China is at the forefront of a global FinTech revolution.
Peer-to-peer (P2P) lending, mobile payments and artificial intelligence (AI) are leading the charge, according to Howard Bosanko Professor of International Finance at the Albers School of Business, Seattle University, Bonnie Buchanan.
"Not only is China right now leading the world in FinTech – it's really moved beyond the tipping point – but it is also leading these three FinTech areas as well," Buchanan said at Sibos 2018, where she presented research delving into China's FinTech foray.
A unique set of circumstances have made China home to the greatest number of FinTech companies, which have attracted more locals using those services across payments, credit, investments, insurance, and wealth management than any other country in the world.
"If you look at China, you've got this expanding middle class that has an unprecedented toleration for technological innovation, particularly when it comes to financial services, and you've got a huge funding gap in part of the Chinese population," she said.
Approximately 432 million Chinese citizens are currently “not banked”, with credit tightly controlled thanks to the dominant position of the country's four state-controlled banks, according to Buchanan.
The FinTech sector, underpinned by widespread internet and mobile phone access and lax regulations, has successfully plugged that gap.
The rise of the world's largest mobile payment market
China's $US3 trillion mobile payment market is now the world’s largest reaching with AliPay and WeChat sharing 85% of the mobile market, according to Grant Halverson, the Chief Executive of banking and payments firm McLean Roche Consulting.
"A key to the rapid development and growth is November 11th ‘Singles Day’, which is a rebranding of Bachelor’s Day, a 90s student tradition: sales for one day in 2017 totalled $US29.6 billion."
AliPay was spun out from parent Alibaba into a new financial company, Ant Financial, in 2011 and has a mission to "bring the world equal opportunities". Alibaba was the top R&D spender for a third straight year, putting out US$3.6 billion.
But while AliPay's growth was driven by China’s weak consumer protection laws, a lack of payment infrastructure, and low transaction fees (0.6% compared with US vendors’ 3%), that may be changing, said Halverson.
"If you want to send or receive cash across the network, they're increasing those charges," he said.
"The moment they were split out, you've got a different business case, like when eBay spun out PayPal. Those businesses have to stand on their own feet."
AliPay is pushing ahead with its global ambitions, forming new relationships with US retailers and service providers, allowing Chinese tourists to still use AliPay when abroad. It is now accepted at more than 170,000 locations in North America, according to researcher Coresight. AliPay is now in 28 countries and WeChat in 17 countries, Halverson said.
Ant Financial's Senior Director, Head of Financial Institution Strategic Partnership Dept, International Business Group, Clara Shi, recently said the firm now holds minority stakes in nine mobile wallet providers across the Asia-Pacific.
"That actually provides the local digital payment service to the local users," she said at Sibos 2018. "And additionally, we actually work very closely with the merchants in markets where Chinese people love to go, so as of today there are 40-plus countries with offline acceptance for AliPay. We want to expand to more markets and the ultimate goal is wherever you find an 'ant' you will find AliPay." For example the newly launched Sydney City Card, aims to attract tourists is the first of its kind to bring together Alipay, Tourism Australia and Sydney.
However, Halverson remains sceptical that AliPay will make large inroads in developed markets such as Australia, where mobile payments have made barely a dent in the popularity of debit and credit cards.
"I think where they will become a competitor or a leader is with facial recognition. In China they're saying that within five years there will be facial recognition everywhere to track your movements. I see them trying to sell that technology, but it also raised a whole other issue about privacy in Western economies."
Tens of thousands of merchants in China offer AliPay's facial recognition 'smile to pay' facial recognition service, which was upgraded in December 2018.
Success mixed with danger
Massive conglomerates such as Baidu, Alibaba and Tencent now dominate China's technology landscape. However, thousands of FinTech start-ups of varying quality, encouraged by the relative ease of obtaining a banking license and easy regulations aimed at fostering the sector, are aggressively marketing their wares direct to the public.
"The whole FinTech space in China is a totally unregulated wild west," says Halverson. "I've invested money myself in FinTechs and I looked at China and said, 'this is not a place that I even want to touch'."
For example, the Chinese P2P lending sector was kicked off with one platform in 2007, helping bring loans to under-served consumers while offering higher interest to investors.
However, the sector has also been blighted by several collapses and cases of fraud. The biggest collapse was P2P lending platform Ezubao in 2015, which had built a $US7.6 billion empire on a fraudulent pyramid scheme.
"That's the only reason they changed the rules in China – Western people got impacted and started to kick up, but if there hadn't been any Western involvement I doubt there would have been any change of rules," Halverson says.
Since 2007, at least 5,962 lending platforms have been launched, yet more than 4,000 of them have halted operations or encountered problems such as disputes, frozen withdrawals, executives who absconded, or outright fraud, according to Buchanan's research.
However, there have also been high profile successes such as Lufax, which collects fees of about 4% from people borrowing amounts of around $US10,000. It has partnerships with more than 520 online lending platforms and runs approximately 100 stores across 80 cities in China.
Halverson says there is a massive divide between the FinTech approach in emerging markets and mature markets, where the rule of law is stronger and existing infrastructure meets many consumer and business needs.
"The lessons don't really work either way. The number of times I've seen Americans come to Asia to pitch an idea and it doesn't work... and vice versa."
China's FinTech boom also faces another challenge as its economy continues to slow against the backdrop of a trade war with the US.
"The market in China had been going gangbusters and it's all changed in the last six months. So now, we'll see whether they continue to have the massive investments have placed in FinTech."
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