With a population of over 1.35 billion and the second largest economy in the world, China plays an important and influential role in the global ecosystem. Summarizing the hallmarks of China’s FinTech market, ITA puts China among the top financial technology markets along with the UK, Singapore, Brazil and Australia.
Unlike the US and Europe’s telecom and Internet companies, China’s Internet giants have been strategically expanding into payments/finance and their local consumer banks are more sophisticated. The results of strategic efforts are seen in the valuation map of 27 FinTech unicorns spread around the world, where China’s power players are consolidating the most financial power even with fewer representatives – China-based unicorns are worth over $96 billion in valuation, while America’s unicorns’ valuation is at $31 billion and the ROW – $11.5 billion. No region is anywhere close to China with its power team BAT (Baidu, Alibaba and Tencent) – the GAFA of the East.
DBS suggests that while London, New York and Silicon Valley, compete to position themselves as the world’s ‘FinTech hub,’ China has leapfrogged ahead to become the undoubted center of global FinTech innovation and adoption – thanks to developments across multiple hubs, such as Shanghai, Hangzhou, Beijing, and Shenzhen. Two of the most prominent megalopolises in China – Hong Kong and Shanghai – have been recently recognized in the ranking of the world’s top FinTech hubs globally.
In the report published earlier in December, DBS outlined important insights on the rise of FinTech in China, emphasizing unparalleled opportunities in this vast market with a unique history of growth and development, leading to FinTech investments in China surging to $8.8 billion between July 2015 to June 2016, equivalent to an increase of 252% since 2010.
“The disruptive nature of FinTech is best illustrated in China, where disintermediation is starting to reshape the industry.”
So, what exactly will inhibit a dramatic rise of FinTech in China? Five factors are emphasized by DBS as the fertile foundation to realize the disruptive potential of technology startups in the country.
Unmet financial needs
Exceptional growth in both China’s economy (at $10.9 trillion in 2015, China’s GDP already almost equates to the aggregate of the next 10 largest markets) and its middle class with spending power (individuals in this category set to rise from about 150 million to one billion – or 70% of China’s projected population by 2030), has been paving the way for a corresponding rise in financial services in China.
While commercial banks have been the largest beneficiaries, compared to other markets, China’s banking sector is perceived to be somewhat underdeveloped.
Image source: The Rise of FinTech in China, DBS
At 20%, the current retail loan penetration is also one of the lowest in the world. One in five of China’s adult population remain unbanked. The story with SME loans is not any better – they receive only 20–25% of bank-disbursed loans, while accounting for 60% of GDP, 80% of urban employment, and contributing to 50% of fiscal and tax revenues in China. SMEs are also reported to be suffering from asymmetric information, with limited transparency in their financial positions and credit rating assessments. Even if they do secure bank loans, the interest rates are typically double that of large corporations, based on inherent (or perceived) risk concerns, DBS suggests.
Retail customers have not been particularly well-served by China’s under-developed consumer banking system either – traditional banks are seen as offering homogeneous, uncompetitive, unimaginative financial products that are pushed out to customers, rather than responding to customers’ needs. Therefore, as the study suggests, non-banks have an upper hand in China especially when it comes to competitiveness in offerings, digital functionality and experience, quality, innovation and (albeit relatively new to the financial scene) even trust levels.
An innovative nation is a connected nation, and China is a perfect example of a country that is able to leverage its ubiquitous connectivity for good.
According to DBS findings, in June 2016, China had 710 million internet users (more than the US and Europe combined), bringing its online penetration rate up from 1.8% in 2000 to 51.7% by mid-2016. Meanwhile, the smartphone is becoming the universal internet access device – as for this June, 656 million (or 92.5% of users) were going online via connected devices.
As a result, mobile online payment users touched 358 million individuals by the end of 2015, on an impressive annual growth rate of 64.5%, despite rising concerns about the security of mobile finance activities. At that point, more than 1 in 2 persons were using their smartphone to conduct financial transactions primarily through Alibaba’s Alipay or WeChat’s payment service.
Image source: The Rise of FinTech in China, DBS
High levels of internet and mobile penetration led to the development of the world’s largest and most developed e-commerce market – by the end of this year, e-commerce sales are projected to reach $899 billion, which comprises 47% of global digital retail sales. By 2020, mobile transactions are expected to rise from 55.5% of all e-commerce sales to 68%.
Despite China’s massive e-commerce growth, DBS notes that incumbent banks have failed to capitalize on digital payments due to low credit card penetration rates, which were never able to gain traction in the country (China had only 0.29 cards per capita in circulation at the end of 2015). Spending on bank cards has similarly contracted, with users paying 3.3% less YoY via cards in Q2 2016. Therefore, Chinese consumers have moved from cash straight to digital wallets on their smartphones, largely bypassing payment cards.
China’s e-commerce market and its adoption of Internet and mobile payments are also being attributed to the presence of a massive domestic retail market in a closed digital economy which blocked a significant amount of international competition. As a result, domestic equivalents such as Baidu, WeChat, Weibo and Youku were able to scale with little to no friction. The emergence of e-commerce giants served as a precursor to the rise of the FinTech firms – many of which are their financial subsidiaries focused on payments and third-party remittances.
Image source: The Rise of FinTech in China, DBS
Internet giants driving innovation
Alibaba’s Alipay is reported to be the largest online payment gateway in China, accounting for half of Chinese third-party online payments (and 68.4% of the mobile payments market); Tencent’s Tenpay currently commands another 10% (and 20.6% of the mobile payments market).
Having a vast consumer market reach, three years ago, Alibaba used its Alipay platform to launch money market fund Yu’e Bao, allowing merchants and customers using Alipay to park their excess cash in Yu’e Bao to earn an attractive interest that banks were unable to offer. This natural extension of Alipay’s services resulted in exponential growth. In June 2015, following the success of Yu’e Bao, Ant Financial launched MYbank, a new online bank in China.
Tencent’s WeChat has had a similar story, growing from being just a social platform to a multifunctional portal, where users can transfer money and pay for various services. WeChat transformed itself into a payment platform in 2013 and launched a personal online investment fund in January 2014, which was followed by the launch of WeBank, China’s first online bank a year later.
The growth of mobile payments in the country is also owed to the adoption of QR codes and, particularly, by online-to-offline (O2O) services, when customers are acquired online, but the delivery of the product or service takes place at physical locations.
DBS emphasizes that amidst the growing Chinese middle class, there is a disproportionately large presence of a new segment of digital savvy consumers – the Gen-Y and millennials – who account for 45% of consumption. These ‘digital natives’ are more open to new technologies. Not only does that group of population exhibits a higher tolerance towards financial risks and greater propensity to spend than the older generations, but also demonstrates more individualized preferences, and demands real-time, hyper-connected, client-centric offerings.
They are driving the online retail market and leading the charge in China’s mobile payments adoption, with 66% of post-1990s millennials shopping and 54% banking via their mobile devices, as the study found.
In addition, digital natives are reported to be cold to brand influence since they do not hesitate to migrate away from banks to engage with digital disruptors that can better deliver to their financial needs with higher interest rates and fast, convenient services. As a result, a rising number of young Chinese consumers end up accessing financial services for the first time through FinTech-developed platforms, rather than incumbent banks.
Chinese consumers openness to sharing personal information online, store payment information in their smart devices and experiment with other forms of non-cash payments has been reported to be the social foundation for e-commerce and digital banking success – commencing with retail spending and third-party payments, and quickly expanding to include financial services such as P2P lending, WM and mutual fund purchases.