China: Turbocharging the FinTech phenomenon

Online payments systems such as Alibaba Group's Alipay and Tencent's WePay came onto the market at the same time as the world was undergoing an explosion in Internet connectivity and smartphone ownership. With 695 million mobile Internet users, the Chinese have quickly grown accustomed to using the devices across all aspects of their lives. "They didn't mind giving up some privacy. It's all part of what they have been doing already," Mullin says.

FinTech providers have also been pushing against an open door thanks to the dominance of the nation's big state-owned banks, which have traditionally seen their mission as one of servicing the needs of other state-owned companies. That has left a large portion of the country underbanked, especially individual consumers and small and medium-sized companies, Mullin says. He estimates that only about a fifth of all loans are to consumers.

SME currency challenge

Take Mofei Chen, the Shenzhen-based founder of Money Bazaar, a peer-to-peer foreign currency exchange platform. Chen studied at Cass Business School in London and worked briefly as a proprietary trader, where he experienced first-hand the favourable terms on which professional speculators could access currency markets. During his time in the UK, both as a student and trying his hand running an Amazon business importing goods from China, he also learned the hard way how expensive those same currency markets are for small businesses, entrepreneurs and ordinary citizens.

"You have to be a really big international account for the banks to give you a good rate. When someone exchanges money for real reasons they are charged very high rates," he says, "but speculative traders pay only one or two basis points – 100 basis points make up one percentage point – between the bid and ask." His sense of the unfairness in the current system is one of the primary reasons he set up Money Bazaar.

The P2P system mimics a trading platform by matching bids between buyers and sellers of foreign currency. A Chinese student who wants to pay university fees overseas can match their need for the foreign currency with a buyer – say, a UK-based Amazon trader who wants to pay for Chinese goods in yuan – without having to pay the spread demanded by banks or traditional forex platforms. Money Bazaar takes a flat 0.15% fee. Most users "don't want to make any profit, they just want to change money at the lowest cost," he says.

Most Chinese FinTech firms are funded by domestic state-owned banks and private investors, and existing government restrictions on foreign investment continues to hamper overseas investors seeking exposure to the FinTech arena.

Excluded investors

Limits on foreign ownership of China's traditional banks and mobile phone companies has also restricted access to FinTech alternatives too, with overseas investors excluded from the fundraising for Tencent's WeBank, for example.

Other firms pointed to a lack of sufficient investment in training of new software developers specializing in big data analytics and augmented and virtual reality, suggesting this could act as a brake on future growth.

The lack of financial expertise inside the tech industry is a barrier to expansion, says Zhang Jianliang, CEO of Rongzhijia, a peer-to-peer lending start-up based in Shanghai, which uses big data to match individual borrowers with licensed lenders, providing other services such as risk control and post-loan supervision.

"Instead of absorbing talent from the traditional finance industry, we have preferred to recruit talent from within FinTech over the past 10 years," he says. 

Insurance innovation

It's not only the banking and currency sector taking advantage of China's FinTech innovation.

Visitors to Beijing airport can see first-hand Baidu Inc.'s prowess at artificial intelligence as they're scanned by the tech giant's new facial recognition system there. It's unlikely, though, that the company's robots fielding questions from passengers will know the answer to the biggest bugbear of Chinese aviation: How to fix the world's worst record of delayed flights.

Another technology company, though, can at least help compensate for hours waiting around the departure hall. Zhong An, China's first all-online insurer, offers flight-delay insurance, calculated by using real-time weather reports, historical performance and other data. Ping An and PICC, two traditional insurers, are using telematics data analysis to improve how they price car insurance.

Consultancy Oliver Wyman predicts annual premiums from what it calls "ecosystem-oriented innovation" - such as flight-delay insurance - will reach 202 billion renminbi (US$31 billion) by 2020; policies based on wearable devices or telemetrics will generate 197 billion renminbi.

Threat or opportunity?

As recently as last year, traditional insurance companies had viewed FinTech as more of a threat than an opportunity, according to PwC's Global Fintech Survey, with 74% seeing it as a disruptive challenge to their businesses. This year's report found a majority - 52% - now put disruption at the heart of their business strategy, and that 45% have teamed up with InsurTech innovators, up from 28% in 2016.

Surging rates of growth in China's insurance industry have attracted the attention of big technology companies as well as FinTech start-ups and investors. That has been facilitated by government and regulators keen to see more of the population and businesses get protection.

"China's regulators encourage innovation when there is a public policy benefit," says Janos Barberis, founder of Hong Kong-based FinTech accelerator SuperCharger and one of Institutional Investor's top-35 global FinTech leaders. 

But regulators have recently tightened their oversight to curtail growing risks to the financial system: the China Insurance Regulatory Commission banned sales of short-term, high-yield life-insurance policies that it says are really high-risk investment products, and promised sanctions against those that flout rules.

The most to gain

Of the traditional financial services industries, insurance has perhaps the most to gain from the next wave of FinTech disruption. That's because it's likely to be driven by several mutually reinforcing technologies that include artificial intelligence and machine learning, the Internet of Things and big data - all of which are areas in which Chinese technology companies contend for global leadership.  

China is in the top three globally in terms of venture capital investment into AI and machine learning, big data and wearables, according to McKinsey & Company. Since 2014, Baidu, Alibaba and Tencent - collectively known as BAT - have also been pushing the boundaries of computing efficiency. Alibaba can process payments at three times the rate of the leading US payments system. 

The emerging technologies also all have the potential to radically impact insurers' costs, human resources, sales and product lines.

Assessing risk through data

Travel and shopping, leisure activities, driving habits, employment and other information gleaned from consumers' data, for example, can help InsurTech companies make better assessments of risks attached to a policyholder - or that same person's risk appetite for investment. Technology that can customize, market, distribute and automate the entire transaction process - and that can do so at scale - should lift sales and cut costs.  

"Being able to develop relationships with technology ecosystems is a must in order to gain access to consumer data and develop insurance products that meet their needs," says Cliff Sheng, Partner and Head of Financial Services, Greater China at Oliver Wyman.

"Early access, smooth business cooperation, and top-level relationships can help to establish dominance. One example is Zhong An working with [online retailer] Taobao early on to gain access to its e-commerce ecosystem, and then introducing shipping return insurance."

Sights set overseas

The partnership approach also offers opportunities for China's InsurTech players to expand overseas and for foreigners to participate in the Chinese market: Alibaba and France's AXA agreed to a global distribution deal at the end of July; Tencent has taken a 20% stake in the Hong Kong unit of British insurer Aviva.

In China, Baidu has tied up with China Life and Taiping, while another example of the ecosystem model is Zhong An. Since Ping An, Tencent and Alibaba established the company in 2013, it has sold more than 7.2 billion policies to more than 492 million customers. Shoppers on Alibaba buying shipping return insurance account for about half of Zhong An's business.

"Core insurance business functions — from customer service to distribution and underwriting — will rely heavily on a complex network of digital partners, reaching far beyond the walls of a single organization," according to consultancy firm Accenture.

Cashless is king

China's Fintech dominance is underpinned by the powerful role of digital payments in the contemporary marketplace.

From high street merchants to some of the most modest street-side food stalls selling quick bites, everyone accepts mobile payments. No other nation has so quickly adapted and embraced mobile payments trend.

The value of mobile payments jumped 33.8% to 39.24 trillion yuan - or just over US$6 trillion - in the second quarter from a year earlier, on the back of a 40.5% surge in volumes to 8.6 billion transactions, central bank data shows.

It's a powerful indication of just how far FinTech applications have penetrated the nation's payments system.

"It is easy to see how powerful and pervasive WeChat has become as a mobile payment platform -- every mantou [steamed bun] seller on the street has a battered smartphone taped to their cart with a QR code," says Ross O'Brien, technology practice leader at consultancy firm Intercedent Asia.

A recent survey by Tencent University, a research arm affiliated to the Shenzhen-based company, found 40% of Chinese regularly carry around less than 100 renminbi (US$15) in cash, with a single note lasting for up to a month. Eighty-six percent said they would be unconcerned about having no cash at all because of the prevalence of mobile payments.

In fact, China's national figures create a false impression as they average penetration across what remains a vast and extremely varied nation. In rural areas, which account for 30% of all mobile Internet users, mobile payment penetration is just 17%, the Tencent survey found. A McKinsey & Company study last year found 35% of consumers in the Shanghai city cluster had purchased clothing online in the preceding six months, compared with just 4% in the Chengdu city cluster.

"There's great opportunities to expand among young people or in rural areas," adds Rongzhijia's Jianliang. "More youngsters have adopted the borrow-to-buy lifestyle, while alleviating poverty and developing rural areas is the government's long-term strategy."

Overseas growth strategy

Having conquered the domestic market, China's mobile payments giants are seeking growth from markets overseas. To repeat their domestic success, however, they face a number of hurdles.

"The practical limitation is the fact that China's financial and technology ecosystem is largely, and mostly by its own design, in a hermetically-sealed parallel universe," says O'Brien. "Without global adoption, inter-operability or financial connectivity, its impact outside China's borders will be negligible," he says, pointing to the fact that while Tencent controls about half of China's mobile data traffic, less than 10% of its more than 900 million active users are overseas.

For now, China's FinTech players are seeking to ride on the tidal wave of Chinese people traveling overseas for work, leisure and education. Chinese tourists are expected to make 127 million trips overseas this year, according to Travel China Guide, with almost 30% making their choice of destination on the opportunities to shop. In December last year, BNP Paribas sealed a deal with Alibaba to process payments by Alipay users in France – with a view to expanding the service in other European countries.

The sheer weight of consumer demand is likely to push merchants into accepting Chinese payments services, says Steve Worthington, a professor at Swinburne University of Technology in Melbourne.

China's FinTech companies are also targeting other developing nations – especially in Asia – where the same driving force of large underbanked populations offers the chance to scale up their already proven business model, he believes.

Digital payments backbone

This widespread use of digital payments is the backbone of China's FinTech sector, providing a treasure trove of insightful buyer data, which can be repurposed for a wide variety of commercial purposes, such as marketing, product development and advertizing.

In short, control of the data from the digital payments space offers the potential to spread into alternative FinTech arenas, for example lending, where user data can be utilized to create credit ratings.

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