In 2008, Alibaba founder Jack Ma famously declared, “if the banks don’t change, we will change the banks.” His words sparked an entrepreneurial renaissance in China’s fintech industry. ‘Fintech’ (金融科技), a portmanteau of financial technology, refers to the application of new technologies to “improve and automate the delivery of financial services.” Since Ma’s pronouncement, mainland China has produced eight fintech ‘unicorns,’ collectively worth 214.6 billion USD. Although each of these companies works to reimagine a different aspect of banking, on the whole, Chinese fintech has two objectives: to maximize the economic potential of China’s banked, while integrating the country’s remaining unbanked. This piece profiles some of the fintech unicorns engaged in this mission — specifically within two sectors, lending and payments — and explores the global implications of their innovation.
Empowering China’s Banked
The first half of China’s fintech strategy is to maximize the economic potential of China’s banked.
The largest of all Chinese fintech unicorns, Jack Ma’s Ant Financial (“Ant”) is breathing new life into an outdated lending sector. 39.4% of Ant’s revenue comes from its lending platform, CreditTech, which “addresses the unmet credit demands of unserved consumers and small businesses in China.” Specifically, it leverages Ant’s AI algorithms to more accurately identify default risks and “compress lending costs.” This technological insight allows CreditTech to service individuals and ventures that would otherwise appear too risky to traditional banks.
Lufax is a peer-to-peer (P2P) lending marketplace that matches borrowers with investors. P2P implies that users enter into an agreement with one another, not the company. Lufax simply collects a 4% commission on the total loan for arranging the transaction. Though perhaps riskier for investors, Lufax nevertheless solves a key limitation in the lending sector: capital supply. After all, centralized lenders like Ant can only underwrite so many loans. However, with Lufax, anyone can be a bank. Its decentralized system renders every Chinese saver’s excess deposits available for investment. This fintech breakthrough marks a tremendous democratization of lending services, which until now, had been monopolized by China’s commercial banks, and by extension, the CCP.
China’s innovation in the payments sector is as impressive. Whereas in the U.S., credit cards are the preferred non-cash payment method, in China, ‘e-Wallets’ reign supreme. e-Wallets, as their name suggests, are digital wallets that interact seamlessly with the payments environment. Like regular wallets, they consolidate various payment methods: cash, credit, debit, and more.
China’s e-Wallet space can best be characterized as a duopoly, split between Ant and Tencent. Ant’s product, Alipay, leads slightly with 54.5% market share. The payments giant has 785 million monthly active users and handles upwards of 175 million transactions a day. Tencent’s equivalent, WeChat Pay, comes in at a close second with 39.5% market share. That said, WeChat Pay enjoys one significant advantage over Alipay: compatibility. Unlike Alipay, which is a standalone product, Chinese consumers depend on WeChat for a range of services, from shopping, to food delivery, to ride-hailing. Once in the app, users are unlikely to inconvenience themselves with an external payment method like Alipay.
Even if Alipay and WeChat Pay are industry competitors, from a Western perspective, they represent a united force. Combined, the two e-Wallets processed 20.5 trillion USD in 2016. For reference, PayPal only processed 354 billion USD in 2016. China’s dominance in the e-Wallet space will soon have global implications, with e-Wallets predicted to become the leading payment method globally by 2023.
Integrating China’s Unbanked
The second half of China’s fintech strategy is to integrate its remaining 225 million unbanked.
In terms of lending, unicorn WeBank specializes in “inclusive finance.” Founded in 2014 by Ant’s rival, Tencent, WeBank provides loans to low-income individuals with little-to-no borrowing records. In fact, 8.2 million of its users had no prior credit. By the numbers, WeBank’s average loan is 8,000 RMB (1,215 USD), the average borrowing period is 52 days, and its self-reported delinquency rate is 0.64%. (U.S.-based Lending Tree’s delinquency rate is 3.3%.) WeBank prides itself on its industry-low borrowing fees: over 70% of borrowers pay less than 100 RMB (15 USD) in interest. As for payments, e-Wallets’ ability to send and receive money via mobile phone makes them perfect for rural unbanked people, who could be miles from the nearest payments terminal.
China is already the largest economy in the world. Integrating the country’s 225 million unbanked — 16% of the total population — would boost its GDP by trillions. This prospect holds not only financial merit, but political significance as well. The World Bank estimates that there are an additional 1.5 billion unbanked beyond China’s borders. Chinese fintech is uniquely positioned to service this demographic. After all, the challenge of delivering financial services to an unbanked farmer in Gansu isn’t all that different from reaching one in Niger or Yemen. As one Tech in Asia reporter notes, “the entire financial system could be due for an overhaul, and China is right at the forefront.”
Where exactly China’s fintech revolution will lead is not yet wholly clear. What is clear, in the words of Dr. Julian Gruin, is that “the image of China’s financial system as deeply repressed and dominated by a few large state-owned commercial banks is rapidly becoming outdated.” In its place, a new, decentralized fintech ecosystem is emerging — one better poised to unlock the economic potential of China’s banked, unbanked, and foreigners alike.
Source: CSIS, by Marko Marsans