China’s fintech sector has surpassed leading fintech hubs across the world. In his exclusive essay for finews.first, Kim Iskyan explains how this became possible.
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A recent joint report by professional services firm EY and Singaporean bank DBS concluded that China has surged ahead of Silicon Valley and London, becoming the «centre of global fintech innovation and adoption». China is now home to the world’s biggest fintech outliers, or «unicorns», which are start-up companies that are valued at over $1 billion.
Of the 27 fintech outliers in the world, the four largest outliers are Chinese. The eight Chinese unicorns in total are valued at just over $96 billion. Meanwhile, the 14 fintech outliers in the U.S. are collectively valued at $31 billion. What’s behind China’s rise to the top?
Global consultancy McKinsey recently noted a few reasons for China’s success in fintech. First, its central bank has in recent years provided a supportive regulatory framework for the development of digital finance.
«One in five Chinese adults does not have access to banking services»
Second, China’s e-commerce sector is also well developed. China accounts for 47 percent of global digital retail sales (it surpassed the U.S. in 2013). China’s market share is going to continue to rise – it has 721 million internet users, or about 52 percent of the population; by comparison, 89 percent of Americans use the internet.
Third, a large segment of China’s population continues to be underserved by traditional banking. Many customers have skipped traditional bricks-and-mortar banking in favour of more accessible online providers of finance.
One in five Chinese adults does not have access to banking services. China has only 8.1 commercial bank branches (and 55 ATMs) per 100,000 people. That’s substantially lower than the 28.2 branches (222 ATMs) in the U.S. and Canada, and the 28 branches (81 ATMs) in Europe.
«In particular, payment solutions are central to China’s fintech scene»
Small- and medium-sized enterprises (SMEs) meanwhile receive less than a quarter of the country’s bank loans, despite accounting for 60 percent of GDP and 80 percent of employment in urban areas. They are increasingly looking to online finance solutions for their payments, credit, investments and insurance needs.
In particular, payment solutions are central to China’s fintech scene. Around 40 percent of China’s banking services customers use fintech platforms to settle domestic and international payments. Nearly 58 percent of all internet users use mobile payment applications, so 380 million Chinese people shop online via their phones. Almost 200 million people use their phones as a wallet for in-store payments.
Leading Chinese tech giants Baidu, Alibaba and Tencent – known collectively as «BAT» – are behind some of the biggest fintech companies. EY/DBS sees «BAT aggressively creating all-encompassing platforms» to serve the needs of China’s under-banked consumers and SMEs.
«Deposits move onto online/mobile finance platforms and away from traditional banks»
And according to an industry report by Innotribe, an organization monitoring emerging trends in financial services, «BAT» are proving that «services like wealth management can be provided to anyone at an affordable price, relative to the value, which often means incredibly cheap». Consequently, the cost of capital for banks in China has increased, Innotribe notes, as deposits move onto online/mobile finance platforms and away from traditional banks.
China’s government is keen to shift the country towards a more services and consumer-oriented economy, with technological innovation and e-commerce growth among its highest priorities. The country’s fintech sector is already the biggest in the world, and it’s just getting started.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore.
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