4 key trends to fully understand China Fintech

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In the west, inspirations of Fintech tend to focus on the application and practicability of blockchain in the near future: for instance building trust between counter-parties in the sharing economy such as P2P lodging Airbnb, reducing transaction costs in financial underwriting, streamlining clearing and settlement of cash securities, improving efficiency in anti-money laundering, etc.

China Fintech, on the other hand, though its iridescence of rapid growth, massive scale and incredible possibility, has seized the fascinations of mass out there, is still in the phase of leveraging digital channels to solve basic financial need, as many dubbed the phenomenon more precisely in the term “internet finance”.

First China is the fertile soil of internet finance disruption due to the unique environment of fire and ice.

China stands out as having an explosive mix of very advanced internet economy and an under-developed banking system, which created an eager appetite for internet finance innovation.

The firing side is internet economy has taken up 7% of China’s GDP, (versus 4 to 5% for the US, Japan and Germany), with a 50% growth rate over past 5 years.It is the world’s largest e-Commerce market – with USD 2.5 trillion worth of annual transactions.

Nevertheless the icy territory has not been radically broken: nearly half of China’s households are “low-income” (defined as having an annual disposable income of less than 100,000 RMB). These customers are usually unable to meet the RMB 50,000 investment threshold for wealth management products offered by banks, and therefore are often under- banked. In addition. Only 10% of the population have borrowed from a financial institution, the lowest penetration rate in the APAC region.

Second, China internet finance is the new game for big players, either the foray from internet giants, banks under digitalisation mindset, or even traditional industry leaders hankering for new experiments

Internet Giants

It is no big secret that China Internet Giants are a very special species. They hold firm belief in “winner takes it all” mentality and fiercely mould finance as part of their business pie. Within recent years, major local internet giants all have rolled out diversified financial service portfolios, primarily leveraging their large user base and low acquisition cost through internet. Alibaba’s Ant Financial is the most influential one among all, armed with its strongest e-commerce foundation, online payment, data mining, risk management and product development.

-Banks under digital transformation

Traditional financial institutions in China are accelerating their digital transformation process to ride the wave of internet finance. And Ping An Group often represents the best practice in this category. Starting as a prominent insurance group, it has heavenly invested in internet finance in the past decade, implementing multiple core subsidiaries covering P2P lending, wealth management, mobile payment, healthcare, auto etc in order to maximise online&offline touchpoint with consumers and gather personal information to perform big data mining.

-Unconventional industry leader

A peculiar group of players that previously had little or nothing to do with Internet or finance, such as retail magnet Gome and Sunning, and real estate leader Wanda Group, have been emerging in the scene as well. They are shaping a new business format of “offline resources + online platform + financial services”, and acquiring multiple licenses from the regulators.

In addition, China auto giant Wanxiang has poured USD50 million in creating a venture capital fund, that will invest broadly in applications for blockchain technology in which Wanxiang will be the sole limited partner.

Although the number of players in this category is not very large yet, they somehow have imposed themselves as formidable threats to internet giants and banks.

Third, current hotbed of China internet finance is surrounding wealth management and financing.

Wealth management

For the last decade, wealth management distribution has been dominated by major Chinese banks, even though banks are quite expensive and rank as the highest cost element of fund manager’s business (Trail fees at 50% of management fees, Custodian fees 25 basis points per annum).

Henceforth, internet finance has played a key role in disrupting the status quo, especially in the sale of money market funds powered by those internet giants. Compared to wealth management products offered by traditional banks, their Internet counterparts have higher returns, almost no entry barrier, and T+0 liquidity. Alibaba’s Yu’e Bao and Tencent’s Licaitong are already becoming the textbook showcases in any research paper of China internet finance.

Financing

Supply chain financing, consumer financing and P2P lending have been the most important areas mostly explored by the major players in internet finance ecosystem.It is the frontier at least certain creativity has flourished.

Among them, P2P lending requires more rigorous risk control. Although there has been massive expansion in P2P lending, the default rate and failure rate have been soaring in tandem as well. With the development of credit bureau (8 new licenses were given to private sector  companies such as Alibaba and Tencent), P2P will tap deeper into the consumer lending segment (for example car loans, houses mortgages) and large SME lending. Current frontrunner of P2P is PingAn Group’s Lufax.

Fourth, bitcoin blockchain in China, too hard to say “I love you” by the regulators at this stage

Many perceive that Chinese authority’s stance toward internet finance has been supportive and tolerant so far; yet it still keeps a wary eye on the whole progress. Bitcoin, the embryo of blockchain, has proven to be very popular in China. In fact, more than a third of world’s bitcoin transactions go through China, and the country is the world’s leader when it comes to mining the currency and developing bitcoin technology such as bitcoin exchange and bitcoin related web applications.  The future fate of Bitcoin and other crypt-currencies in China remains uncertain, as pending for regulator’s further policy.

Regulations in general are expected to increase over time but more likely to be slow and behind the curve.

Cecilia Wu

A witty, nutty and frosty writer who hopes to jot down moments of inspiration from her daily life

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