The Elements of Fintech in China
Financial technology (fintech) refers to the technological innovations that improve the delivery and use of financial services by consumers and businesses (including banks). Examples of such services in the West include Apple Pay, Robinhood, PayPal, and Venmo. China has emerged as the global leader in fintech, boasting an expansive network of digital tools and software used to conduct financial services. It is imperative to understand the development and operations of fintech in China to forecast the future growth and implications of Chinese fintech firms’ overseas expansion.
Over the past two decades, fintech in China has grown rapidly due to several unique factors such as the condition of Chinese financial services, demographic change, and the ubiquity of smartphones. Historically, Chinese citizens and Small-to-Medium-Enterprises (SMEs) in both rural and urban areas were relatively underbanked yet very internet savvy. E-commerce platforms easily entered the market to provide citizens and institutions with a cash-less and convenient way to make payments. The booming middle-class population in China comprises around 400 million people, a demographic that rivals the entire population of the United States, further created greater demand for financial services, and created a large consumer base for such companies. Since 2012, China has observed the widespread coupled use of smartphones, 4G, and WiFi. This tech affinity made digital payments more convenient for customers to use and provided strong foundations for fintech providers to expand. In contrast to the West, China was able to quickly adopt mobile payment services because it skipped past the development of card payments used in personal finance. Customers and businesses heavily relied on cash payments to make transactions through the late 1990s.
Mobile payments are a key element to China’s fintech industry. The number of people that made mobile merchant payments in 2019 was around 577 million, and this figure is expected to rise to almost 700 million by2022. In 2017, it is estimated that China’s 890 million unique mobile payment users made transactions totaling around $17 trillion. The two most prominent figures in the Chinese mobile payments market are Alipay, a third-party mobile and online payment platform owned by the Alibaba Group, and WeChat Pay, a digital payment tool within the WeChat mobile app umbrella. With monthly active users of over 500 million (AliPay) and 900 million (WeChat Pay), these two companies have captured 93% of the mobile payments market share in China. Mobile payments services use QR codes for transactions, which have been a key success factor in the widespread adoption of digital payments in China. These black-and-white codes are easy for businesses to hang up and customers to scan, which is why they have become ubiquitous.
The prominence of fintech in China can also be viewed in terms of unicorn companies, privately-held startup companies with valuations of over $1 billion. 9/27 fintech unicorns are Chinese, which is second only to the U.S. Chinese fintech firms employ consumer-oriented business models through means like integrating social networking in their platforms and focusing on convenience. They are expected to take two distinct approaches to expansion into developed and developing economies. For developing economies, the underbanked population will be the target demographic, similar to their domestic strategy. For developed countries, the strategy is more complex, as several factors make the barriers to entry for Chinese firms very arduous. For example, Chinese fintech firms enjoy access to detailed information on its users and their financial habits; governments and citizens abroad fear that these companies would pose a national security threat to their countries due to these data acquisition methods. Furthermore, QR codes have not yet been widely adopted in other countries. As a result, this would lead to a slow rate of rollout and the use of mobile payments in contrast to China.
Until a recent crackdown on the industry, Peer-to-Peer Lending (P2P), was a common practice utilized in the Chinese fintech sector. Since 2007, the lending industry has observed rapid growth. However, it lacked regulation and surveillance, resulting in few barriers to entry for firms. It is estimated that at its peak, about 40% of platforms were Ponzi schemes. Now, P2P lenders are being given until 2022 at the latest to exit the fintech industry via business restructuring or complete termination of the company.
During discussions, the China team and the Global Macro Team’s discussion focused on the prospect of global adoption and expansion of Chinese fintech services. The concern over data collection and national security in Western nations is a significant barrier to entry for Chinese fintech firms seeking to expand globally. For example, the U.S. government would likely bar Chinese fintech companies from practicing in the country if they continued to harvest/mine detailed financial data on consumer spending and infringe on the businesses of domestic banks. An important perspective that was mentioned in the discussion regarding how traditional credit card companies will adapt to forgone transaction fees resulting from the prospective adoption of mobile payment platforms that bypass their services. Business practices that could benefit from the immense data that Chinese fintech services have access to were also deemed problematic during the discussions. Consumers would be the target of strategic marketing campaigns, potential invasions of privacy, and more. Through research and discussions, the China team learned that a lacking QR code presence in the U.S. is not a major barrier to entry due to their recent COVID-19-inspired growth in popularity and other payment infrastructure innovations that are expected. This means the team has identified national security concerns held by policymakers to be the single most daunting challenge for Chinese fintech firms seeking entry into American and European markets.
