In many ways, China is a land of copycats and fakes. People in China have produced fake Prada purses and Rolex watches, opened Apple stores that aren’t really Apple stores, and even pirated global investment bank Goldman Sachs.
So whether China’s technology sector is another example of monkey-see, monkey-do, is a fair question. And there’s no clear answer. “China never really stopped being a copycat, and that’s why its tech companies aren’t changing the world,” trumpeted the headline of an opinion piece in the South China Morning Post in April. It continued,
“Innovation and creativity are not rewarded in the Chinese commercial or educational sectors, which emphasise rapidly monetizing activities and rote learning.
Obeying authorities ensures stability and eventual success. Gaining favours from regulators and party elites are the surest path to good fortune. Unfortunately, it is precisely this type of closed minded thinking coupled with cronyism and exclusive capitalism with Chinese characteristics that will continue to kill innovation and stifle creative thinking across China.
That explains why China’s big internet companies are basically copies of their western counterparts. It also explains why their tech giants aren’t changing the rest of the world.”
The same month, Wired magazine disagreed. “China is no longer a nation of tech copycats,” one headline declared. It continued, “Now major cities are crowded with ambitious inventors and entrepreneurs, flocking into software accelerators and hackerspaces. They no longer want jobs at Google or Apple; like their counterparts in San Francisco, they want to build the next Google or Apple… Anyone with a promising idea and some experience can find money.”
Whether it’s a copycat or the real thing, China’s fintech sector is huge and growing fast. Fintech – that is, the use of technology to make financial services more efficient – is turning traditional models of banking and finance on their heads by making them cheaper and more accessible to billions of people.
The last time we talked about fintech, we said that Asia would lead the way for future growth. Well, it seems as if that “future” has arrived, at least for China. A recent joint report by professional services firm Ernst & Young and Singaporean bank DBS concluded that China has surged ahead of the likes of Silicon Valley and London to become the “undoubted centre of global fintech innovation and adoption”. China is now home to the world’s biggest fintech “unicorns,” which are start-up companies that are valued at over $1 billion. Private equity firms and other fintech investors have never been busier with investing in China.
Of the 27 fintech unicorns in the world, eight are in China, valued at just over US$96 billion. The four largest unicorns are Chinese (the largest by far is Ant Financial, which operates the payment affiliate of online retailer Alibaba). The 14 fintech unicorns in the U.S. are collectively valued at US$31 billion.
What’s behind China’s rise to the top?
Global consultancy McKinsey recently noted a few reasons for China’s success in fintech.
First, its central bank has in recent years provided a supportive regulatory framework for the development of digital finance. Chinese Premier Li Keqiang has vocally supported the need to encourage the “healthy development” of internet banking.
Second, China’s e-commerce sector is also well developed. China accounts for 47 percent of global digital retail sales (it surpassed the U.S. in 2013). Demographics show that China’s market share is going to continue to rise – China has 721 million internet users, or about 52 percent of the population; by comparison, 89 percent of Americans use the internet.
Third, a large segment of China’s population continues to be underserved by traditional banking. So – similar to how many consumers in some emerging markets went from having no phone services at all, to having mobile service (thus skipping land lines altogether) – many banking customers have skipped traditional bricks-and-mortar banking, to use alternative, more accessible online providers of finance.
Two parties are pushing things forward
Consumers who fall between the cracks of China’s banking system, and small companies, are the drivers of China’s fintech sector.
As shown below, one in five Chinese adults does not have access to banking services. China has only 8.1 commercial bank branches (and 55 ATMs) per 100,000 people. That’s substantially lower than the 28.2 branches (222 ATMs) in the US and Canada, and the 28 branches (81 ATMs) in Europe.
Small- and medium-sized enterprises (SMEs) meanwhile, receive less than a quarter of the country’s bank loans, despite accounting for 60 percent of GDP and 80 percent of employment in urban areas. In ever-increasing numbers, they are looking to online finance solutions for their payments, credit, investments and insurance needs, in part because via peer-to-peer lending networks they can receive loans far faster than they could through a bank.
In particular, payment solutions are central to China’s fintech scene. At present, around 40 percent of China’s banking services customers use fintech platforms to settle domestic and international payments. Nearly 58 percent of all internet users use mobile payment applications, so 380 million Chinese people shop online via their phones. Almost 200 million people use their phones as a wallet for in-store payments.
Leading Chinese tech giants Baidu, Alibaba and Tencent – often known collectively as “BAT” – are behind some of the biggest fintech companies. DBS/EY sees BAT “aggressively creating all-encompassing platforms” to serve the needs of China’s under-banked consumers and SMEs.
And according to an industry report by Innotribe, an organisation monitoring emerging trends in financial services, BAT are proving that “services like wealth management can be provided to anyone at an affordable price, relative to the value, which often means incredibly cheap”.
As such, the cost of capital for banks in China has increased, Innotribe notes, as deposits move onto online/mobile finance platforms and away from mainline traditional institutions. This does come with risks, though; peer-to-peer lending Ezubo was exposed as being allegedly one of China’s biggest Ponzi schemes, defrauding more than 900,000 people of $7.6 billion.
China’s boom is Asia’s windfall
As China’s fintech rises, the centre of global fintech is shifting away from the original hubs of the US and UK. Chinese technology firms are entering new overseas markets to diversify operations and reduce their reliance on the domestic market. What Chinese fintechs learn abroad will further bolster their capabilities domestically, allowing them to stay ahead of the global competition.
Credit China FinTech Holdings Limited (which is a public company traded in Hong Kong) as one example. It’s a leading provider of peer-to-peer lending and other financial services in China. It says that it’s focused on “SMEs and middle-class consumers via mobile internet”. It recently announced it that it will be imminently establishing a Southeast Asia headquarters in Singapore so it can bring its operating experiences in China to developing economies across Southeast Asia and South Asia. Credit China also specifically cites the relatively low urbanisation rates in the two regions – despite their enormous populations – as being ideal for demand growth of fintech services.
Through their affiliates, the BAT giants are expanding to serve outbound Chinese travellers. They’re also expanding their customer base in emerging economies, including Southeast Asia. For instance, Alibaba acquired a controlling stake in Southeast Asian e-commerce platform Lazada for USD$1 billion earlier this year. And the start of 2016 saw search giant Baidu invest in India’s largest online travel agency MakeMyTrip.
China’s government is keen to shift the country towards a more services and consumer-oriented economy, with technological innovation and e-commerce growth among its highest priorities. Its emergence as the world’s prime fintech hub will go a long way to achieving this objective. And for that, Asian investors, consumers and businesses should look forward to the future.