China is experiencing an explosion of tech-driven finance businesses – fintechs, led by Ant International's Alipay.
By embracing disruptive fintech platforms, Chinese consumers and businesses are building China a powerful position in the new global payments landscape.
For more than a quarter of a century, financial visionaries have been predicting that technology will humble banks. After all, what’s money but information needing to be moved and stored?
If that prediction is to come true, it now seems likely to come true first in China. That nation is experiencing an explosion of tech-driven finance businesses – fintechs.
Consulting firm Accenture estimates the first quarter of 2016 saw fintech investments across the Asia-Pacific region surge by more than 500 per cent, to US$2.7 billion – more than half the world’s fintech investments during the period. The lion's share of this sum was attracted by Chinese platforms.
“Alipay has evolved from a payment platform into a global lifestyle super app.” Miranda Shek, Alipay
The Chinese fintech boom is founded largely on the country’s embrace of mobile e-commerce. By 2017, estimates suggest, China's shoppers will be spending more than US$1.2 trillion online; that’s up from 2014’s US$670 billion and more than twice the US figure. Two-thirds of China’s online payments happen on smartphones. China’s financial landscape is ideal territory for fintech firms.
So far, one fintech firm overshadows all the others: Alipay.
The mighty Ant
Alipay is the world's most valuable fintech services provider. Its parent company, Ant Financial, is controlled by Alibaba executive chairman Jack Ma. That gives it access to Alibaba’s huge portfolio of e-commerce businesses, which currently account for around 80 per cent of all China's online orders. So Alipay has more users than anyone else – around 500 million – and more merchants involved in its ecosystem. Through ownership of Alipay, Ant Financial plays a part in about 65 per cent of China's online payments and about 80 per cent in the mobile space.
Over the past few years, Ant Financial has gone beyond payments, diversifying into areas such as wealth management and small business loans. It has also moved into overseas markets, investing in Paytm – India's largest mobile payment and e-commerce platform – and partnering with European firms and businesses to offer services to Chinese tourists.
“Alipay has evolved from a payment platform into a global lifestyle super app,” says Miranda Shek, Alipay's head of international communications. “Our focus over the next few years will be providing finance to … users all over the world.”
If that doesn’t make the world’s banks nervous, nothing will.
Alipay is far from unchallenged. Rival Tencent is a growing threat, largely thanks to its wildly popular WeChat app (see intheblack.com/wechat), which now boasts about 700 million users. These people are increasingly using WeChat Pay to transfer money and make payments. Its convenience has boosted adoption rates and has given Tencent a massive advantage as it looks to boost mobile payment market share.
“The incredible growth of WeChat Pay over the past couple of years is an indication that nothing is certain in China’s fintech industry, and that a compelling business model can still disrupt industry leaders,” says Zennon Kapron, director of Asia-based financial research firm Kapronasia.
With smartphone rivals Apple, Samsung and Huawei also entering China’s mobile payment market recently, not to mention the launch of Baidu Wallet and JD.com’s JD Finance, the next 12 months should see China’s fintech competition become even fiercer.
Leading the disruption
A recent Citigroup report argues that China’s burgeoning fintech platforms have already passed a “tipping point” when it comes to disrupting the country’s banking industry (see breakout quote, right). Citi notes that China’s fintech companies often have as many, if not more, clients than the country’s top banks. Perhaps as importantly, many Chinese fintechs have well-resourced parent companies, something Western fintechs mostly lack.
“There is certainly a systemic risk of disruption,” says Haydn Shaughnessy, co-founder of London-based advisory and research firm The Disruption House.
“Recent studies have shown that Chinese millennials in particular prefer to operate in an integrated environment on one platform. They have a high propensity to switch out of conventional banking completely.”
According to data from Kapronasia, China’s banks lost about US$22 billion in payment revenue to Alibaba and Tencent in 2015. While this only represents a small fraction of their overall revenue, the ongoing liberalisation of interest rates and compression of margin spreads mean the Chinese banking sector is increasingly feeling the squeeze.
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Beyond payments, China’s lending and financial product distribution have already been significantly disrupted by fintechs. With peer-to-peer (P2P) lending in China reportedly topping US$150 billion in 2015, Chinese platforms like Lufax and CreditEase have ballooned into some of the world’s largest P2P lenders and are now expanding their business models to include financial products such as insurance and funds.
Banks bite back
As China’s banking population migrates toward digital solutions, conventional Chinese banks are adapting their operating strategy.
“The Chinese banking system wasn’t caught napping while a new breed of fintech distrupters emerged,” says Tim Pagett, Deloitte China’s financial services industry leader.
“Many have used their positioning to understand new market players and provide finance for the development of new and innovative industry initiatives.”
China’s state-owned banks have increasingly been moving into e-commerce themselves, creating their own internet-based offerings, developing mobile applications and forming strategic alliances with fintech players to service platform users.
Some have even eliminated transfer fees for customers to remain competitive.
Going forward, the level of collaboration between China’s banks and fintech start-ups is likely to increase, with the latter looking to leverage the trust Chinese consumers place in big-name brands.
China CITIC Bank International and China Construction Bank are already participating in a Hong Kong-based fintech accelerator program, while research by Accenture shows that the level of investment in Chinese fintech start-ups aiming to partner with the banking industry grew by nearly 140 per cent last year.
At this stage, it is unlikely that traditional Chinese banks view leading fintech players such as Ant Financial and Tencent as a serious threat. As those players continue to develop, however, the competition inside China’s banking sector will continue to stiffen, especially when it comes to attracting the younger, more fickle and tech-savvy Chinese demographic.
“We still see a significant role for China's conventional banks in the execution of overall fiscal and monetary policy,” says Pagett.
“But as more and more Chinese customers seek alternatives to traditional banking products, it will be interesting to see if there is a stronger migration toward non-conventional providers.”
As for Ant Financial, the company appears more interested in collaboration than competition. The “Ant Financial Cloud”, a cloud-computing unit launched in October last year, is designed to provide entire IT systems for banks and mutual funds.
“We're not looking to replace conventional banks,” says Alipay’s Shek. “We now have over 200 financial institutions as partners and are building an open ecosystem that helps them provide more efficient services.”
Boom or gloom?
The pace of technological evolution and the power and penetration of mobile devices mean that the fundamentals of China’s financial services sector are now radically changing. But while the future of Chinese banking appears to lie in fintech, there are still plenty of hurdles to be negotiated.
Perhaps the biggest immediate challenge to Chinese fintechs comes from domestic regulators. Having witnessed almost 900 Chinese P2P lending platforms fail in 2015, not to mention the recent exposure in Chinese media of a US$7.6 billion Ponzi scheme by Ezubao, Beijing imposed tough new P2P legislation at the beginning of this year. In April, a task force headed up by the People’s Bank of China began a one-year crackdown on fraud and risk in online payments.
The Chinese Government is implementing policies that both encourage financial industry transformation and innovation, and aim to protect consumers, constrain overheating and ensure the stability of China’s banking industry.
“So far, new regulations on P2P lending have been sensible,” says Kapron.
Some elements of the Chinese fintech market may have encouraged irrational pricing and valuations for unproven and highly speculative developments. But it is unwise to base overall conclusions on sector growth on such activity. Indeed, ongoing regulatory tightening is likely to benefit larger fintech players such as Ant Financial and Tencent by clearing out rivals with unsustainable and unscrupulous business models.
“China’s fintech boom is not like the dotcom bubble, where many of the major players go out of business,” says Shaughnessy. “It is driven by people’s desire for wealth creation rather than wages. The market may cool, but it won't go bust.”
Whether it involves conventional banks, start-ups or a combination of the two, the disruptive innovation of banking and payments is increasingly a Chinese phenomenon. As recent multi-billion-dollar funding rounds prove, global investors are increasingly keen to sustain this fintech revolution.
Despite recent regulatory tightening, Beijing is also likely to continue supporting the fintech sector, which it sees as a powerful tool for developing and consolidating commerce in overseas markets.
Away from the more mainstream, dollar-dominated trade arena, fintech-based trade may eventually prove to be an effective tool in assisting Chinese firms to out-compete their Western rivals in places like India and Africa.
“Bankers would be foolish to think that in five years’ time the majority of supply chain or trade transactions will still be of the conventional variety,” says Shaughnessy. “Going forward, ever greater numbers of private customers and businesses will be accessing and moving their money through fintech platforms.”
As China’s major fintech players lead the way by moving ever further into smartphone-centred financial services and products, conventional banks across the world will need to respond to the challenge.
Read how fintechs are meeting the borrowing needs of small businesses.
The world’s top fintech unicorn (the tech industry term for start-ups worth US$1 billion or more), valued at anywhere up to US$60 billion. Through Alipay, it facilitates purchases for customers on Alibaba’s stable of e-commerce sites (and a growing number of offline-to-online, or O2O, payments), and also operates an online bank (MYBank), a variety of loan platforms, and Yu’e Bao, China’s largest money-market fund. By 2018, Credit Suisse estimates Ant Financial will be handling US$1.7 trillion worth of transactions annually.
The world’s second-largest fintech unicorn, Shanghai-based Lufax is valued at around US$19 billion and is controlled by Ping An Insurance, China’s largest insurer. Starting life in 2012 as a P2P lender, it has since diversified into a wider range of products, including wealth management and fund distribution. Lufax raised US$1.2 billion from investors in January and has reportedly financed 20,000 loans worth a collective US$2.5 billion since launch.
Founded in 2010, San Francisco-based Stripe offers processing services for a wide range of online and mobile transactions, which customers can then integrate into their apps. Stripe recently launched Atlas, a business-in-a-box service designed to help entrepreneurs start a company in the US.
Founded in 2013 and valued at around US$4.5 billion, San Francisco-based Zenefits offers cloud-based software services for companies looking to manage HR (with a strong focus on health insurance).
An online Chinese electronics retailer that lets buyers pay in monthly instalments, this Beijing-based, Ant Financial-backed start-up was founded in 2014. Targeting China’s aspirational classes, it has already secured more than US$200 million in funding.
Kathleen Boyle, editor, Citibank Global Perspectives & Solutions
"With advances in technology, the relationship that customers have with their bank and with their finances has changed. Customers rely less and less on walking into a branch for their banking needs, and instead have digital options to help them – ATMs, online chat, mobile phones and internet banking.
"So far, these have been seen more as additive to a customer’s banking experience, but when do we go over the digital disruption tipping point and see a change in the fundamental banking business?”
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