The rise of FinTech in China

Redefining financial services

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Aspects of China’s traditional banking sector may be somewhat underdeveloped compared to those in other developed markets, but the nation is emerging as the world’s FinTech market leader.

For the period between July 2015 to June 2016, Chinese FinTech investments in the market surged to US$8.8 billion, commanding the largest share of global investment in this sector.1

As this exponential growth continues, China is poised to leapfrog developed nations and move to a digital financial marketplace.

Domestic dominance

With high levels of internet and mobile penetration, China is already the world’s largest and most developed retail e-commerce market, accounting for 47% of global digital retail sales – the result of a massive domestic retail market in a closed digital economy.

Now, these digitally savvy Chinese consumers, who have few reservations about sharing personal information, are ready to embrace FinTech offerings, creating opportunities for FinTech firms and incumbents willing to take on digital transformation.

These opportunities will come initially from the under-banked or unbanked populations of small and medium enterprises (SMEs) and consumers with unmet needs. FinTech firms are also targeting the maturing demands of the burgeoning middle class for wealth management, insurance and private banking.

To meet these needs, the Chinese technology giants are aggressively creating all-encompassing platforms with the aim of embedding their services – financial and non-financial solutions – into customers’ lives. They are also investing heavily in emerging technologies to support next-generation financial services, such as blockchain and artificial intelligence solutions.

Once the nation-wide Social Credit System (SCS) is in place, the potential of China’s FinTech market will open up even further. The SCS, which is expected to be operational by 2020, will assign a credit score to every citizen and business in China based on their financial and social behaviour.

These are challenging times for China’s incumbent banks, which are already struggling with a slower rate of economic growth, non-performing loans and other such factors. This is further exacerbated by the spectacular leapfrog of retail customers from cash into mobile payments – bypassing payment cards altogether – thus depriving the incumbent banks of potential sources of income. In 2015, net profit growth for China’s commercial banks reduced to a pedestrian 2.4%, with bigger banks registering their slowest growth in years.

China’s financial services sector is hence ripe for disintermediation and a new-normal environment.

Currently, the big winners in this flurry of activities are domestic players, both the dominant technology players and more progressive incumbents. Almost all of the FinTech activities are being funded by domestic state-owned and private investors. Equally, attempts by foreign entrants have met with varying levels of success, limited by government restrictions on operations and investment and cultural differences.

Nonetheless, China’s financial market is too big, too valuable and has too much untapped potential for international players to ignore. For those still keen on entry but awaiting the government to ease some of its barriers to foreign participation, we see two main strategies for addressing Chinese FinTech opportunities:

  1. Outbound – opening up new markets for Chinese consumers who increasingly shop and invest overseas.
  2. Inbound – providing new capabilities to Chinese firms in areas such as risk management and banking system automation.

Global aspirations

The giant Chinese technology firms, flush with cash and IT infrastructure, have  extensive global ambitions. They are penetrating new product markets overseas to diversify revenue streams and reduce their  domestic reliance.

In addition to investing in Silicon Valley and mature markets, the technology giants are expanding to serve outbound Chinese travellers  while  simultaneously pursuing new customers in emerging economies from Africa to Southeast Asia. They are particularly interested in the future possibilities of new online-to-offline revenue streams.

However, Chinese players have not always fared well outside their uniquely protected domestic market. In theory, internationalisation efforts should: provide technologies for advanced transaction processing capabilities; open up the global settlement network; breakdown international payment barriers; and enhance opportunities for these Chinese technology players to transform financial services - from the ground up. Yet, just like in China, business success overseas requires catering to the individual peculiarities of international markets and their consumers.

Chinese companies cannot merely replicate and export domestic business models abroad. They need to adapt to local cultural norms and expectations and focus on safety and security reassurance. To do so, they may need to collaborate with and invest in overseas comparators.

The future of Chinese FinTech

In the coming years, China looks set to continue to dominate the global FinTech industry with a very strong domestic market. Internally, the push and pull factors are clearly in place to catalyse the establishment of a leading digital finance sector. On the push side, capital investment is pouring in and the market is being bolstered by substantial government support for innovation. On the pull side, demand is being driven by under-served SMEs and tech-savvy, often unbanked, consumers keen to access financial services via their mobile phones.

Overseas, Chinese FinTech firms will also play an increasingly important role in the global collaborations driving technological innovation. What these companies learn abroad, they will bring back to the domestic market, further fuelling the sector to stay ahead of the rest of the world.

Exciting times lie ahead.