Fintechs in China .........................................
Symbolize Chinese fintechs
China is way ahead in creating and promoting fintech ecosystem:
When the topic is fintechs in China, the discussion invariably centers around two mega platforms - Alipay and WeChat. These two are synonymous with China’s fintech growth. An estimate puts the value of mobile transactions on these 2 platforms at $12.8 trillion during January-October 2018 period, which is way above the $49.3 billion worth of transactions in the US during this period. Alipay and WeChat, owned by Chinese internet behemoths Alibaba and Tencent respectively, together account for 93% of China’s mobile payments market. Alipay claims it has the ability to process 256,000 transactions a second. The fraud loss rate on Alipay platform is less than 0.01 BPS as opposed to 3 BPS at one of the world’s leading online payment company in the US. And on Alipay platform, it takes just 3 minutes for a borrower to fill out a loan application and the loan is approved in one second and with zero manual intervention. The company claims it is using big data and AI algorithms to achieve what is called the ‘310’ model - 3 minutes to apply for credit, 1 second to approve, and 0 people involved in the decision.
Alipay and WeChat have changed the way Chinese people live their financial lives. They are one-stop shops that enable half a billion Chinese to access an array of services - from payments, loans, investments and credit scores to taxi rides, travel bookings and social media. In contrast, Alibaba and Tencent know the health (or lack thereof ) of small businesses across China and they have loan products for companies that banks might consider risky. Similarly, people with no traditional credit score can get cheap loans because Alibaba and Tencent have their payment and purchase history.
GROWING BEYOND CHINA
Both Alipay’s and WeChat’s reach is now not confined to China as both the entities have designs for shaping the global fintech market as the intention is not just provide Chinese-developed technology for the countries in South East Asia and Africa as well as India to run the mobile finance systems there but also to be participants in businesses there. Alibaba’s affiliate Ant Financial has already reached several countries in Asia and is major investor in several wallet companies in the developing world. To name a few are Easypaisa in Pakistan, BCash in Bangladesh, TOUCHNGO in Malaysia, Kakaopay in South Korea, GCASH in the Philippines, Ascend in Thailand and Emtek in Indonesia. And, of course, Paytm in India.
FLUSH WITH FUNDS
Chinese fintechs do not suffer for want of funds. A KPMG report in July 2018 mentions that in addition to Ant Financials’ $14 billion fundraise, there were 4 other $100 million-plus mega rounds including $290 million to Dianrong, an online lending marketplace; $160 million to WeCash, another credit assessment and lending platform and $130 million to Meili Jinrong, a peer to peer lending player in the first half of 2018 alone.
Besides Asia, Chinese fintechs are also active in Africa. Ant Financial, for example, has partnered with the United Nations Economic Commission for Africa and the International Financial Corporation to promote digital financial inclusion. The company will make investments as also technological capacity building in the continent.
INDIA TOO A TARGET
India too is a target market for Chinese fintechs. Ant Financial has already made its presence felt in the country through its investment and technological support for Paytm. It is also expected that more Chinese investors and entrepreneurs will enter the country as they are waiting for regulatory approvals. Some are already in the country. For example. Chinese micro-lending company Fenqile and smartphone maker Xiaomi have invested in student lending platform KrazyBee. Xiaomi has also invested in ZestMoney, a digital lending platform. It has already become the largest smartphone
seller in the country in just three years and is testing features such as Mi Credits.
According to Chinese government statistics as much as $37.5 billion has been raised by fintech companies in China between 2014 and the first half of 2018 and the prospects are very encouraging as the increasing technology adoption rates and the scope for growth from serving the large underbanked population in the country. Many banks in the country are increasing their focus on digitization and developing transformation strategies, offering opportunities for B2B-focused fintechs to enable banking transformation. Two such fintech entities are OneConnect, a platform provider for smaller banks and a subsidiary of Ping An, and CGTZ, a Hangzhou-based online lending platform, which has a focus on extending its services to providing rural financing solution.
BANKS INTO FINTECHS
China’s commercial banks are boosting their fintech investments and capability to counter competition from internet giants. Some banks are responding to the fintechs in a big way. For example, China Construction Bank has its own wholly-owned fintech unit joining Ping An Bank, China Merchants Bank, China Everbright Bank, Industrial Bank, and China Minsheng Bank. The bank’s investment in fintech development in 2018 reached 2.2% of its operating income, 22% higher than in 2017. China Merchants Bank, which is striving to transform itself into a digital bank, has participated in the development of the People’s Bank of Chinaled trade finance blockchain platform in the GBA. Some of the banks that have set up their dedicated fintech units have also chosen to partner with leading Chinese internet giants to tap their technology and build their in-house services. Ant Financial has a cooperation agreement with China Everbright Bank to help the bank’s digital transformation effort.
Having said this, the rivalry between fintechs and traditional banks exist. A Chinese research firm has come out statistics to say that fintech firms will take more than 40% of China’s potential payment-card fees by 2020, an annual loss of about $60 billion for banks. The fintech firms’ move into retail banking is even more alarming and traditional banks do not want this to happen. And their tactics are yielding results. Ant Financial was forced to cap the amount of cash users can invest or withdraw in a day. WEBANK and MYBANK, online banks launched by Tencent and Ant Financial, are governed by deposit caps. And the central bank halted a trial in which Ant Financial and Tencent were developing credit scores on individuals.
One glaring proof of the success of fintechs in China is evident from the fact that while the U.S. and Europe promoted card payments by allowing companies like American Express, MasterCard and Visa to expand territorially, including in China, Chinese consumers are increasingly using their mobile phones to buy goods and services, bypassing the payment cards system and going from cash to mobile payments directly.
Apart from mobile payments, fintechs in China have also contributed to the development of other key markets like online lending, consumer finance, online money-market funds, online insurance, personal financial management and online brokerage. Of the 27 fintech ‘unicorns’ in the world, 9 are Chinese (including one from Hong Kong) and 12 are American.
China today is the global leader in online lending, accounting for three-quarters of the global market. The majority of China’s online lending is peer-to-peer and P2P lending platforms grew from 200 in 2012 to more than 3000 in 2015 while P2P loans reached RMB 252.8 billion by the end of 2014, then quadrupled to RMB 982.3 billion in 2015.
As regards regulating fintechs, China’s central bank, the People’s Bank of China recently announced that it is planning to steadily develop a system of rules in this regard. In fact, way back in July 2015, the central bank, the ministry of industry and information technology and 8 other authorities had jointly brought out a document, ‘the Guiding Opinions on Promoting the South Development of Internet Finance’, which is not acting as the constitution for internet finance businesses in the country. As per this guidance, the central bank regulates online payments, the China Banking Regulatory Commission regulates online lending, online trust and online consumer finance, the CSRC regulates equity crowdfunding and online funds sales and the China Insurance Regulatory Commission regulates internet insurance.
Apart from the policy framework to regulate the internet finance across all verticals, the government has also set up a centralized clearing house (Wanglian) for all third-party payments, enabling regulatory oversight on fund flows, which were previously circumvented by fintech players. Ant Financial and Tencent each own 9.61% of Wanglian. Recently the central bank has also set up a fintech committee to act as overall coordinator of all fintech efforts and policies.
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