It was more than 20 years ago that Bill Gates told us: "Banking is necessary. Banks are not." Although the rise of Chinese fintech – and global fintech in general – has spurred the conventional banking sector into some serious reappraisal of its business operations, it doesn't look as though the Microsoft Corp. founder will be proved right any time soon.
Today, Chinese fintech is on an exponential trajectory. According to consulting firm Accenture, the Asia-Pacific region saw fintech investment more than quadruple in 2015 to $4.3 billion. The first quarter of this year saw investments increase by a further 500 percent year-on-year to $2.7 billion. Most of this money has been poured into Chinese platforms.
The rise of Chinese fintech has been largely underpinned by the country's e-commerce sector. By 2017, data from Tech in Asia suggest China's shoppers will be spending more than $1.2 trillion online (up from $670 million last year). Because of this, coupled with China's widespread smartphone and internet usage, consumer-unfriendly banking system and a heretofore accomodating regulatory environment, a number of leading Chinese players have taken the lead in global fintech innovation.
Yet tech firms are not about to kill off China's traditional banks, or foreign banks operating in China. According to a recent joint report by the University of Cambridge and The University of Sydney, total consumer lending by registered banks in China was $3 trillion in 2015. This was still 57 times greater than the $52.4 billion volume reported by fintech lenders in China.
While China's fintech sector is booming, this year will see new Chinese regulations governing fintech start to bite. Conventional banks are also rising to the fintech challenge by collaborating with startups, creating their own fintech subsidiaries and improving their retail banking and small-business-focused offerings. When it comes to assessing fintech disruption, these are increasingly pertinent factors.
China's fintech space is dominated by Alibaba Group Holding Ltd. and its affiliate Ant Financial Services Group, the world's most valuable fintech services provider. Through its ownership of Alipay, Ant Financial reportedly controls around 65 percent of China's online payments, and nearly 80 percent of mobile payments. Alipay currently processes 80 million transactions every day.
Since it was created in 2014, Ant Financial has steadily diversified its financial services, moving into areas such as wealth management and small-business loans. It has also expanded internationally, investing in Paytm, one of India's largest mobile payment and commerce platforms, and Finextra says Ant Financial is partnering with European firms and businesses to offer services to Chinese tourists.
Yet according to Miranda Shek, Alipay's head of international communications, the company has no interest in outmuscling banks. Alipay has developed partnerships with all 19 Chinese national banks, including the Agricultural Bank of China, the Industrial and Commercial Bank of China and the Bank of China.
"We're not looking to take over conventional financial institutions," says Shek. "In fact, market share has never been our focus. Currently we have over 200 financial institutions as partners and we are building an open ecosystem, enabling traditional financial institutions to provide services in a more efficient way."
Looking to jump ahead of the innovation curve, many Chinese banks are now choosing to sponsor their own fintech startups. In China, where building consumer trust is a key issue, this David-and-Goliath double act often makes sense for nascent fintechs too. This also conforms with global trends; research by Accenture shows that the level of investment in fintech startups aiming to partner with the banking industry grew by 138 percent in 2015, while investment in those that wished to compete grew by only 23 percent.
Launched in 2014, the FinTech Innovation Lab Asia-Pacific, facilitated by Accenture, now involves 20 banks, including China CITIC Bank International and the China Construction Bank (Asia). Overseas banks are also getting in on the accelerator act - Standard Chartered teamed up with Chinese search engine behemoth Baidu Inc. to launch a fintech program in Hong Kong last year.
One of the major drivers of Chinese fintech growth has been the inadequacy of China's retail and SME banking sector. With most mainland banks focusing their efforts on servicing the corporate market, obtaining a loan has traditionally been a tough and time-consuming proposition for Chinese small-business owners. Household lending has been largely restricted to mortgages.
"Chinese Banks have underserved the household sector, given their focus on other parts of the economy, and are now playing catch-up," says Mark Young, a managing director with Fitch Ratings Singapore.
But this doesn't mean the rise of fintech has caught Chinese banks unaware. The majority have rapidly taken advantage of financial technology, using it to revolutionize their small-business lending operations. Many are now investing massive sums in fintech; the Industrial and Commercial Bank of China, for example, now employs more than 10,000 fintech-dedicated engineers, according to The National.
China's state-owned banks have increasingly been moving into e-commerce themselves, creating their own internet-based offerings, developing mobile applications and waiving transfer fees for customers to boost competitiveness. The Bank of China has even built its own in-house "credit factory" to improve its small-business lending process.
"The pace of technological progress and the burgeoning functionality of mobile devices means that financial service providers in China have no choice but to evolve and adapt," says Tim Pagett, Deloitte China's financial services industry leader. "But going forward, China's banks will undoubtedly continue to play a central role in the implementation of fiscal and monetary policy."
Beijing is now in something of a quandary with regard to fintech. It wants to encourage financial industry transformation and innovation, but also needs to protect consumers, constrain overheating and minimize counterproductive disruption. After several recent high-profile cases of fraud within the peer-to-peer sector, the Chinese government is increasingly laying down the law in what was previously a fairly unregulated space.
"The biggest challenge to fintech will be from China's regulators," says Zennon Kapron, founder of financial research firm Kapronasia, which has offices in China, Singapore and India. "Beijing is already cracking down on certain areas of fintech, such as mobile payments."
Following the announcement of tougher regulations for online P2P lenders by the China Banking Regulatory Commission in December 2015, the People's Bank of China announced in March 2016 that online Chinese P2P lenders could no longer lend money for property down payments. In April, a task force headed up by the PBOC began a one-year crackdown on fraud and risk in online payments, while in June, the bank's governor, Zhou Xiaochuan, stated that he intended to maintain "great vigilance" on so-called “shadow” banking activities.
"We expect regulation to play a key role in determining how the Chinese fintech sector evolves," says Fitch's Young. "There is likely to be a fine line between the development of regulation to ensure orderly growth and the establishment of significant barriers to entry to protect the incumbents."
Partly as a result of its own previous deficiencies, China's financial system is now rapidly innovating. Widespread mobile internet, the rise of a tech-savvy millennial generation and the accessibility of big data mean that well-positioned Chinese fintechs now have a golden opportunity to leverage the wealth being generated by the country's middle class.
Yet China's fintech startups today face myriad challenges. They must contend with an evolving regulatory landscape, scale up quickly despite scarce resources, and choose whether to go it alone or team up with an established financial institution.
As domestic regulations start to bite, what happens during the next year will determine the longer-term valuation of Chinese fintech business models. In a crowded market, leading players such as Ant Financial and P2P lender Lu.com are likely to benefit, as rivals with unviable models and insufficient funding fall by the wayside.
For the Chinese banking sector, fintech is clearly a game-changer. Nevertheless, conventional banks are likely to remain key players.