FinTech in China: Growth Drivers & Trends
FinTech in China: Growth Drivers & Trends
Innovations in data science and the advent of the Internet have changed the global financial industry. One of the signature changes in the industry is the innovation of financial methods, which includes Financial Technology (FinTech). Compared to the traditional financial methods, FinTech is driven by big data, cloud computing, artificial intelligence (AI), block chain and mobile networking. The largest FinTech company in China is Ant Financial Company, an affiliate of Alibaba, which was valued at 14 billion dollars in 2019. They are a cornerstone in China’s new Social Credit System, also know as Sesame Credit and provide a wide range of financial services, including Alipay, lending and more.
Main Technologies behind FinTech in China
The main technologies currently used in FinTech are Big Data and AI. The following section is about how banks and large tech institutions are utilizing these core innovations.
Big Data is huge in China. The country is slowly turning into a cashless economic system due to the rapid growth in mobile payments through apps such as Alipay and WeChat pay. This new payment method is widely used in China, from restaurants to public transportation. This payment through apps generates a lot of data. Another example of the use of Big Data is the individual and company credit scores that are being generated from it. This makes it easier for people to apply for a loan and it allows people to pay more easily by installments based on their financial status. It considers the spending and cash inflow habits of a user when evaluating their credit score. For example, Ant Financial applies this technique to their network to offer loans.
AI is used in several ways in the financial industry in China. For example, the Ping An Bank has started using AI as part of their customer service, by applying a natural language processing technique. Online shopping platforms, such as Taobao and Jindong, use AI and data mining together to predict customers consumer habits. Based on this information they then introduce new products to them. E-commerce platforms use the data of their consumers with the assistance of AI to recommend products for the consumers to purchase based on previous purchases.
Why FinTech in China is growing in prosperity
From a macro perspective, there are three main reasons why Chinese FinTech is quickly growing in prosperity: the relatively easy access to data, there is a large userbase and product diversity, and it is encouraged by the government.
Easy access to data
FinTech benefits from online service businesses and easy access to data in China. Currently, China has the largest e-commerce industry in the world. The data generated by this provides a strong backbone for FinTech in China. Furthermore, compared to consumers born in the 70s and 80s, the younger generation are more willing to spend money compared to the generations before them. Instead of saving as much as possible, the current generation loans more money, and they can use their smartphone to do this. This has led to the boom of the online small loan market, one of the applications of FinTech. The process of borrowing money is simplified and fully digitized. One only needs to download an app and register with the loan provider. After these relatively easy steps, the user can borrow a small amount of money from RMB 3,000 to RMB 10,000 through a mobile application.
However, there is a catch. During the registration process, users agree to privacy regulations which often include allowing third party use of their data. An example of an online lending app is RenRenDai, which roughly translates to person-person loan. The following is part of their privacy regulations, to which users agree when signing up:
“The user agrees that we can verify, use and retain the information, either user submitted, collected by us or through a partner”; “We and our affiliates and partners can make targeted recommendations about our products, services or promotions to you via email, phone, and SMS”; “Users agree that the app has the right to collect and search relative information via ‘Cookie’ or other devices”.
With clauses like this it shows that FinTech companies have easy access to user data. A caveat is that currently there are no clear regulations by the government how companies can use the data.
Large user base and product diversity
China has a large number of users due to its large population. Furthermore, FinTech in China has a broad application of mobile technology compared to some other countries. FinTech is used in all six main financial sectors in China: paying, borrowing, retail, banking, insurance, wealth management, and trading. In contrast, American FinTech focuses on High Frequency Trading (HFT) and some vertical markets. Vertical market providers are focused on specific goods and services that meet the needs of a niche customer group. The payment market and healthcare market are both examples of vertical markets. One of the features of vertical markets is high barriers to entry for new companies. By operating in more sectors, FinTech companies in China have much more opportunities when it comes to creating products and reaching customers.
Encouragement by the government
The Chinese government encourages all kinds of financial innovation while the governments of many western countries place restrictive policies on the financial industries’ use of new technology. Especially after the use of derivatives, which partly led to the financial crisis of 2008, governments have been wary of financial innovation.
Although the Chinese central government increased regulations governing peer to peer lending P/(P2P) companies, the overall FinTech regulatory environment is still quite flexible. This explains why there have been many new FinTech companies in China in the last five years compared to other countries.
Privacy challenges in Chinese FinTech
In short, development of FinTech in China is able to take advantage of the large number of users and the support from the government. The trend of Chinese FinTech allows more people to enjoy a wider range of financial services and the central government is investing significantly in regulation technology (RegTech) for the FinTech industry. However, users’ data and the privacy rights lack strong protection, which has become a focus of the central government in the last few years. How FinTech companies respond to the increased regulation of storage and use of personal identifiable information will largely determine their future success and longevity in the Chinese market.
Maturity of FinTech in China?
PayPal Holding Inc is the first foreign company active in China’s digital payment market. Paypal’s successful market entry demonstrates that China’s digital payments market is opening up. PayPal entered the Chinese market in the early 2000s with eBay but left in 2006 due to the difficult regulatory environment. Shortly after Beijing introduced regulation for the payment processing industry and shut out foreign competition altogether.
However, on the 1st October 2019, the People’s Bank of China allowed PayPal to buy the shares of a Chinese payment company; and on the 20th December 2019, PayPal completed the acquisition of 70% equity in GoPay (国付宝). Currently, Ant Financial and Tencent occupy 90% of the mainland China digital market, therefore there is only little room for newcomers, especially for foreign companies. The more recent opening up of the financial markets and continued success of domestic firms signifies a certain degree of market maturity in China and shows that domestic digital firms are capable of competing with foreign firms.
Growth drivers of FinTech in China
There are two key drivers of long-term growth for FinTech in China; the promotion of inclusive finance systems and technological innovation.
Inclusive finance systems
Inclusive finance systems (known as PUHUI or普惠金融) means that the financial institutions provide financial services for all social classes with reasonable prices, especially for small companies, farmers, the disabled, and other low-income groups. The Chinese government stresses the importance of PUHUI finance for Chinese society. As it will enable the financial sector to develop sustainably and encourage more individuals to own businesses. This is one the of the reasons why the Chinese government opened up the financial market to foreign companies, reduced regulations in the financial industry, and provided subsidies for FinTech companies over the past two years. It is worth noting that FinTech is highly involved in the process of building PUHUI Finance in China. Thus, China provides many opportunities and possibilities in FinTech.
Technological innovation is the most essential factor for the growth of FinTech. China already has some online service platforms that have the patents and the skills to support FinTech development. For example, Tencent and Baidu both operate in the Fintech sector. There are two types of companies that operate in the Fintech sector in China. First of all, there are companies created through collaborations between existing online companies and banks. For example, the ZhongAn Insurance Company was created in collaborative partnership between the Ping An Bank, Tencent and the Ant Financial Company. The second type are FinTech companies operating solely, without large corporations behind them. These companies have their own departments of Big Data and AI. SAMOYED Financial Company is a FinTech company founded in 2015, providing financial services online which hwas awarded 2019 best FinTech company in China in 2019 by Investment Times.
Trends in FinTech in China
There are three main trends of FinTech in China:
- Both the government and FinTech companies are devoted to building a social credit system. Facial recognition technique will help to recognize individuals, like an identity card; and then big data will able to calculate an individuals’ credit score. Thus, facial recognition and big data techniques will bring more energy to FinTech in the future.
- In 2020, the size of China consumer credit market is predicted to reach 12 trillion, excluding real estate sector. In 2019, many P2P companies went bankrupt which led to enhanced government regulation of FinTech in order to allow a smooth transition of the finance industry. The big demand and the size of the Chinese credit market still provides opportunities for FinTech lending companies.
- FinTech can optimize management strategies and the price of financial services, which also improves the efficiency of management and services. At this stage, FinTech companies in China focus on the consumer market instead of the B2B market. Many institutions want to digitalize the natural language and the work process, leading to AI replacing human labor in the financial sector. Thus, the FinTech companies that provide digital services or are focused on the business market may continue to gain popularity.
Shenzhen is the place for FinTech in China
There are a few reasons why Shenzhen is a perfect place for FinTech companies. Firstly, Shenzhen has the advantage of being in close proximity to the technology and financial heart of China. Shenzhen is called the Silicon Valley of China, because many of its successful technology companies were ‘born and raised’ in Shenzhen. Famous companies, such as Tencent, Huawei and Baidu, all have their origin in Shenzhen. Furthermore, Shenzhen has its’ own stock exchange and is the third-largest insurance city in China. Another great reason why Shenzhen is an important place for FinTech in China, is because the local government provides special incentives for FinTech WFOE, such as subsidies and bonds.
Shenzhen policies to open up the financial market
- Able to set up a wholly foreign owned enterprise in credit investigation and rating service areas.
- Reduce the start-up time of foreign-invested enterprises to less than 5 working days for all WOFE
- Support for foreign investment to set up research and development institutions, and can receive the corresponding funds up to 10 million yuan; Imported supplies for research will be exempted of import duties, value-added tax (VAT), consumption tax, and there is a full refund of all value-added tax for purchases of domestic equipment;
- There are two main awards for financial companies. The Financial Innovation Award for the companies and the institutions has five places for the first prize, and the bonus for each is 1 million yuan. There are ten places for second prize, the bonus for each is 500 thousand yuan The total amount of the Financial Innovation Award is within 19.5 million yuan. Another prize is the FinTech Award for FinTech companies, the total amount of the prize is within 6 million;
Finally, Shenzhen has the Qianhai Shekou free trade zone (FTZ), which has many opportunities for FinTech WFOE in Shenzhen. The Shekou FTZ is different from other FTZ’s in China, because it has a strong focus on the Financial Industry. It is a demonstration window of China’s opening up of the financial industry and the cross-border RMB Business Innovation Pilot. Shekou FTZ can be regarded as the new connection between China’s financial sector and the international financial sector. Furthermore, it should be noted that Beijing is slowly implementing Shenzhen as a potential replacement of current place Hong Kong holds in China’s international financial system.
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1421 Consulting Group’s Shenzhen office supports foreign companies setting up and growing their business in China, we provide a wide range of services for foreign companies to achieve success in China. 1421 is also familiar with the regulations and the subsidies regarding WFOEs in Shenzhen. Please contact us at email@example.com for more information regarding FinTech and anything else China related.