personal information, transactions and even social media information to create credit scores.
For instance, China’s two biggest e-commerce portals, Alibaba and JD.com, offer their customers loans of small amounts of money– less than 10,000 yuan. E-commerce lending is cautious though. Their clients must be well-known to the big shopping platforms. But there is a more radical side to China’s online lending: peer-to-peer (P2P) credit.
P2P lending jumped from 214 lenders in 2011, to more than 3,000 by 2015. Fair enough. This kind of lending was renegade–completely free from any kind of regulatory oversight, enabling it to develop into a financial cesspit of sort, full of frauds and sketchy funding models. It’s worth noting that many of these P2P firms have been shut down. You may have heard about last year’s US$7.6 billion Ponzi scheme scandal in which the heads of one P2P loans startup ran off with 900,000 people’s savings? Surely this kind of situation would be the end of P2P lending?
Despite a string of high-profile collapses, P2P lenders still have a vital role to play in China. These online lenders continue to answer a basic need, offering credit at lower interest rates to millions of people that banks continue to ignore. Instead of using the typical means to obtain funding from institutional investors, P2P firms have more than 4 million Chinese investing in them. These platforms then divide loans into smaller, more manageable chunks to disperse risks.
Still, China continues to have “problematic” online lenders– close to 2000 of them in last year alone according to the China Banking Regulatory Commission. Clearly, there’s still work to be done with regulations.
In the past, Chinese investors faced two options for managing their cash:
Bank it with traditional banks where interest rates were low, but safety was guaranteed, or;
Take a chance on the stock market where the opportunity to make a killing was as high as the chances of losing it all.
Now, thanks to FinTech, asset managers have become virtually obsolete. There’s no need for intermediaries when investors can access the markets straight from their iPhones. And, like I always say, you can look to the millennials to understand why this is happening. China’s best-paid workers are younger and happen to be the country’s largest generation of white-collar workers. At just 22 year old, these workers are making vast amounts of money and they trust web-based platforms to manage it for them.
The result of this kind of booming investment scene is democratisation. Funny that for a Communist country. But in all seriousness, FinTech in China is opening up investment opportunities to everyone, not just wealthy investors. All you need is 1 yuan and a smartphone. Companies like WeChat, with their 800 million active accounts, or Ant, with a not-too-shabby 400 million, are leading the way. And there’s a lot we can learn from them.
The key is collaboration
The rise of FinTech in China is amazing to watch, but this doesn’t mean that traditional banking is obsolete, nor will it be in the future. Yes, apps and online lenders have gigantic user bases, but they’re made up of individual consumers and small businesses. Let me put this into context: the outstanding balance of P2P credit is a puny 0.8% of total bank loans from state-owned banks. And credit provided by e-commerce firms adds up to less. One more fact: the earnings from mobile payments, while enormous, still amount to barely 2% of bank revenues.
Banks in China, like our banks in New Zealand are changing their business models and collaborating with FinTech companies to do better by their customers. Neither the banks nor FinTechs here are in a better position than the other, in fact, they need each other. Banks bring the branch networks, risk controls and brand and reputation to the yard. Savvy FinTech firms know that banks have these incredible advantages and pairing up with them is smarter than challenging them. And this has paid off in China as banks hedged their bets on FinTech firms being useful for innovations so the rise of mobile payments and online lending has been made possible without being hindered by hefty regulations.
Let’s learn from them.
Peter Fletcher-Dobson is Kiwibank’s Digital Strategy Lead. Follow him on Twitter.