Behind the Great Fintech Wall
The Fintech revolution continues to gather momentum globally. To find the red-hot centre of the Fintech boom today, one should look at a country teeming with consumers, with a burgeoning financial infrastructure, a swell in monetary transactions, and the presence of some of the world’s largest tech companies.
China is leading the way in consumer adoption of financial technology. Almost 70% of active online adult consumers said they regularly use Fintech services, more than 4 out of 5 respondents in China said they have used at least one Fintech service for mobile money transfer and payments (1). China is on the frontline of the fintech revolution, reaching new horizons in finance and boosting the biggest market for digital payments, artificial intelligence, peer to peer lending, big data, blockchain, crowdfunding and robo-advisors.
The Chinese market is occupied by two key players – WeChat Pay and Alipay. They belong to giant corporations (Tencent and Alibaba) with numerous interconnected platforms, that allow users to buy train or plane tickets, order dinner to be delivered, rent a bicycle during rush-hour, book a hotel, call a taxi or do shopping. All these services use the same user identity, so the transaction can be finalised with a password or biometric verification. In addition to these platforms’ built-in wallets, users can add their bank cards and pay individuals or businesses from any connected account.
Since the introduction of credit and debit cards, paper money started to lose its practicality and therefore its primacy, pushing the world towards a cashless economy, where e-wallets in smartphones are becoming the dominant solution. China is at the forefront of this trend, as Fintech breakthrough solutions are accessible not only for innovation enthusiasts but have become an integral part of society’s daily life. Even senior citizens who run tiny grocery stores and small businesses expect customers to use phones for payment rather than cash.
The growth of digital transactions and money transfers through third-party payment systems are helping the nation to go cashless. Mobile payments such as QR code transactions are widely used for shopping, restaurants, travel, and medical services. According to IResearch the value of third-party transactions through mobile is forecast to rise from 120 trillion yuan ($17.4 billion) in 2017 to 354 trillion yuan in 2020.
With the growth of Fintech, China is still ardent on making a clear distinction between blockchain and cryptocurrencies, clearly favouring blockchain. Unlike many other countries, where it hasn’t got a clear place in the legal system yet, China declares that technology has a strategic meaning for the government. Thus, the Blockchain Services Network (BSN), a national blockchain infrastructure project aiming to become a unified operating system, was established. Notwithstanding the fact that this technology cannot be freely used in financial solutions (following the 2017 cryptocurrencies ban), Chinese blockchain-based companies are actively looking for other ways to benefit from this framework. For example, blockchain edit-proof record is being used by JD.com – one of the biggest retail shopping platforms. Here it helps with supply chain tracking and is mostly used with regards to food safety and branded goods authenticity. Moreover, in China we’re seeing a first blockchain web-court, dealing primarily with internet-related cases and holding all stages of the process online. Another expansion opportunity for this technology is cloud storage: the national giants like Baidu, Tencent and Alibaba are developing cloud infrastructure for third parties. Thus, the companies will enjoy the benefits like improved data safety, intellectual property rights protection and more.
Numerous companies are developing their solutions based on Big Data, which is being widely used by banks and other lending institutions to help with credit risk management. Currently, China is witnessing a rapid growth of peer-to-peer lending platforms, that smartly connect lenders with borrowers, maintaining risk management and safety. These changes might give hundreds of millions of individuals access to the credit market thereby unleashing new opportunities.
AI and neural networks similarly have multiple applications. Using big data processing they can analyse massive amounts of information, helping to develop better solutions according to the clients’ demands, as well as recognise suspicious activity. AI-based tools are already being widely distributed on a stock market. Machines analyse technical indicators and make a large volume of decisions with a great degree of accuracy, that the human brain physically could never reach. Such smart solutions found fruitful soil in asset and wealth management industry. In the past, the Chinese population had high household savings rates and preferred conservative tools like bank deposits. Nowadays the situation has changed, creating a growing demand for more sophisticated solutions on both retail and institutional markets. Within several widespread frameworks, retail investors can choose from a wide range of instruments like funds of different types, deposits and insurance. As it is all connected to the same account, stock market investment literally is at your fingertips. In theory, you could buy shares in funds within 10 taps. However, these tools are unlikely to replace asset managers and investment advisors in the foreseeable future, because, despite their impressive technical analysis capabilities, they cannot clearly estimate the human factor, as well as macroeconomic and political context influence.
Another type of fintech that could play a key role in the near future are the so-called neo-banks or challenger banks. These mobile-only banks offer an account and a debit or credit card as their own products. All other products are offered through partnerships with other fintechs or regular companies. One example is N26, one of the largest neo-banks which allows transfers via TransferWise, savings management with the Fintech Nutmeg, and loans or investments in credits with the Lending Club platform – all through one app. The positive experience of neo-banks suggests that it is now possible, through APIs, to connect different suppliers of financial products and services and thus expand the range of products available to users, without the need to produce these products and services from within the organization itself. This is known as the paradigm of open banking, a model that some traditional banks are beginning to adopt as a possible solution to the coming disruption. While banks have certain advantages that fintech lacks – more capital, better knowledge of regulations, recognized brands and customer loyalty – fintech can bring new capabilities to banks, including agility, innovation, cost reduction, better user experience and greater ability to use data. The financial disruption tsunami is already here and banks need to be quick and determined if they want to avoid obsolescence.
Some Chinese companies are experimenting with a gamification of Virtual Reality as tools to provide financial services to millennials in ways they may actually enjoy, and that is an important area to focus on. A recent study shows that 80% of millennials would rather go to the dentist than hear what their bank has to say (2). Banks are trying to collaborate with fintech companies to drive transformation and long-term growth to attract more clients from the younger generation.
China is already ahead of the rest of the world when it comes to prioritizing financial technologies and putting conscious effort into their development. Fintech is going to continue soaring globally, even if the segments within it grow at different rates. Therefore, the finance industry and the technological infrastructure underpinning it will be significantly different in the near future.