What Is Behind China's Success In Fintech?

China may not be the strongest innovator overall, but the country gets Fintech right


China’s relationship with innovation has always been complicated and inconsistent. The reason behind this is that - unlike Taiwan, Japan, and South Korea - China has been following a path of copying tech solutions, rather than providing their own disruptive innovation. Despite such an approach, one innovation sector is booming: Fintech.

The Chinese population is currently at 1.3 billion people, making it the biggest market in the world - the perfect environment for internet finance. According to McKinsey & Co, by the end of 2015, China’s internet finance sector was valued at $1.8 trillion. The biggest player in the sector, Alibaba Group, is the dominant force, but there are also a number of fintech unicorns that are rapidly growing in valuation and are capturing market share.

There are several factors that are contributing to China’s fertile environment for internet finance. Firstly, Chinese e-commerce is in a good state, with 30% of China's total population using e-payment systems. Also, the rapid expansion in smartphone usage ensures a fairly easy deployment of fintech in the country. Additionally, the People's Bank of China openly expressed its support for internet finance back in 2013, and since then, the regulatory system has been highly supportive of finance technologies.

The largest fintech affiliate in China is Alibaba's Ant Financial Services Group, which is worth $60 billion. It is followed by Lufax peer-to-peer lender, with a valuation of $18.5 billion, indicating a growing popularity of online lending platforms that provide credit to SMEs and consumers. There is also Jiedaibao which is backed by JD Capital, and Zhong An Online P&C Insurance - both valued at more than $7 billion.

Western markets struggle to equal China’s growth, due to the regulatory problems and political uncertainties. However, Chinese fintech is yet to be hit by proper regulatory guidance, which surprisingly wasn't released until just recently. Zhou Xiaochuan, governor of the People's Bank of China has announced the bank's intentions to maintain 'great vigilance' on shadow banking activities, which include banking actions performed through methods that don't fall under existing financial regulations.

The reason behind the new regulatory regime is the increasing number of fraud cases in the digital space. For example, in February, P2P marketplace lending platform Ezubo defrauded investors out of $7.6 billion, meaning that authorities have no other choice but to close track companies for suspicious activities.

Economic advancement, financial industry liberalization, e-commerce and booming mobile technology put China on the fintech forefront, but for how long? Porter Erisman, Alibaba's former VP, said that in China, people will do anything to get around the middleman. Such a mentality is different to that of the western world where 'the middleman' is hardly avoidable, with companies usually taking immediate marketing steps and fees. On the other hand, fintech in China lacks western business legacy preferences. China has its own straightforward strategy orientated on faster service delivery and growth. However, Chinese first generation investors and savers may lack the experience of western ones, and once the fintech boom slows down, those VCs may face challenges in maintaining success.  


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