The beauty of the digit express is that I can go wherever I want (“beam me up Scotty”). Using airplanes I would have gone from India to China. Instead I went from India to Amsterdam to China.
“Bits don’t stop at borders, but money has to show it’s passport”.
That model is true in most places. Fin is highly regulated, while Tech is mostly unregulated. That is true in India, where Tech is mostly unregulated and therefore the Facebook of India is…Facebook and the Google of India is…Google. The sweet spot between e-commerce and payments is still up for grabs and that maybe why the Indian government decided to go after Uber specifically around payments and why the Amazon of India could be Amazon but could also be Flipkart or Snapdeal or Alibaba. Becoming a Bank in India is tough, same as it is in America or Europe.
This seems to be reversed in China. The Fin part is fairly normally regulated, but the Tech part is more controlled. China has it’s national champions in search and social and e-commerce. You could argue that the Chinese companies have simply done a better job at winning in China or that there are barriers to entry for foreign tech companies; I don’t want to get into that debate. Yet in Banking, China seems no more closed/regulated than any country. For example, Citibank has almost the same number of branches in India (44) as China (47).
Alibaba has already shown that it regards the line between e-commerce and finance to be a line that it can and will cross. Alibaba has huge ambitions in Finance.
The more recent news is Tencent moving into the same space. Tencent owns (among much more), the popular messaging app called WeChat. A few days ago, they announced the launch of WeBank.
Rumors fly that Facebook will monetize WhatsApp by getting into Finance, probably through Payments. So, WeChat moving into Finance first will be interesting to watch.
The Chinese government seems very aware that the massive old companies with their close ties to the massive old banks do not create the wealth in the same way that a thriving entrepreneurial economy does. The strength of Alibaba is the wake up call. Alibaba clearly shows that serving the needs of small scale entrepreneurs is a huge business. The large banks in China do not serve the financial needs of small business; a story echoed around the world. In order to address this, the Chinese Government approved licenses for five new Banks backed by private investors. In China, these investors include Tencent and Alibaba.
To put that into American context, it would be like Google and Facebook getting banking licenses.
The Chinese Government is doing this because small businesses account for about 60% of China’s GDP and 75% of new jobs.
The innovation being done by these new banks is familiar to anybody who has studied Lending Club and Ondeck – use Big Data to automate loan processing to reduce cost. There is nothing new here. What is different in China is the disrupters will be getting banking licenses in order to level the playing field between big and small business.
As China premier Li Keqiang said,
“We will lower costs for and deliver practical benefits to small clients, while forcing traditional financial institutions to accelerate reforms”.