Innovators around the world have heralded fintech as a force that will remake the storied financial sector. Investors agree. In the first three quarters of 2018 alone, venture capitalists invested $32.6 billion in 1,164 companies — almost double last year’s $17.9 billion invested globally. Already, fintech startups are impacting consumers lives: in 2017, an EY survey across twenty markets found that 33% of people were regular users of at least one self-characterized fintech product, a figure that has more than doubled since 2015. Remarkably, 13% were regular users of five or more fintech services.
Globally there are 33 fintech unicorns. Of which, 24 (73%) are from the “West” (North America and Europe) and 6 (18%) are from China. There are only 3 elsewhere.
By analyzing the geography of successful models and exploring where they intersect, one can uncover valuable insights about the future of fintech. A comparison between the 24 Western fintech unicorns and the six Chinese unicorns reveals the emergence of two distinct fintech models. But in certain geographies, these systems are intersecting, and no model has yet to prevail. South East Asia represents this “ground zero,” and is an ecosystem ripe for analysis.
Fintech in the West
The last fifteen years of Western consumer fintech can be summarized in one phrase: the systematic unbundling of the traditional bank.
Fintech pioneers began innovating in an ecosystem with a highly banked population and reasonably accessible payment systems (e.g. ACH, Visa, Mastercard, Debit). Thus, to disrupt the industry, they targeted individual product lines of traditional financial services companies. First, startups like Paypal disrupted the way consumers pay for goods and services. Later, companies like Prosper and Lending Club took on lending with the advent of peer-to-peer loans. Next came startups like Betterment, Wealthfront and Robinhood that disrupted investment and wealth management. More recently, insuretech gave way to leaders like Trov, Lemonade and Metromile which have made it easier to purchase a range of insurance products. Finally, digital banks like our investee Chime has recently made considerable headway and is reinventing the overall banking experience.
The rise of the Chinese fintech ecosystem
Chinese entrepreneurs faced a radically different starting point when they entered the fintech space. A large portion of the Chinese population had never had a bank account; as recently as 2011, 36% (or almost half a billion people) were unbanked. There was no incumbent payments infrastructure that was available to the majority of consumers.
Alibaba and Tencent created the infrastructure themselves. First came Alibaba. In 2013, its e-commerce focused payments platform Alipay overtook Paypal as the world’s largest mobile payment platform. Then came Tencent’s WeChat pay, which was built on top of the wildly successful social network. It quickly captured market share away from its rival, reaching 39 percent in 2017 as compared to Alipay’s 54 percent. Unlike Paypal and Venmo in the West, they are used much more broadly than peer to peer payments. Through QR codes, commercial payment adoption has also soared. WeChat and Alipay have become the de facto payment networks in China, with 527 million mobile payment users in 2017resulting in $32 trillion in transaction value.
These platforms weren’t the waves of disruption like their US counterparts. Rather, on top of the herculean task of creating the full-stack infrastructure — KYC, credit rating, fraud management — they spawned a financial ecosystem built on top of the network. Companies (or the platforms themselves) leveraged their large user base to offer a range of new financial products almost immediately.
For example, Yu’e Bao, a money market fund was launched in 2013 by Ant Financial, Alibaba’s affiliate fintech company. In just four years, it became the largest money market fund that has ever existed globally, with 1.7 trillion yuan ($270 billion) in net assets.
Today, a range of financial products and services are all offered through WeChat and Ant, spanning mobile payments, wealth management, credit scoring, loans, credit cards and even donations.
Ground zero for the future of fintech
Markets like South East Asia (“SEA”) are bellwethers for how fintech may evolve in the rest of the world. In SEA, the Western and Chinese models are colliding.
On the one hand, successive waves of fintechs are gathering steam and building individual pieces of the financial ecosystem. According to PitchBook, 119 fintech venture capital deals in SEA totaled $250 million in 2017. The first three quarters of 2018 already surpassed 2017 with $313 million invested across 88 deals.
Individual models themselves draw inspiration from both ecosystems. Startups like Kredivo, which is building the next generation credit card and lending platform in Indonesia, look like Capital One or Affirm in the US. Conversely, companies like Funding Societies in Singapore might look more like peer to peer lenders in China like Lufax, and Axinan, a next generation insurer, like its Chinese equivalent Zhong An.
Yet at the same time, in markets like Indonesia half of the population remains unbanked, payment platforms play an important role in onboarding users into the financial system. Social networks like Tencent’s WeChat and Facebook’s Whatsapp are seeking to offer payments in the region.
Perhaps the most powerful evolution is the rise of homegrown platforms to offer payments, with novel use cases. Notably, the ride hailing providers Go-Jek and Grab have each created wallets to pay for their services. Within these wallets, they are offering a range of financial products and services. They increasingly see payments core to their growth, and importantly sustainability — since financial services are core to their monetization strategy. While on the surface, this strategy may be surprising, it makes sense. Payment platforms require a regular use case to build a habit and a method of getting cash into and out of the system. Ride hailing services have both — a regular service (rides among a slew of other offerings) and a legion of agents (drivers). For the moment, these services remain highly concentrated in urban areas. Rural customers remain underserved for the moment.
What this teaches us for the rest of the world
Today, the West and China account for the majority of the major fintech successes. But fintech is exploding across the world, and the success stories of tomorrow will likely incorporate lessons from both ecosystems.
For instance, in Brazil, digital banks like Bank Neon and credit card providers like NuBank share more in common with Western peers like Chime, N26, and Revolut than Ant or WeChat. Yet 99Taxis, owned by Didi Chuxing, has launched its own payments platform similar to Go-Jek. Across Africa, telecom operators are creating the payment platforms, and cash-in, cash-out network required for the ecosystem. The story of Nigerian-based Paystack, which provides online payment facilities to merchants, is also telling: the company went through Y Combinator, received funding from Stripe, Visa and Tencent, resulting in a joint US-Chinese backing. Diverse markets worldwide increasingly resemble SEA– highly populous nations with growing smartphone penetration and active internet usage.
Studying markets like SEA sheds light on the future of fintech in the West and in China. How will large platforms like Amazon and Apple, which already have payment credentials built in, offer financial services? Conversely, once the payment ecosystems are mature, will China see a new wave of independent fintechs rising?