Unraveling China’s FinTech Dominance: A Comprehensive 50-Point Summary.
“You cannot see the picture if you’re in the frame.”
This ancient Chinese proverb perfectly captures the perspective on FinTech when viewed through a “Western lens.” After spending half a year immersed in the enigmatic realm of Confucius, Dragons, Alibaba, Tencent, and Baidu, I have reached this conclusion:
If there is a FinTech equivalent to Silicon Valley, it is China. No contest.
At present, no other region can rival China’s prowess in the FinTech landscape. Here are a few observations and insights gathered during my time in the area:—
- China reigns as the world’s largest FinTech market. In 2015, the market size of internet finance in China surpassed a staggering $1.8 trillion.
2. China excels as a global leader across the board, attracting substantial portions of worldwide investment in various sectors.
3. China boasts 8 of the 27 global FinTech unicorns, which have collectively raised $9.4 billion in funding and hold a combined valuation of $96.4 billion.
4. China’s unique Internet ecosystem is unparalleled, with several factors contributing to its FinTech success:
a. Rapid economic growth and high national mobile internet penetration;
b. A vast e-commerce ecosystem, where domestic Internet companies focus on payments and have access to an enormous volume of transactions and user data;
c. A relatively ‘unsophisticated’ incumbent consumer banking sector;
d. A large underbanked and unbanked population, coupled with a high savings rate (30%+);
e. Over $7 trillion in investable “retail” wealth earning meager interest;
f. A need for credit, with a financing gap of $3.5 trillion for small businesses and consumers; and
g. Accommodative regulations.
5. Chinese consumers have eagerly embraced FinTech services, including online banking, digital currencies, money transfers, payments, crowdfunding, lending, investments, and insurance.
6. China’s technological dominance can be attributed to its Internet giants, collectively known as the BAT (Baidu, Alibaba, and Tencent). These three companies are at the heart of the FinTech revolution, controlling e-commerce, messaging, and search platforms while owning multiple major FinTech businesses.
7. BAT companies possess a significant “unfair advantage” over incumbent banks and other competitors, stemming from their access to proprietary rails and data, which include payments, commerce, transactions, and consumer information.
8. The majority of third-party payments and financial products operate on ‘third-party rails,’ meaning banks do not see or have direct involvement with these transactions.
9. Alibaba, for instance, has over 500 million users who have been supplying the company with behavioral data for years. In contrast, the National Credit Bureau, operated by PBOC, holds data for only 300 million people, which accounts for less than 25% of the total population.
10. The world’s four largest FinTech unicorns hail from China: Ant Financial ($60B), Lufax ($18.5B), JD Finance ($7B), and Qufenqi ($5.9B).
11. Chinese consumers did not adopt the web browsing habits prevalent among American and European customers; as a result, “Mobile is now the entry point for all customer acquisition strategies.”
12. Mobile payment transactions have reached unprecedented levels, with over 410 million people shopping online through their phones and nearly 300 million people using their phones as a wallet for in-store payments.
13. FinTech innovation in China surpasses that of any other developed market. Tech and platform companies with transaction data and proprietary rails are leading the charge.
14. For major Internet companies, financial services have emerged as an ‘adjacent’ value category — sometimes even larger than the core business — by capitalizing on transaction data and communities.
15. The Chinese “BAT companies” triumvirate — Baidu, Alibaba, and Tencent — are omnipresent across various sectors, including payments, lending, banking, insurance, and investments.
16. China’s Internet giants hold a dominant position in the FinTech space due to their early involvement in building e-commerce and payment ecosystems.
17. Alipay and Tencent control approximately 90% of the Chinese mobile payments market, forming the foundation for various other financial applications. Alibaba’s Alipay holds around 50% of the market share, while Tencent’s WeChat Pay claims another 40%. (*updated)
18. Alipay and WeChat Pay are widely utilized for point-of-sale (POS) payments, providing users with a convenient and seamless payment experience.
19. Alipay and WeChat are ubiquitous in China. In 2015, Alipay processed approximately 70% ($931B) of all mobile payments in the country, and managed 3x as many transactions ($232B) as PayPal did in the same year.
20. Over 1 billion people utilize Tencent’s diverse applications in Messaging, Gaming, Content, Payments, and Wealth Management.
21. Wealth Management is a huge category in China. For example, Baidu’s mutual fund (RMB 3 billion) sold out within three days of its launch in 2014.
22. In just three years, AntFinancial’s Yu’e Bao has become the third-largest money market fund in the world with AUM of ~$125bn. Another leading player is Tencent’s Licaitong.
23. China’s growth story since 2000 is fueled by massive debt. Excessive debt leverage makes the entire ecosystem vulnerable to market shocks.
24. Competing in China is tough, especially against the BAT companies, resulting in domestic incumbent banks continuing to struggle with their relatively under-developed systems.
25. China has a high savings rate (30%+), providing local banks with plenty of cash, but most lack the systems and processes to profitably conduct consumer lending at scale.
26. The biggest FinTech startups are in Payments and Lending, accounting for nearly 80% of the combined value of all unicorns.
27. Within financing, major value chain segments include Supply chain financing, Consumer financing, P2P lending, and Crowdfunding. Lufax is the largest P2P lender, with a valuation of $18.5B.
28. Alipay’s mini-loans provider Hua-Bei (Just Spend) is huge, accounting for 26% of transactions made on Singles Day in 2016. Tencent’s lending application Wei Li Dai is by invitation only for WeBank customers. Baidu also has a microloan provider focused on college students, You Qian Hua.
29. China has the highest number of P2P lending companies in the world. In 2015, registered P2P lenders originated approximately $60B in consumer loans and $40B in business loans. However, the situation is far from rosy in P2P lending.
30. As of Jan 2016, there were 4,500 P2P platforms in China, with ~50% facing fraud, high delinquency, or liquidity-related issues.
31. The China Banking Regulatory Commission (CBRC) released guidelines in August 2015.
32. Since then, there has been a nationwide crackdown on P2P lenders, with authorities slamming the brakes in the wake of financial scandals involving billions of yuan.
33. As a result, weaker P2P platforms are shutting down. This “cleansing and consolidation” wave will likely continue over the next 12–18 months.
34. Although regulatory scrutiny is increasing, Chinese officials have been more liberal than regulators in other markets. Regulators are also considering easing restrictions that currently hamper commercial banks’ investment in technology enterprises.
35. “Data is the New Gold,” and all key internet finance companies are participating in this gold rush. Chinese FinTechs are using Big Data to provide credit scores to the “unscorable.” For example, Zhima Credit/Credit Sesame by AntFinancial. Tencent is also planning to start a credit-scoring business soon.
36. 60% of the users have never owned a physical credit card. Traditional banks are not lending money to individuals because they lack a reliable credit score.
37. The Chinese government is also developing a nationwide social credit system by collecting information online and providing all its citizens a score
38. China is redefining how the world thinks about payments. When comparing payments and lending solutions in the west, no contender offers the versatility and comprehensiveness of Alipay or WeChat Pay.
39. The market has mostly leap-frogged from cash straight to “mobile and digital.” and has well surpassed the “disruption point.”
40. Large payments companies are also beginning to position themselves for success “outside borders” through acquisitions, equity investments, or strategic partnerships, for e.g., AntFinancial’s recent investments in Thailand’s Ascend Money and India’s PayTM and their partnership with First Data in US and Ingenico in Europe.
41. Most of China’s 1 billion have no affiliation with a bank and will access financial services for the first time through an Internet company.
42. Until recently, China’s banking industry was 100% state-owned. Tencent’s WeBank(100% online bank) is China's first private sector bank.
43. WeBank was soon followed by the launch of Alibaba’s MyBank and Baidu’s Baixin Bank.
44. On the Insurance side, ZhongAn (one of the largest 100% online Chinese insurance companies) is backed by Alibaba and Tencent.
45. As the Chinese economy shifts from the “Ownership to Access” paradigm, the debt profile of the new generation is beginning to differ dramatically from the previous generation.
46. The technology sector now makes up 30% of the MSCI (China Investable Market Index). It was a mere 7% of the index three years ago.
47. Together, Baidu, Alibaba, and Tencent companies dominated China’s Internet ecosystem and generated $39 billion of revenue for the 12 months ending 30 June 2016.
48. For leading players- Speed and Scale are the core strategy. When it comes to FinTech, China is a world leader in every aspect. With the largest chunk of global investment in the sector, the market is adopting technology faster and at a scale bigger than anywhere else.
49. In a rapidly growing consumer economy, with more than 700+ million internet users, China FinTechs have fundamentally transformed the ecosystem and created immense wealth for all stakeholders.
50. That the Chinese have leapfrogged a generation of Consumer Finance is an understatement. No wonder it is said that — “Saving and making people money” is the driving force behind many of the biggest consumer wins of the Internet era.
You can also follow this (below) tweet thread for all things FinTech China.
[This post first appeared as a tweetstorm in oct16 and later in LTP on 28Nov16 ]
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