Why China is leading the FinTech revolution
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Digitalisation is driving a much-needed transformation in financial services. At the forefront of that change is China. And its position at the frontier means lessons for the rest of us…
Unless you’ve been living under a rock, there’s no doubt that you’re aware of the current FinTech boom. And like many trends – in finance, e-commerce or even fashion – it all started in China.
A large and expanding customer base? Check. A burgeoning financial infrastructure? Check. Escalating monetary transactions? Check. A population that is enthusiastically embracing all things digital? Check.
The conditions in China were ripe for financial revolution. A large portion of previously unbanked individuals… A dramatic and swift uptake of digital payments…. Multiple conditions converged to result in the optimum conditions for FinTechs to dominate the market. And dominate they have, with the majority of Chinese consumers now managing their financial affairs with a few clicks of their smartphones.
China is currently the largest FinTech market in the world and one that experts agree will continue to experience growth.
From Alibaba to Tencet, multiple major Chinese players have made their foray into financial services. Arguably the most acclaimed of the resulting FinTechs has been Tencent-owned WeBank. The first online bank worldwide, the largest banking unicorn globally, the first private bank nationally, the first Chinese digital bank rated by Moody’s and S&P – there’s no doubt as to its pedigree.
Alibaba’s Ant Financial and its brands that include MYbank are also achieving staggering results. Its focus on capturing China’s rural markets has underpinned its success. It now has clients across 750 counties and a non-performing loan ratio of around 1.52%, far lower than the 2.99% average for Chinese SME loans (as of June of last year).
Read more: What is Fintech and What do Fintech Companies Do?
So why has China led the FinTech revolution?
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The perfect banking storm
China’s FinTech boom has been largely driven by the absence of strong traditional banking services, unfulfilled financial needs of the average citizen as well as SMEs, and the huge number of Chinese citizens who use the internet.
According to Statista:
In 2020, China’s internet users amounted to 934 million which meant that almost 65% of the population had access to the internet.
Not only do they use the internet, but they bank with it. While as little as two decades ago, China dealt almost exclusively in cash, e-commerce transactions via digital wallets are expected to reach more than 65% in 2021. It’s a country where daily life is conducted via super apps and this extends to the way its citizens manage their finances.
Read more: WeChat Pay and Alipay, China’s biggest payment platforms: Explained
The proliferation of easy-to-use, low cost and integrated FinTech offerings has won over China. Research shows that China led worldwide adoption rates of FinTech services like banking and payments, with 92% of FinTech adoption by small and medium enterprises in this category.
What makes these FinTechs so successful
In simplest terms, the success of FinTechs like WeBank is down to this: they don’t operate as banks with technological advantage, but rather as technology companies with banking licenses. They offer banking solutions by the people, for the people.
Launched in 2015, today, WeBank has over 200 million customers and it’s the leader in assets, loans, net profits, return on equity and other major categories in the Chinese digital banking space. According to its CIO Henry Ma, it was “founded with the mission of providing affordable, accessible, appropriate, and sustainable banking services for the underserved individuals and small businesses.”
“We want to serve the part of the market that is underbanked or unbanked. Many of our customers are very small mom-and-pop shops … a market which is highly overlooked by the traditional banking industry. We try to tackle this financial inclusion topic with technology.
The key is to try to tackle this particular market with a vastly different cost structure. Because, if you’re a traditional bank, the reason why they wouldn’t try to tackle this market is because it’s too costly for them to run a sustainable business based on the cost structure that they have.”
This foundation of inclusivity is why FinTech adoption will mean better outcomes for businesses and customers. Because FinTech is about solutions first and banking second. This approach is also readily scalable. Once the platform is established, the marginal cost of serving additional customers is almost zero.
Take China’s main mobile payment providers – Alibaba’s Alipay and Tencent’s WeChat Pay. Each has around one billion customers. And their corresponding data. And digital technology works fast.
The result? WeBank and MYBank process loan applications almost instantly.
MYBank’s SME loan business operates under the “310” model. An online application takes less than three minutes to fill out, it’s almost instantly processed and once approved, the funds are in the borrower’s Alipay account within one second; and there is zero human intervention in the entire process.
By taking advantage of digital innovations, WeBank and MYBank currently each grant around ten million SME or personal loans annually, despite having only 1,000-2,000 employees each.
What FinTech can learn from China’s pioneering ways
If China is a case study for the emergence of FinTech, then there are lessons to be made from its trailblazing nature.
1. Reimagining existing banking doesn’t work
Traditional banking is in crisis. More than a third of UK bank branches have closed in the past 5 years. Consumer trust in banks is at an all-time low. And these institutions aren’t agile enough to adapt.
The most successful FinTechs are not just upgraded traditional banks but are entirely new models built from scratch to satisfy the fluctuating needs of a digital era. That was exactly how WeBank, the originator of developed online banking, was established.
2. Embrace seamless integration
China is proof that consumers want less fragmentation of their financial services. Its reality is one where p2p payments, bank transfers and wealth management can be conducted alongside food delivery orders, taxi bookings and mobile phone top-ups. All via a smartphone and with as few clicks as possible.
This type of embedded finance is set to be one of the biggest financial trends in the West in the near future as businesses race to catch up with consumer demand for seamless, friction-free experiences.
Market analysis from Lightyear Capital, a New York-based private equity firm, predicts embedded finance (including payments, lending, and insurance) will generate $230 billion in revenue by 2025, a 10-fold increase from $22.5 billion in 2020.
3. The customer comes first
There’s no doubt that in China, FinTech lives firmly in the realm of its super apps. And their position as indispensable to the average citizen is down to their customer-first spirit.
“This is particularly noticeable when compared to European firms, who might focus on which financial services they can offer rather than which services their customers want,” according to financial market expert Chris Skinner.
The result? The super apps have evolved to include a wide range of consumer services, financial or otherwise, that are offered by the platform as well as those offered by partners like Uber and AirBnB.
4. Don’t forget about SMEs
Almost a decade ago, Chinese SMEs received less than 25% of the loans extended by Chinese banks, according to the World Bank’s 2012 Enterprise Survey. This even though SMEs accounted for more than 60% of China’s GDP and 80% of urban employment. This discrepancy in bank lending can be attributed to the lack of qualified collateral and credit histories among SMEs.
Since then, FinTech has covered this gap in the market. In 2020, Ant Financial and its WEbank issued RMB 422 billion in small business loans as of June 3, according to Ant’s prospectus.
How? With the provision of functional and affordable banking services to SME, primarily by leveraging big data or digital footprints on existing platforms. This approach “yields better prediction of loan defaults during normal times and periods of large exogenous shocks,” according to the IMF, and also means that customers, like smaller SMEs and those in rural areas, can be served.
FinTech has dramatically altered the economic and financial landscape of China. Now, it’s a trend poised to sweep the rest of the world. Ride the wave with a trusted partner – speak to us to find out how your business can benefit from inclusive, embedded and seamless finance solutions.