China un­locks po­ten­tial of fi­nan­cial tech­nol­ogy

China Daily (Canada) - - ANALYSIS - By HAKY MOON For China Daily

When it comes to fi­nan­cial tech­nol­ogy, or fin­tech, China is a world leader in ev­ery as­pect. The coun­try has taken some of the largest chunks of global in­vest­ment in the sec­tor and is adopt­ing the tech­nol­ogy faster than any­where else.

“China is the home of fin­tech in­no­va­tion and adop­tion,” says James Lloyd, Asia-Pa­cific fin­tech leader with con­sul­tancy EY, dur­ing Fin­no­va­sia 2016, a fin­tech event held in Hong Kong in late May.

“Dur­ing an event in Shang­hai, in­ter­est­ingly, a (chief fi­nan­cial of­fi­cer) of a Chi­nese fin­tech uni­corn I met said fin­tech is ba­si­cally a Chi­nese phe­nom­e­non,” he adds.

Uni­corns are very suc­cess­ful startup com­pa­nies val­ued at more than $1 bil­lion. Fin­tech uni­corns are rare but they are show­ing up in China.

In April, pri­vate com­pany Ant Fi­nan­cial Ser­vices Group, which owns and op­er­ates the coun­try’s largest on­line pay­ment plat­form by trans­ac­tion vol­ume, Ali­pay, raised a record­break­ing $4.5 bil­lion in fund­ing.

This se­ries B round was led by China’s sov­er­eign wealth fund China In­vest­ment Corp and State-owned China Con­struc­tion Bank. Com­pa­nies use se­ries B fund­ing rounds to at­tract in­vestors, by­pass the de­vel­op­ment stage and ex­pand their mar­ket reach.

“If you look at China, it’s streets ahead on the fin­tech side,” says Lloyd, when com­pared to Europe and the US.

Bank­ing and fi­nan­cial ser­vices are ex­pand­ing through­out China as ser­vice providers strive to reach a large pop­u­la­tion that is un­banked — lack­ing ac­cess to fi­nan­cial ser­vices — and pro­vide them with sav­ings ac­counts, in­sur­ance and pen­sions. Such ef­forts are help­ing to drive the ex­plo­sive growth of fin­tech in the coun­try.

In con­trast, the adop­tion of fin­tech in the West has not been as rapid, even though a rea­son­able level of prod­uct de­vel­op­ment ex­ists and fi­nan­cial prod­ucts are gen­er­ally widely avail­able.

“While in­no­va­tion and fin­tech is ‘cool’ in the US and Europe, it’s ac­tu­ally hard­core in China,” says Lloyd.

“The un­met needs are sim­ply great, by virtue of a bank­ing sys­tem that is tra­di­tion­ally fo­cused on cor­po­rates, by virtue of the ab­sence of fi­nan­cial ser­vices that we, in Hong Kong, might take for granted.”

Lloyd adds that whether that re­lates to credit cards, in­vest­ment prod­ucts or sav­ings ac­counts, the ab­sence of these prod­ucts is re­ally the root of in­no­va­tion in China.

In the first quar­ter of this year, fin­tech com­pa­nies in China at­tracted $2.4 bil­lion from ven­ture cap­i­tal firms in nine deals. This ac­counts for 49 per­cent of the $4.98 bil­lion in in­vest­ment in the space recorded glob­ally.

Ray­mond Cheong, a part­ner with ac­count­ing firm KPMG China, notes the grow­ing global and do­mes­tic in­ter­est in China’s fin­tech ecosys­tem.

“With in­no­va­tion oc­cur­ring across a num­ber of sec­tors, con­sumers are in­creas­ingly look­ing to avail of tech­nol­ogy and liq­uid­ity within the China (ven­ture cap­i­tal) com­mu­nity. This cre­ates a per­fect storm in terms of achiev­ing these high lev­els of fin­tech in­vest­ments,” Cheong says in a note.

The lack of fi­nan­cial in­fra­struc­ture is the driv­ing force be­hind fin­tech in­no­va­tion.

Large tech play­ers fo­cus­ing on fi­nan­cial ser­vices have taken up the ma­jor­ity of the mar­ket share. These in­clude Alibaba, Ten­cent and Baidu, all of which are at the core of China’s fin­tech revo­lu­tion.

These three com­pa­nies con­trol the largest e-com­merce plat­forms and own ma­jor com­pa­nies in the fin­tech wave in China. Ten­cent-backed WeBank, for ex­am­ple, is the coun­try’s first purely on­line bank.

De­spite the ex­cit­ing out­look, the growth of China’s fin­tech in­dus­try has not been smooth nor is it likely to be. The evolv­ing reg­u­la­tory en­vi­ron­ment is seen as a hur­dle to some in­vestors.

In July 2015, au­thor­i­ties un­veiled the Guid­ance on Pro­mot­ing the Healthy De­vel­op­ment of In­ter­net Fi­nance doc­u­ment af­ter a se­ries of scan­dals in peer-to-peer lend­ing com­pa­nies came to light.

“The fund­ing and progress in Chi­nese fin­tech has been re­mark­able. It is clear that there is sig­nif­i­cant fu­ture growth po­ten­tial,” says Zen­non Kapron, co­founder and di­rec­tor of Shang­hai-based China Fin­Tech, a com­pany that works with star­tups, fi­nan­cial in­sti­tu­tions and in­vestors.

“The real ques­tion is how fast the reg­u­la­tors will let it grow as they seek to bal­ance in­no­va­tion and progress with po­ten­tial risk, which is still very un­clear.”

China may be lead­ing the way in fin­tech in­no­va­tion, but de­vel­oped mar­kets in Asia such as Sin­ga­pore, South Korea and Ja­pan are also pro­mot­ing fin­tech, al­beit for dif­fer­ent rea­sons.

While China has a clear need for fi­nan­cial ser­vices, more de­vel­oped economies rely on fin­tech for in­no­va­tion within their fi­nan­cial ser­vices in­dus­tries.

Gen­er­ally, Asian com­pa­nies’ in­ter­est in fin­tech con­tin­ues to be strong, with more than 30 per­cent of deals see­ing cor­po­rate par­tic­i­pa­tion. It is pri­mar­ily driven by bank­ing in­sti­tu­tions that have al­ready made in­vest­ments in the space by ac­quir­ing fin­tech com­pa­nies, form­ing part­ner­ships or set­ting up in­no­va­tion pro­grams.

Sin­ga­pore is also tak­ing steps to ride the wave of in­no­va­tion in fin­tech. Some of its govern­ment-backed projects are part­ner­ships be­tween Stan­dard Char­tered Bank and DBS us­ing blockchain tech­nol­ogy for fi­nan­cial trans­ac­tions. Blockchain al­lows par­ties to carry out di­rect trans­ac­tions with­out us­ing an in­ter­me­di­ary.

Still, the fin­tech revo­lu­tion in China is re­mark­able in Asia Pa­cific sim­ply due to its sheer vol­ume, size and the vast po­ten­tial of the coun­try’s un­banked pop­u­la­tion.

Lloyd from EY says: “Hong Kong, Shen­zhen and Guangzhou have about 60 mil­lion peo­ple. That’s al­ready pretty world class in terms of pos­si­bil­i­ties and po­ten­tial from a do­mes­tic mar­ket per­spec­tive.”

These cities have a larger pop­u­la­tion than Sin­ga­pore and South Korea com­bined and are China’s ris­ing stars in the fin­tech fir­ma­ment.

Also speak­ing at Fin­no­va­sia 2016, Jin Pang, chief mar­ket­ing of­fi­cer of the Shang­hai-based fin­tech com­pany Dian­rong, noted the po­ten­tial China can un­lock be­cause the mar­ket is still so im­ma­ture.

“The sort of in­no­va­tion that is hap­pen­ing in China is much more so­phis­ti­cated than the de­vel­oped mar­ket and there is no border when it comes to fi­nan­cial in­no­va­tion,” Jin said.


A teller serves a cus­tomer at a bank in Shang­hai. Ef­forts to reach a large pop­u­la­tion that lacks ac­cess to fi­nan­cial ser­vices are help­ing to fuel the ex­plo­sive growth of fin­tech in China.

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