Michael Zhu: Which Comes First in Fintech — Finance or Tech?
Fintech is a very interesting sector as finance plays an integral part in every business process. Between 2013 and 2018, fintech has grown six fold, and has made lateral connections with other industries such as telecom and offline trading. In China, internet banking has grown at a remarkable pace, with Ant Financial being a major fintech player on a global scale. The global market has reciprocated in response as we see the large number of fintech companies listing on the Nasdaq, exceeding five billion US dollars in financing.
Yet the growth of fintech does not come without its challenges, such as issues with P2P. Although the availability of capital helps, the bottleneck lies with regulations in the evolving industry. We have seen many prominent enterprises become stuck when faced with a lack of clarity on regulations, despite their strong technical know-how.
As China has largely focused on enterprise-scale solutions, challenges, hence opportunities, remain for the personal and SME finance markets. Currently, only 300 million of the whole Chinese population are loan holders. From an asset management point of view, the private sector in China controls lots of liquidity, making for a market with higher potential than the US. Insurance also has a relatively low penetration rate in the Chinese market, and there is still much room for development for the sector to digitize and utilize big data. All these point to great opportunities for fintech entrepreneurs.
Aside from industry progress, technology in itself has experienced immense growth in the last couple of years. The maturity of cloud computing, big data, AI, blockchain etc has given the financial sector a great boost and brought us to a turning point. Let’s look at how the application of such technology has enhanced efficiency for fintech.
While many financial institutions are occupied with the cloud, big data, AI etc, many are also adopting biometric recognition for payment processes. Blockchain on the other hand has increased payment efficiencies. China’s tight relationship with fintech in terms of both penetration and knowledge has drastically lowered the use of cash and is now unmatched by other countries.
Over the last year, we have all been closely following the regulation of fintech platforms. With P2P platforms considered as a part of the wider financial system rather than independent businesses, more pressure has been placed on them. Having said that, this is a positive move for long term development, as clarity on compliance is very much needed.
Meanwhile, the Greater Bay Area (GBA)’s issuance of virtual banking licenses has also given the financial sector a great push. Gobi Partner’s portfolio company WeLab has already successfully obtained a virtual banking license, pushing us into a very exciting chapter as we witness the launch of virtual banks. Although revolutions come with challenges, all in all, there’s a lot of confidence in Chinese businesses’ development and adoption of fintech and AI, as the reformed policies are giving us safe boundaries to operate within.
Looking forward, as we consider new investments in the field, we largely follow several principals, the most basic of which is whether this entity operates in a domestic or international market. USD flows freely in the global market, where vast opportunities lie in cross-border transactions and insurance fields. Take cross-border transactions for example, with the trade war putting pressure on the volume of trades that have typically been between China and the US, they will be redirected to other countries, meaning more currencies will be traded. With other factors such as “one belt one road” boosting the volume of such trades, adding to the complexity of transaction networks, we have invested in transaction platforms that not only service enterprises, but SME that trade across borders too.
While the application of newly developed technologies is resolving bottle necks and pain points for the financial industry, we also need to identify whether they are real solutions to real demands. There are many cases where institutions have enhanced efficiencies through digitizing or automating their processes, however, has it really helped them in their businesses in terms of increasing revenue or market share? Enterprises must be able to recognize risks that come with digitizing a business simply for the sake of it.
As for talent in fintech, does finance or technical expertise matter more? Naturally, there’s no straight answer for this. Financial skill set, especially in regard to compliance is important, but evidently, so is technical skills. When we find a team that has stronger technical knowledge, we look to help strengthen their team with the other complement by looking for a Chief Compliance Officer, for instance. In the past, licenses in China were not necessarily categorized into very specific classes, and entrepreneurs only learned about it as they went, but as the government raises the bar in in the finance and compliance fields, founders will need to be familiarizing themselves with relevant regulations and requirements to stay competitive.
All in all, fintech as a field is ripe with both short- and long-term opportunities as much of China’s population have yet to become users. Entrepreneurs will need to find their own niche, but after the last two decade’s growth spurt, we have arrived at a time where technological breakthroughs are required to become game changers, hence startups will need to prioritize their resources. Afterall, in fintech, the technical component is key and cannot be fully substituted with just a healthy source of funding.
