SINGAPORE (Dec 12): Every now and then, you see a media story somewhere about China’s ascendancy as a global fintech, or financial technology, player. The truth is that China has dominated the world’s fintech scene for nearly three years now and indeed has been its main engine of growth during the period. Two years ago, China became the world’s largest online alternative finance market by transaction volume.

Chinese fintechs have grown nearly fivefold since 2013 and now dwarf counterparts in developed markets such as the US. Within China, disruptive fintechs now have a lead over incumbent state-owned banking giants. In the first nine months of this year, fintechs accounted for 53% of all payments in China by volume, with banks accounting for the rest. More than 40% of all Chinese use one alternative financial product or another from a fintech provider. “Chinese fintechs now have critical mass, yet they are still in the third year of what is likely to be a 10- to 15-year evolutionary cycle,” Joseph Ngai, Hong Kong-based managing partner at McKinsey & Co, tells The Edge Singapore.

Over the next 12 months, several Chinese players will be seeking to raise billions of dollars to list mainly on the tech-heavy Nasdaq or the New York Stock Exchange. Bourses such as the Hong Kong Stock Exchange are again trying to see whether they can tweak their listing rules to entice players such as Alibaba Group Holdings’ affiliate Ant Financial, Tencent Holdings’ WeBank and Ping An Insurance (Group)’s venture Lufax to list there. The Chinese fintech listing bonanza next year is likely to be the biggest since Facebook’s botched listing in 2012 and Alibaba’s record-breaking IPO in September 2014, which raised US$25 billion.

To be sure, with more than 730 million internet users, China is the world’s largest, and still by far the fastest-growing, digital economy. Americans, Germans and Japanese may spend more per capita on the internet, but a much larger percentage of Chinese are buying, selling and moving money online than people in any other economy partly because they are not tied to a legacy retail and financial infrastructure like their counterparts in developed markets.

China already has the world’s largest e-commerce ecosystem. It surpassed US$672 billion, or about 40% of the world’s total, in 2015 according to US consultancy eMarketer. Alibaba’s gross merchandise volume was more than US$502 billion ($712 billion) in the 12 months to June this year, more than double that of Amazon. com. Alibaba’s GMV grew 69% in the second quarter of 2016, to a staggering total of US$94.3 billion. Alibaba’s Alipay, which has 450 million active users in China and nearly 70% share of the third-party mobile payments market, is the world’s largest online payment gateway, with a total payment volume in 2015 that was more than three times that of Nasdaq-listed PayPal.

Ant Financial, WeChat and Lufax — the big three fintech players — each now has between 350 million and 750 million fintech customers. For nearly half of all Chinese adults, their fintech account is the main way they save, invest, borrow, buy insurance or investment products or make other financial transactions. “The average Chinese consumer is more comfortable using Alipay or WeChat Pay than the average American is using Apple Pay or Android Pay,” says Ngai.

Since its introduction in 2004, Alipay has grown as the payment affiliate of Alibaba, broadening out into other financial services such as money market funds, banking and insurance. Tencent — which operates dominant messaging apps We- Chat and QQ — has its own WeChat Pay and Tenpay and also controls WeBank, the first online-only bank in China. Unlike US social media platforms such as Facebook, which are more silo-based, WeChat offers a comprehensive one-stop shop for social and online interactions such as one-stop payment services including taxi booking, ordering food, peer-topeer money transfers, bill payments and even electronic red packets during the lunar New Year.

Tenpay has been a key beneficiary of Tencent’s vast and growing social ecosystem, with market shares of more than 20% in third-party online payments and 10% in mobile payments. With 750 million users, WeChat is the world’s largest consumer financial services company. Tencent also offers other financial services such as Welidai, which offers personal loans to online customers, with average loan sizes of RMB20,000 ($4,120) to RMB200,000 and annualised interest rates of 7% to 18%.

Driving force
The driving force behind China’s fintech boom is the large and growing unmet demand for credit, particularly from smaller enterprises. Meanwhile, there is plenty of funding from venture capitalists, high-net-worth individuals as well as medium-sized cashrich companies, and a fintech-friendly regulatory environment. Moreover, the lack of a well-developed legacy consumer finance and payments infrastructure helped Chinese fintechs make deeper inroads than their Western counterparts.

Ant Financial and WeChat have been innovative in rolling out products and services that cater for the mass market and concentrated on financial inclusion. Alibaba, Tencent and Ping An have been focused on developing a financial ecosystem to grow their interaction with Chinese savers, investors and borrowers. One successful player is Gome Electrical Appliances, China’s largest retailer of household goods, which has become the biggest consumer finance business in China by extending credit to people who are buying refrigerators, microwave ovens and washing machines.

Faster fintech adoption has been helped by early digitisation as well as the rapid growth in e-commerce in China and the rapid development of its social media ecosystem. Indeed, Chinese messenger apps such as Tencent’s WeChat are so far ahead of their time that global giants such as Facebook, Google and Apple are now busy copying them. Another reason is China’s regulatory environment, which has been very open and supportive of fintechs. The only area that regulators have begun to tighten recently is peer-to-peer lending.

The key to the fintech boom is the scale of “unmet financial needs” in China, James Lloyd, fintech leader for EY in Asia, tells The Edge Singapore in a recent phone interview. “Unlike Singapore, where everyone has access to credit cards and a range of investment products, banks in China have been focused on corporates or stateowned enterprises at the expense of consumers and small and medium enterprises,” he notes. That has led to a huge underserved market that fintechs have been only too eager to fill. Fintech players have created highly innovative client ecosystems that are unique and cannot be compared to anything else in the world.

Lloyd describes China as fintech’s Galápagos, after a Pacific Ocean island off Ecuador with huge plant and animal diversity found nowhere else on earth. (Charles Darwin reportedly visited the island in 1835 and his observation of Galápagos’ species inspired his theory of evolution.) Unlike in Europe or the US, Chinese fintech companies grew in an isolated terrain that allowed a diversity of financial species to emerge that exists nowhere else. “In the West, the impact of fintechs has been limited, with fintechs just nibbling around the edges of some retail banking profit pools,” says Lloyd. “In China, fintechs have had a transformative impact.”

Ping An, which started as a property insurer and helped fund the world’s largest peer-to-peer lender Lufax, is a case in point. “Ping An is a forward- thinking incumbent insurer that sees huge opportunities in traditional insurance business but is also very aware of the impact that technologies will have on financial services,” says Lloyd. Ping An founder Peter Ma, in his private capacity, has funded an array of fintech ventures. Lloyd argues, however, that Ping An is the exception rather than the rule in China, where incumbent financial services players have not ventured into the fintech space the way their Singapore counterparts such as DBS Group Holdings have.

In terms of volume, fintechs now handle more payments in China than incumbent banks. In value terms, banks still handle more than 90% of the transactions because fintechs are handling smaller amounts that retail clients transfer to Alibaba, Starbucks, McDonald’s or the Didi Chuxing taxi service rather than the millions or billions that corporates move.

Another big fintech player is Zhong An, an online insurer that counts Alibaba and Ping An as shareholders, and has carved a niche in insurance for travel or flight delays as well as shipping returns. If you buy something on Alibaba’s Taobao site or T-Mall, you could buy insurance in case the goods were faulty and needed to be shipped back to Alibaba. Zhong An sells insurance for small-ticket items but in huge volumes.

If large Chinese banks are sitting on huge non-performing loans and their bad debts are rising, why is Beijing allowing fintechs to take market share and bleed them further? McKinsey’s Ngai argues that, so far, Chinese banks have not focused on the consumer market seriously, so they are not worried about losing a little bit of market share to fintechs. He says, “Incumbent banks are clearly at risk, but they are fighting back with their own online efforts, so it’s too early to write them off.”

EY’s Lloyd says, “If you are a small businessman or an individual and you start transactions on WeChat or Alipay, you still need a bank account to move money around and load on to your wallet.” The fintechs are increasingly becoming like banks but, for now, they are not replacing banks. The main concern is that some people are moving from bank deposits to WeChat or Alipay and never moving back. Lloyd adds, “The worry is that banks no longer know what customers are doing with their money, so they are losing relationships.”

The one player that is likely to be most affected is China UnionPay, the dominant payment systems operator and credit card issuer in China. Alipay and Tenpay are increasingly taking a share of the payment business from UnionPay and, over the next few years, will take an even bigger share from it, says Lloyd.

Overseas push
Will Chinese fintech players ever make an impact outside China? Over time, Lloyd says, Ant Financial, We- Bank and others are likely to have a signi ficant impact overseas. “It will be the greatest nearer mainland China. So, we will see them grow in Hong Kong, Southeast Asia and India,” he says. Ant andWeBank have publicly said they are seeking to grow in emerging markets where they can replicate some of their ecosystems. “Ant Financial has been investing in Thailand, Singapore, Vietnam and India,” Lloyd adds. For its part, Alipay has fairly audacious targets of “more than one million merchants outside China” and “more than two billion users worldwide”.

It is all about partnerships and enabling access to Chinese travellers who are going there. Alipay and Tenpay want Chinese who are travel ling to London, Paris or New York to be able to use their payment systems wherever they are. Since Octo ber, Chinese tourists have been able to use Alipay in New York and Cali fornia. In addition, WeChat payments as well as Tenpay are being rolled out in key US cities over the next few months. China’s overseas tourism has grown 1% a year over the past five years to more than 120 million trips last year and is forecast to grow to 500 million by 2020. Yet, as they move abroad, argues Lloyd, Chinese fintechs will realise that the challenges are going to be significant when they are on equal footing with established players such as Visa, Master card or Apple Pay.

Once Chinese fintech players start to be listed in the US next year, attention will turn to what they might do with their money and keep US investors interested. US players such as PayPal and Square have been mentioned as likely targets. “For Chinese fintechs expanding overseas, acquisitions are absolutely the way to go,” says McKinsey’s Ngai. Whether they can transform from pioneers in disruptive alternative finance to global leaders in their own right remains to be seen.

This article appeared in the Corporate of Issue 758 (Dec 12) of The Edge Singapore