Happy New Year. 新年快乐. Chinese New Year is on what the Western Gregorian calendar records as 28 January. So while in America and Europe we are done saying Happy New Year to each other, this is when Chinese people are saying Happy New Year to each other.
The biggest mistake is approaching Fintech in China with preconceived notions based on the past.
In China, Fintech is called Internet Finance. There is more to this than a name change. The way that the Internet and Finance is evolving in China is utterly different from how they evolved in America because the Chinese figured out that controlling the Internet was more important than controlling Finance.
Three things to know about China – it is big, it is fast growing and it is different (from the West). We focus on China because it is big and fast growing, but our analysis focusses on the last part – how Fintech in China is different.
In the West we grew used to the idea that American innovation is adopted with variations in different countries. So it became customary to refer to any local ventures as the XXX (American leader) of YYY (country in question). China is different. Not only are the local variants very big, they also do things fundamentally differently from American companies. This does not only have ramifications for the second largest economy in the world (which is growing faster than the largest economy, America). The China model may also come to define the 21st Century in the same way that the America model defined the 20th Century.
I wrote this before the stunning news about Ant Financial buying Moneygram came out. The cat has landed among the pigeons. The payments game has changed. Read to the end for our take on this.
Bits don’t stop at category borders
One of our mantras at Daily Fintech is that “bits don’t stop at borders”. This is what we learned in the search and social eras of the Internet and what we saw with our own eyes at Daily Fintech. We just wrote what we figured was interesting and people from 130 countries found us.
However, the Fintech coda is “bits don’t stop at borders, but money has to show its passport”. Financial Regulation is by country (and by State in America).
When we look at Fintech (or Internet Finance) in China, one thing jumps out. The Chinese Government was forward-looking and proactive. They wanted to control the future not the past. So they controlled Internet more than they controlled Finance. It was relatively easy for a Western bank to set up a Bank in China but very hard for a Western search engine or social network to set up a search engine or social network in China.
The other mantra is that “bits don’t stop at category borders”. This points to how the China model is fundamentally different from the America model.
In America, we grew used to each of these categories being separate with individual winners;
- Search (Google)
- Social (Facebook)
- Ecommerce (Amazon)
- Payment (Paypal)
- Lending (Banks)
- Wealth Management (Private Banks & Asset Managers)
- Cloud infrastructure (Amazon)
The last one is interesting. Jeff Bezos is an amazing entrepreneur who understands that bits don’t stop at category borders. He saw no reason why a bookseller should not go up against IT giants by creating Amazon Web Services (AWS).
BAT Baidu Alibaba TenCent
We focus first on the Internet part of Internet Finance, dominated by the BAT triumvirate – Baidu Alibaba TenCent – each of which has a fundamentally different strategy:
- Baidu, the search engine giant, is going down the VC route by investing in ventures in all the above categories.
- Alibaba leverages its e-commerce business to move first into the Payments sector, before expanding into Lending and Wealth Management. Given their heritage, they have focused on an area neglected by Banks, Small to Medium Enterprise (SME).
- Tencent is tapping into its huge WeChat user base to build a consumer-oriented financial network.
These are the barbarians at the gates. Next we look at the incumbent firms behind those gates.
Incumbent financial institutions – watch out for Ping An
China’s banks are usually portrayed in the West as big and inefficient, with high non-performing loans. There is nothing here to match the scale and agility of a Goldman Sachs or JP Morgan Chase. Yes, we see some moves such as China Construction Bank and Industrial and Commercial Bank of China moving into e-commerce platforms; but this feels like catchup at best.
However, one incumbent financial institution in China is making some big waves – Ping An Insurance Group. This publicly listed holding company has two subsidiaries in traditional insurance: Ping An Life Insurance, Ping An Property & Casualty Insurance (where the company started) and various other traditional financial companies, but it is their Fintech holdings that are more interesting:
- Lufax is the no 2 Market Place Lending platform in China. It was valued at $19 billion a year ago and is said to be headed for IPO.
- Pinganfang is a real estate e-commerce platform, helping home buyers to get mortgages. It is a collaboration with a major property developer in China called Shum Yip Group. They pitch it as “Real Estate + Internet + Financing”; this confirms the category busting “bits don’t stop at category borders”.
- Ping An Puhui offers micro finance to the 67 million startup companies and 270 million blue-collar workers in China, a market that has not been well served by China’s big banks. This is critical to Beijing’s ambitions in financial inclusion and the transformation of China from an export-driven economy to a more broad-based consumer economy.
- Zhong An is a full stack regulated InsurTech venture, created as joint venture between Ping An, Alibaba & TenCent. You can see a single round over $900m on Crunchbase; no step ladder funding here. Zhong An first got traction from return-delivery insurance for buyers on com(Alibaba online marketplace) and is a specialist in providing cover for various risks relating to the internet economy. Zhong An sells direct, not via traditional insurance agents and like Lufax is headed towards IPO.
Bricks & Clicks – with a difference
The Chinese consumer is the 21st century gold rush for retailers globally – offering both scale and growth. It is also of course brutally competitive but also the first market of this scale to come of age after e-commerce was the norm. The most fierce battles are in consumer electronics where two Chinese companies dominate the physical stores – Gome & Suning. Both are combining their offline resources such as customer leads with data mining to design new financial products. This is like the American Banker’s nightmare of Walmart but worse as the Chinese banks are much less established with consumers. Consumer engagement and affinity are increasing, and online-to-offline mobile payment via smartphones has become a new battlefield where companies are already starting to compete fiercely for market share.
China’s capital market is opening up. As they accumulate more wealth, Chinese consumers are hunting for higher investment return. That provides opportunities for Internet-based wealth-management businesses. Younger Chinese consumers who get their first exposure to banking via mobile payments will find an upsell to wealth management quite natural.
SMEs in China contribute about 80% GDP and 60% of employment. As in so many countries, the reluctance of banks to lend offers a huge opportunity for Fintech upstarts.
GAFA (Google Amazon Facebook Apple).
Uber gave up in China, but what about deeper pocketed GAFA?
Google seems to have retired from China.
Amazon is duking it out, with keen prices and pitching Amazon Prime hard in China. Jeff Bezos is not a man who is deterred by a price war. I suspect, Amazon may also score in another brutal price war and consolidation around cloud infrastructure. In China, financial institutions have mostly leapfrogged in-house data centers and gone direct to cloud-based services. Amazon faces stiff competition from Alibaba, Huawei and IBM.
Facebook is trying hard, but may have left it too late to get consumer attention away from WeChat.
Apple is a premium priced product in a price-conscious market but also seems to be in it for the long haul. On devices they will be beaten by cheaper products, so the real battle will be around digital services and there they face BAT.
Ant Financial buying Moneygram
Headline writers can have fun – ant eats dinosaur. Seriously the payments game has changed. Our thesis has been that e-commerce and payments are one market – that Uber is a verticalized payments system – and that the action is in cross border payments. To date we had a world of a) old fashioned payments rails b) banks c) scrappy upstarts. Each of those players will have to totally rethink their game. Banks will have rethink Trade Finance from the ground up, not tweaks to the current systems.
Jack Ma of Alibaba is one of those world-changing entrepreneurs, up there with Gates, Jobs, Zuckerberg, Bezos & Benioff. He stood outside Trump Tower and said he would help US small business sell to China. This is how he does that. Devil/God is in the details of course, but watch this space….
For the rest of the week’s coverage please go to:
Happy Year of the Rooster.
If you want to see these insights before your competitors, join over 16,000 of your global peers who subscribe by email and see these trends reported every day. Its free and all we need is your email.