While the UK and the US have jostled to be recognized as leading global FinTech centers, China has leapfrogged ahead to become the undisputed global FinTech hub. The speed, sophistication and scale of development of China’s FinTech ecosystem have been at a level unmatched in more established markets. As banks and financial services institutions in the West look at ways to incrementally innovate, China’s technology leaders are revolutionizing many aspects of financial services. This is according to a collaborative report produced by DBS and EY, The Rise of FinTech in China.
The report looks at China’s dynamic and rapidly evolving FinTech ecosystem, and examines the drivers behind its explosive growth. It details the unique characteristics and development profiles of China’s FinTech giants, provides an understanding of the opportunities to scale, and assesses the implications in Asia and internationally.
China’s lead is facilitated by the sheer size of the market opportunities present in the financial services ecosystem. At US$10.9 trillion in 2015, China’s GDP already almost equates to the aggregate of the next 10-largest emerging markets. Despite recent market movements, its economic growth continues to outpace almost all other countries. Years of sustained economic growth is swelling the ranks of the middle class, with individuals in this category set to rise from about 150 million to one billion — or 70% of China’s projected population by 2030. This gives rise to a vast consumer base with new-found spending power and unmet financial needs.
Underserved by China’s incumbent banking system, consumers and small- to medium-sized enterprises (SMEs) are increasingly turning to alternative providers for access to payments, credit, investments, insurance and even other non-financial service offerings.
Neal Cross, DBS Chief Innovation Officer, says, “The speed at which China’s FinTech landscape has developed is truly remarkable. It’s gotten this far because China’s landscape has operated in a sandbox-like environment conducive for FinTech to thrive — a strong domestic market, coupled with a constant push for innovation and experimentation driven by leading giants, unhindered by international influence. Much of this can be attributed to the favorable government policies and regulations.”
“While the country hasn’t received the attention and acclaim of its counterparts in the FinTech arena, its champions are blowing away competition all over the world. It’s only recently that we are starting to see China’s leading FinTech companies take center stage at the global level. This will be an ongoing trend in the coming years and we can expect China’s FinTech ecosystem to have a wide-ranging impact on global FinTech development.”
James Lloyd, EY Asia-Pacific FinTech Leader, says, “Chinese FinTech development is primarily characterized by the sheer scale of unmet needs and the opportunities they present. In addition, new providers are typically not constrained by the legacy infrastructure or regulations present in more developed markets. China’s unique mix of rapid urbanization, massive (and underserved) market, e-commerce growth, explosion in online and mobile phone penetration, and customer adoption willingness have created a fertile ground for innovation in commerce, banking and financial services more broadly.
“These developments are also worth considering relative to other markets. For consumers and SMEs at least, it is in developing markets where FinTech will likely have the greatest impact. Markets in which the scale of unmet needs and leapfrogging technology combine to create “10x solutions” — that is, solutions that are an order-of-magnitude better than what they replace. This step change in quality, efficiency and user experience is necessary in order to achieve mass adoption — as what we have seen in China,” adds Lloyd.
Market properties fueling exponential growth
A government-sponsored push into digital penetration, coupled with Chinese consumers’ propensity toward digital adoption, serves as a key driver behind the country’s FinTech boom. There is a disproportionately large presence of tech-savvy millennials or “digital natives” who are open to digital adoption, with less concern over security and providing personal information, as compared with their Western counterparts.
For instance, 40% of Chinese consumers use new payments methods compared with 4% in Singapore, while 35% use FinTech to access insurance products compared with 1%–2% in many Southeast Asian markets. There are also significantly higher rates of FinTech participation in wealth management and lending.
Chinese consumers are also unique in their high uptake of FinTech products. A large proportion of the population is underbanked; these segments are often unable to access banking and financial services that many in developed markets would take for granted, such as credit cards or simple investment products. Chinese consumers are leapfrogging from cash to digital wallets and from digital wallets to other non-traditional services, often bypassing incumbent providers.
In addition, Chinese FinTechs have a distinct efficiency and business flexibility coupled with a strong willingness and ability to adapt quickly — attributes other global and regional players can learn from. FinTech offerings such as Alipay developed as a response to a gap in the market for direct and trustworthy e-payment channels. From there, Ant Financial (the Alibaba financial affiliate which operates Alipay) has expanded into investment products, lending, credit scoring, insurance and so on. Chinese FinTech products are also often highly intuitive and convenient, and platforms and apps soon become indispensable — aiding in the digital adoption process.
Future of Chinese FinTech and the global impact
China will likely continue to lead global FinTech development in the coming years. Domestically, the push and pull factors are clearly in place to catalyze the establishment of a leading digital finance sector increasingly expanding beyond the cities into the countryside.
On the push side, capital investment is soaring and the market bolstered by substantial government support for innovation. On the pull side, demand is being driven by underserved SMEs and tech-savvy, often unbanked, consumers keen to access financial services on their mobile phones.
Overseas, Chinese FinTech firms will play an increasingly important role in global collaborations driving technological innovation — via partnerships, investments and acquisitions. This puts Southeast Asia-based FinTechs and start-ups in a favorable position to collaborate.
EY’s Lloyd says, “We anticipate a mutually beneficial relationship wherein regional players can gain access to funding and expanded customer bases by partnering with Chinese FinTechs, with a view to further developing their coverage and offerings. A key challenge for Chinese FinTechs as they seek to internationalize, however, will be in attempting to replicate their domestic ecosystems overseas; this is where local FinTechs (and, indeed, established financial services providers) can cooperate — or compete.”
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