The Roots of the Disruptive Power of China's FinTech

China is one of the massive forces in global innovation. As Renminbi gains strength and the startup community in the country produces internationally powerful players, it becomes clear that China takes a very special place in the global FinTech arena.

One of the vehicles that allowed China to go far and beyond in the development of disruptive technology is the rate of mobile adoption. In fact, around 675 million people in China use smartphones with 40% of smartphone users making mobile payments.

According to the report on digital disruption by Citi, published this March, China’s e-commerce ecosystem is now larger than any other country in the world in terms of transaction volume. Moreover, China’s top FinTech companies (Alipay, Tencent and others) often have as many, if not more, clients than the top banks.

Companies like Ant Financial and Lufax are at an advantageous position since they can leverage the vast resources of parent companies in e-commerce or finance that can sustain larger and more balance sheet-intensive businesses than Western venture capital funded rivals.

There is a range of reasons China's FinTech firms have grown rapidly, some of which were mentioned in a 100-page report. Among those factors are high national Internet and mobile penetration (as we emphasized before), large e-commerce system with domestic Internet companies focused on payments, relatively simple and underdeveloped incumbent consumer banking and accommodative regulations.

Professionals from Citi believe that among other factors that have contributed to the growth of FinTech in China is that traditional banks previously lacked significant competition, which resulted in limited choice for customers. Once innovative players have entered the market, they were able to easily lure customers and gain traction by offering superior experiences, real-time communication, commerce and connectivity. The boom of mobile platforms naturally led to the idea to leverage those platforms and build financial products on top of them.

Hence, the hallmark of China’s market is that 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 powerful parent company in telecom or Internet business ensures significantly faster and smooth entrance into FinTech and immediate access to the large consumer market. That is why new entrants with a strong umbrella are able to deliver more convenient, reliable, fast and cost-efficient alternatives to traditional bank payments.

Just the fact that China is now the largest P2P lender in the world with almost $66 billion lent out. And even though the total amount of loans lent through online platforms remain a very small part of the total market (less than 1%), China’s market is growing at a rapid pace—around four times the absolute size of marketplace lending in the US and over ten times the UK. By 2018, the Chinese P2P market is expected to be around 9% of total retail loans (for comparison, the US P2P market is just 0.7% and even by 2018, the penetration rate would only be slightly above the current Chinese level, which is estimated be at 3%.

Moreover, the country has the largest e-commerce system in the world with more than $670 billion (40% of the global volume) gross merchandise volume in 2015. By 2018, gross merchandise volume of the e-commerce systems in China is expected to hit $1.6 trillion.

China is clearly on its way to global dominance in e-commerce and FinTech (actually, it is already at the top, but the growth rate seems to be accelerating), and a growing number of banking industry professionals are actively following the opportunities the country creates for disruptive solutions. However, strong FinTech players backed by powerful parents are creating a hostile environment for outsiders and taking the wheel into their hands.