January 15, 2016
The FinTech industry in China should get ready for a rough time in 2016 as government ‘corrective’ actions will force the consequence of spoiling the FinTech party. Banks, on the other hand, may have a big fest in 2016 and reassert their industry dominance.
China, in particular Hong Kong, have long been one of the world's premier financial hubs and one of the most forward-thinking markets with the highest innovation adoption rate of 29%. As a leader in fostering a competitive environment, China largely opened up its market for FinTech startups to disrupt the country’s e-commerce giants Baidu, Alibaba and Tencent that took advantage of the sector.
Excited about the opportunities in a massive consumer market, bright entrepreneurs and FinTech enthusiasts rushed to take a chance in past years. In 2016 however, the government seems to have changed its mind, Hong Kong research company JCap warns.
According to the report published earlier this week, FinTech startups will witness mass consolidation and a massive failure. Low ROIs, new regulations and lack of sustainable business models will force a dramatic decline in China’s FinTech. The upcoming situation will certainly touch e-commerce giants as well, and probably not in a good way. Banks, on the contrary, will be granted an amazing opportunity to reclaim power and dominance over China’s consumer finances.
While catching up with warnings, investors are still looking at China’s FinTech with interest. And they will have an opportunity to pitch in, as Ant Financial, a spinoff of Alibaba Group that runs Alipay, recently announced the funding round opening.
"We don't have a timetable for the IPO yet. But we are paying close attention to the market trends and policy changes," said Ant Financial representatives.
An interesting detail that the research firm pays close attention to is related to interest rates, which have been boosted in the US. It had an impact on capital inflows and outflows, as China’s government continued to slash rates in attempts to create a perfect environment for the both the country's emerging FinTech sector and also the e-commerce giants.
The mechanism turning capital away from China’s market now is a consequence of attempts to create a welcoming and highly catalytic environment for FinTech startups. However, as interests are dropping, e-commerce giants and FinTech companies are aggregating loans to pass them on to consumers, but are able to generate only small returns. As an example illustrated in the report, Alipay generated 0.14% of revenue as opposed to 3.4% generated by PayPal. While focusing on capital deployment instead of competition based on convenience of services for consumers and security, Chinese firms came to a point when decreasing ROI with slashed interest rates pushed FinTech startups out of the market and raised entry costs for everyone but the largest players.
Regulators previously encouraged the activity with intention to provide support to small businesses that weren’t able to receive substantial help from banks. Witnessing the consequences of good intentions, Chinese government is now taking back those steps, returning the power in the lending sector to the banking giants.
The interest rates and capital outflow are not the only reasons the Chinese government will tighten the belt on FinTech lenders. The research firm believes that ecommerce companies including giants like Alibaba, Baidu, Tencent and others are making profits by simulating bank-like services instead of providing the value of actual goods and services for consumers. The revenues that e-commerce companies create are all swirling around captive capital, according to the report. Those revenues were created by speculation with captive capital, from the parent company resources.
As stated in the report, It’s very likely that China’s e-commerce companies, far from representing the rise of consumption in China, are creatures of China’s Era of Capital and will fall like stars."
The FinTech ecosystem in China had a window to bloom and brought the government to realize the massive capital misallocation over time. Lack of regulation, strong currency and the biggest consumer market in the world gave FinTech ample room to grow and make their money. Now, harnessing the results, the government tightens the screws and pushes FinTech out of business to return power over financial services to the banks.
Explaining the intentions behind unsympathetic action of the government related to FinTech, the report concludes, The intentions are not to create a healthier and safer environment for third-party service providers to prosper and grow. Rather they are to curtail their activities sharply if not make their very survival dependent on select and extra-legal tolerance by regulators.