Fintech: While Europe frets, China bets

When world leaders descend on Hangzhou, China in early September for the G20 summit, they may well turn their eyes to the country’s financial technology boom.

Post-Brexit, most of the action in financial disruption has been in the Far East, and there are few signs of it easing.

According to Accenture, China accounted for more than 90% of the $9.6 billion (all figures U.S. dollars) raised this year in Asia for fintech firms. And it’s on pace to double last year’s level of investment.

China placed 7 firms on the KPMG Fintech 100, third only to the U.S. with 40 and Britain at 18. The top spot was claimed by Shanghai-based Zhong An, China’s first online-only insurer, which was launched in 2013 by Alibaba.

Fintech financings are surging globally, hitting a record 26 deals in the first quarter totaling $4.9 billion. Nine of those deals were Chinese, including lu.com and JD Finance, which both raised more than $1 billion.

Those numbers probably went higher in the second quarter, thanks to the $4.5 billion dollar funding round for Ant Financial, a $65-billion startup that’s also controlled by Alibaba.

Is it an emerging market bubble? Or a secular shift from the world’s traditional financial centres?

At the World Economic Forum in Tianjin in June, the bubble symptoms were a hot topic, even among Chinese executives, who fear too much hot money is flowing into the sector. Private fintech firms have been especially attractive since the government cracked down on stock market speculation last summer.

Risk aside, the Chinese fintech sector is attractive thanks to the presence of so many risk-tolerant consumers who are more willing than many Western savers, lenders and investors to try new models. No other market has shown an ability to produce user bases of 10-million or more in a matter of weeks for new products, in part because many Chinese believe their government will backstop losses should fintech experiments crater.

What’s more, no other major market offers as many unbanked consumers. The People’s Bank of China has credit records on less than a quarter of the population. Another 400 million Chinese are considered “underbanked.”

Alipay, Alibaba’s payments platform, has more than 800 million registered accounts, while WeChat, the social app that includes a digital wallet, has 650 million active monthly users. Those numbers explain why payments dominate the country’s Internet finance sector, which exceeded $1.8 trillion at the end of last year.

WeChat seized on the spread of mobile phones, whose ubiquity makes the mobile money market more accessible than ever. China has 1.1 billion mobile-phone subscribers.

Nearly 1 in 5 Chinese bank account holders reported using their phone to make a payment in 2014, compared to a 13% average across developing countries.

Brexit has given investors and tech players plenty of reason to rethink their global strategy, and move China up the priority list. Before its vote to leave the European Union, Britain laid claim to 61,000 fintech employees — second only to California’s 74,000 — and nearly $1 billion last year in new capital.

While China offers unparalleled market scale for developers, its record of user experience is comparatively weak. That’s created a flurry of recent deals by capital-rich Chinese firms to import Western apps and UX designs and scale them.

In April, Huatai Securities announced the $780-million purchase of AssetMark, a California investment advisory firm that has has $29.3 billion in assets under management. It was the largest financial-services acquisition by a listed Chinese brokerage in almost three years.

A month later, Shanda Group, a firm created by some of China’s most successful Internet entrepreneurs, bought 11.7% of San Francisco-based LendingClub.

In June, Robinhood, a Silicon Valley-based, no-fee online brokerage app, struck a deal with Chinese search giant Baidu to offer U.S. stock-trading services to customers in China. Robinhood plans to release a standalone app for the Chinese market. A week after that, New Jersey-based DriveWealth struck a deal with Beijing-based CreditEase to offer a roboadvisory platform to Chinese investors. CreditEase lends to both small businesses and consumers.

In July, Baidu looked to the U.S. again, making an undisclosed investment in ZestFinance, a fintech firm that specializes in credit scoring. The deal could help Baidu develop its own credit-scoring platform in China, where there is no centralized credit-scoring bureau.