Step aside M-PESA and PayPal — WeChat and Alipay are the future of fintech
3 major trends for developing market startups from China’s fintech revolution
Imagine the ideal backdrop for a fintech revolution. What are the perfect conditions? Here’s a list many of us would come up with:
- A literate and smartphone-first population with growing incomes
- An organized and forward-thinking financial regulatory authority supporting accessible digital financial infrastructure
- A traditional banking sector that can either evolve with or be disrupted by startup visionaries with sufficient funding
At this point, many of us are thinking Silicon Valley, so let’s add another condition:
- Strong centralized government planning (more on this later)
In 2017, the streets of Shanghai, not Palo Alto, are at the center of fintech. China isn’t experiencing a fintech revolution, it’s living in a post-fintech society.
Among digitally active users, fintech adoption is more than twice as high in China compared to the U.S.
Meanwhile the U.S., a country that arguably ticks off 3/4 of the above conditions, is seeing mobile payments struggle to gain traction, especially at points-of-sale. Adoption has plateaued and only a small fraction (~5%) of users in a recent mobile payments survey use the leading services (Apple, Android, and Samsung-Pay) once or more a week. Fintech’s growth in China is not limited to payments. Even though P2P innovators like Lending Club were stars in Silicon Valley just a few years ago, China has shown it has a much larger appetite for P2P lending.
At DFS Lab, we work with the best fintech entrepreneurs and investors in Sub-Saharan Africa and South Asia. However, Silicon Valley’s influence is never far with constant mentions of a new venture being the “Lending Club of Pakistan” or the “Affirm of Kenya.” What we don’t often hear are entrepreneurs looking to be the next Alipay or WeChat Pay. Up and coming Chinese startups ushering in the next wave of fintech like Qing Song Chou ( 轻松筹), a crowdfunding platform that is integrated into WeChat, are relatively unknown to the entrepreneurs we talk to.
Qing Song Chou is an especially good example of the missed opportunity to learn and adopt. With a $20 million Series B round of funding, the startup is cracking the challenge of digitizing informal lending based on social relationships. It’s an unsolved challenge often discussed in our sector and there’s a team in Beijing solving it for tens of millions of people who we aren’t talking about.
Obviously, there are major differences between markets. China has a higher GDP per capita and literacy rate than countries in Sub-Saharan Africa and South Asia. More distinctly, it has a centralized government that invests in digital infrastructure and protects nascent companies. These elements are difficult to emulate. However, it would be foolish to ignore the power shift in fintech from West to East and there’s certainly a lot we can learn. Here are three major trends from Alipay and WeChat that we should keep an eye on:
1. Apps as the internet
The next billion to come online will see Facebook, WhatsApp, WeChat or an equivalent as the internet. In Myanmar, DFS Lab’s Ben Lyon saw mobile phone dealers pre-loading Facebook contacts onto <$30 smartphones because customers demanded it. The debate of designing for web vs. mobile is over.
As of early 2017, WeChat has 889 million MAUs (Monthly Active Users). More impressively, an average user will spend as much time on WeChat as users will spend combined across Facebook’s suite of apps (Facebook, Facebook Messenger, and Instagram) on a daily basis.
2. Apps within apps
If you’re going to become the internet, you have an opportunity to cater to the long-tail of consumer demand. WeChat has responded to that opportunity and is now described as the “one app to rule them all.” It has set an example of how a messaging app can evolve and much of its success can be attributed to its “app-within-an-app model.”
WeChat offers access to over 10 million smaller apps in its ecosystem. Each can be officially authorized to access WeChat APIs for payments, location, direct messages, voice messages, user IDs, and more. The smaller apps run like a full web experience without ever leaving WeChat itself which means users do not have to download anything new and developers do not have to worry about compatibility across mobile operating systems.
The New York Times produced a great video highlighting some of the smaller apps within WeChat and how they benefit each other by keeping the user within the larger app. It also touches on privacy concerns that shouldn’t be ignored as we consider how others will try to emulate this trend.
It’s not surprising that Facebook’s plan for Facebook Messenger focuses on a creating a central directory for businesses and chatbots, keeping users in the app by integrating third-party services into the conversation, and the use of QR codes to interact with the physical world — it’s right out of Tencent’s WeChat playbook.
3. Finance in the background
In 2015, more than 1 billion “red envelopes” were sent over WeChat Pay during Chinese New Year. In the following year, the number grew eight fold to over 8 billion red envelopes sent over Chinese New Year. In comparison, PayPal had a total of 4.9 billion transactions in all of 2015.
The feature spawned from WeChat’s own team who wanted an easier way to pay small monetary bonuses around Chinese New Year as part of a broader tradition to give out red envelopes to family and friends during the holiday. They wanted to remove the pain of the financial transaction while highlighting the joy around the tradition. This resulted in a WeChat feature that allows users to send red envelopes in group chats which grew into a social phenomenon that jump started WeChat’s mobile wallet WeChat Pay. It continues to be popular with 88% of users citing it as a use case.
Designing experiences around users’ lifestyles and minimizing finance into the background is not only good practice, it’s at the core of how China’s fintech leaders see themselves. To add a new service in WeChat, users add them using the same process they use to add their (human) friends. Alipay describes itself as a “global lifestyle super app.” A 2016 Alipay promotion video highlights the app as the first stop for not only payments and investments, but also for dining, leisure, and transportation. Finance itself becomes a seamless process in the background for services that matter more to users.
At DFS Lab we advise our entrepreneurs to consider these lessons. Teller designs chatbots for financial service providers, preempting the “apps as the internet” role we think messaging apps will serve for new mobile data users. Utilizing a hybrid of hyper-local satellite and ground-based data sources, Pula will offer timely and personalized advice to farmers while providing crop insurance and other financial services as a seamless background feature.
The success of fintech within our markets in Sub-Saharan Africa and South Asia will not exactly mirror China’s fintech expansion. However, the major trends we can observe from a market onboarding hundreds of millions of new digital finance users tell us a lot about what a leapfrog in financial services looks like.
We are already seeing China’s fintech giants look to expand into markets outside of the mainland. Alibaba’s Ant Financial has invested in HelloPay in Southeast Asia, Mynt in the Philippines, Paytm in India, and most recently, put in a $1.6 billion bid to purchase MoneyGram in the U.S.. WeChat has expanded into Europe and is taking on WhatsApp in South Africa.
It’s likely that the mass adoption of digital financial services in Nigeria or Pakistan will look more like Alipay and WeChat than ApplePay or PayPal, and we’ll be paying attention.