Eight Things Driving China’s Fintech Fortune
In May, the FiDA Partnership took a group of digital finance experts working in Africa to learn about the fintech boom happening in China. The immersive week was designed to get participants out of the boardroom to experience Chinese digital life firsthand. We viewed our experiences through the lens of Africa’s digital finance scene, hoping to learn how China’s innovations could be applied to sub-Saharan Africa. These eight things stood out for us:
1) The Chinese government provides an enabling environment
The Chinese government established an ecosystem that supports digital financial services. Thanks to a mandate requiring state-owned banks to ensure widespread access, over 80% of adults have a bank account which they can access via an extensive branch and ATM network. This frees FinTechs from having to develop expensive cash-in-cash-out networks, as many have had to do in Africa. Prioritization of rural development has extended broadband, universal IDs and road infrastructure, lowering the cost of servicing remote areas.
Chinese regulators’ “wait and see” approach sparked the fintech boom and when regulation was eventually introduced it left space for fintechs to flourish — 200+ licenses have been granted to non-bank institutions.
2) Business model innovation encourages inclusion and sophistication
Laissez-faire regulation and growing tech expertise gave rise to innovative new players entering the financial services space with fresh business models. For example, peer-to-peer (P2P) lenders such as Yirendai arose to capitalise on banks’ neglect of the growing pool of middle class savers and would-be borrowers. Hilda Moraa, founder and CEO of Pezesha, a P2P lending company in Kenya, was particularly interested in this business model, saying:
“There’s quite a lot to learn in that process — how we go about using alternative data to screen our borrowers, and how to promote responsible borrowing and reduce risk for lenders. That all leads to meaningful financial inclusion.”
Data is at the heart of business model innovation in China and companies with large data pools and expertise in deriving insights from them are leading the way. These tend to be tech giants such as JD.com, Alibaba and Tencent, so profits in the financial services value chain are shifting from financial institutions to tech companies. The vast amounts of cash these companies have accumulated in their core businesses also creates space and time for experimentation which has led to more sophisticated financial service products.
3) AI is everywhere
China’s FinTechs are investing heavily in artificial intelligence (AI), which we found has quite a visible presence there. We shopped at JD’s unmanned stores which use smart shelves and facial recognition and saw AI in action at a small mom-and-pop shop in Hangzhou which uses Alibaba’s retail management platform to digitize inventory management.
The store gets advice from the platform on what to stock based on sales history, a trove of data about neighbouring communities, and timely information such as weather forecasts, for example, to make sure they have umbrellas to sell on a rainy day! Cameras track customer movements around the store to create a heat map showing where they spend most time so the owner can optimise layout and merchandising.
AI is also used extensively on the back end. JD, Yirendai, and Bairong showed us how they leverage AI to process large datasets for risk management. JD uses more than 30,000 variables to credit score its users, including the angle of the phone and how hard people press the screen when making purchases!
4) Partnerships abound
In China, even the largest tech titans acknowledge that they are stronger if they work with others. We heard about partnerships addressing a range of needs including risk management, scale, capital constraints, technology, expertise, and regulatory compliance. Two of the biggest players, JD Finance and Tencent, told us how they partner to share user data, enabling JD Finance to develop a deeper understanding of their customers for credit profiling. JD Finance explained how they partner with banks to access low-cost loanable funds in exchange for their large de-risked customer base — the stuff African alternative lenders’ dreams are made of!
5) Social media and entertainment draws customers
We learned this from Tencent’s model. Their messaging and social media platform, WeChat, offers a vast array of services: in Beijing we ordered taxis, rented Ofo bikes, ordered meals, checked movie times, and shopped online—all within the app! WeChat is present in almost all aspects of millions of users’ everyday lives, enabling Tencent to integrate financial services with immediately applicable use cases. This is in contrast to what we see even in more mature digital finance markets in Africa, where financial services are often offered in isolation from existing behaviors.
6) Digital finance solves the trust problem
Professor Long Chen, Alibaba’s Chief Strategy Officer who joined us for a lakeside chat in Hangzhou, noted that tech platforms’ ability to create trust has been a significant growth factor. A calligraphy brush seller in Panjiayuan Market, Beijing, noted:
“I even use Taobao to sell to customers I already know because it creates trust. Payment only happens if the customer is happy and there is a process for returning goods if they are not.”
7) China is figuring out e-commerce for rural areas
Alibaba’s rural team, Cuntao, has extended e-commerce into rural areas by setting up 30,000 service centers at village convenience stores, enabling people with no internet to access goods previously unavailable to them. Centers receive goods ordered through Alibaba’s e-commerce sites and deliver to customers’ homes in return for commission. They are also education centers, teaching villagers how to shop online and helping them place orders.
Cuntao also provides two-way distribution, enabling rural producers to access new markets. We visited a factory started 6 years ago with $1,600 in a single room. It now employs 200 people and sells one million pairs of shoes annually on Taobao.
8) The future is offline
Alibaba believes that a foothold in traditional retail is the path to growth and has developed an online-to-offline (O2O) plan called “new retail” which melds the best of in-shop and online experiences. Using data on purchasing history and shopping habits, Alibaba can personalize product offerings, ad campaigns and purchasing experiences. At Alibaba’s Hema supermarket, shopping is a smartphone powered experience; we scanned QR codes to get product information and payment is cashless (almost touchless) with the use of facial recognition, combined with Alipay embedded in the Hema app.
This is part of an effort to tap into the huge offline commerce sector in the world’s largest retail market. Despite the success of e-commerce in China, 85% of purchases still happen at brick-and-mortar stores, amounting to a $3.9trn opportunity. Venturing offline also enables Alibaba to access customers who are excluded from its online offerings because of a lack of digital literacy or phone ownership — clear learnings for Africa!
Follow Us to Find Out More
We have an exciting blog series launching now, focused on deep dives into China learnings from our trip. Follow us on Twitter or LinkedIn to catch each blog and learn more about these insights. At FiDA, we catalyze knowledge and insights to promote meaningful financial inclusion in an increasingly digital world. If you are interested in joining a Live Learning trip, get in touch!
