China Face-Off America – Battle of Global Payments between Tech Titans

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Earlier this year Daily Fintech did a China week, and there were several interesting topics and key insights discussed. We analysed how the three Chinese Tech giants (Baidu, Alibaba and Tencent) have led the Fintech boom in China and what the favourable factors that helped were. However, over the past few weeks, we have had some developments with WeChat expanding into Europe, and almost as a reaction (perhaps not), Facebook ramping up group payments on messenger, Android pay collaborating with Paypal and more. We have Ant Financial’s bid for Moneygram and there is also a rumour that Whatsapp was ramping up to launch payments in India. That feels like a heated battle between Tech giants of the east and the west (really Chinese vs Americans, such a cliche) for Global Payments Glory. 

While we immerse ourselves in Fin and tech in the west, we often tend to forget that there is a whole new world out there in Asia that completely dwarfs what we have achieved in the west with regards to Fintech. FinTech financing in Asia-Pacific was almost US$10 billion in the first half of 2016, eclipsing the aggregate of North America’s (US$4.6b billion) and Europe’s (US$1.85 billion). WeChat sent 32 billion digital red envelopes over Chinese New Year in 2016 and 46 Billion in 2017. Paypal did 4.9 billion transactions in the whole of 2015 and 6.1 billion in 2016. This list could go on, but you get the point. The dragon really dwarfs the west!!

China Fintech

Stats aside, Chinese tech giants have had tremendous success in their local Fintech market. In comparison, Apple, Facebook, Google and Amazon (the Fantastic Four) have had mixed results in the west.

I am fascinated by what Alipay(from Alibaba) and Wechat (from Tencent) have managed to achieve in China. A good story about the growth of these firms is how WeChat created a highly localised product to compete with Alipay. WeChat had been lagging Alipay upto the launch of “Lucky Money” during the Chinese New Year of 2014. It combined the Chinese tradition of “Red Pocket” with conventional peer-to-peer transaction, and achieved huge success by adding a fun flavor of luck into its payment function. During the New Year holiday of 2014, approximately 10 million users engaged and bundled their bank cards, and 40 million red pockets were dispatched. In 2016 these numbers on WeChat further increased to 420 million, and reached a massive 8 billion that same year. Jack Ma called this strategy by WeChat the “Pearl Harbour Attack” on Alipay.

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Now, lets take a look at what the Fantastic Four have achieved in Payments.

Facebook, apart from hiring David Marcus (from Paypal) haven’t really had much joy with its payments business. Its payments revenue (for 2016) of $753 Million is tiny when compared to ads revenue of about $28 Billion. And the payments revenues were down 11% from 2015.

Google’s Wallet project didn’t go anywhere at all, however it had a much better uptake with its Android Pay. By end of 2017, Android pay is projected to have about 27 Million users. Android Pay have just agreed to integrate Paypal to it, which would mean customers can use Paypal through Android Pay.

Amazon’s “Pay by Amazon” has been a good story from the time it was launched. It has now 33 Million users which is almost a 50% annual growth from 23 Million users last year. Amazon managed to get its Wallet License in India last week (watch this space).

Apple pay has been the leader of the pack in the payments world. With about 84 Million users projected by end of 2017, Apple have so far done well in this space, however still lags behind Paypal.

All these numbers from the Fantastic Four are tiny when compared to the numbers achieved by WeChat and AliPay.

Alibaba have been quite active in expanding through acquisitions. Investment into PayTM in India, provides them a hold into PayTM’s 200 Million user base in India. However the most recent news on Moneygram is an ambitious step into the remittance market, and if the deal did happen (post all the drama), it would provide Alibaba a 5% share of the 600 Billion pound remittance market.

'The Americans aren't objecting in principal to a merger down the line as long as we build a Chinese wall to keep a couple of things secret from the Chinese.'

WeChat have more recently started global expansion into South Africa, set up its European offices in Italy and planning a London launch soon. While they are behind Alipay with their global expansion, their customer acquisition strategy has worked better (than Alipay’s) so far.

When I talk to innovators in India, I often tell them to create a simple solution to an existing problem without overengineering it. That’s generally true for most developing nations. There are ample problems to solve and a half decent solution can see massive growth if executed well.  In the case of China a few hundred million users went from Cash to Mobile Payments and it was a classic leapfrog moment. Most likely Alipay and WeChat wouldn’t see this again in their Global expansion adventures.

I believe they would have better success through acquisitions, investments and partnerships with key payment players in their target markets, rather than trying to lift and shift their business model in China elsewhere. I also think that the winner of the East vs West payments war would be decided by key battlegrounds in India, LATAM and Africa. If Alipay and WeChat could expand into these regions quickly, then the Fantastic Four would struggle to gain ground. However, you don’t write off the likes of Apple, Amazon, Google and Facebook that easily. Watch this space!!

Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

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Interview with Soul Htite of Dianrong to understand the intersection  of Supply Chain Finance and Blockchain

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Both subjects, Supply Chain Finance and Blockchain, get a lot of attention on Daily Fintech. So when we saw a solution combining them (called Chained Finance) we were intrigued. When we saw that the venture behind this initiative (Dianrong) is in China and that the Founder & CEO (Soul Htite) was a co-founder of Lending Club, we reached out to him to understand more.

I asked the questions that occurred to me. What questions should we have asked Soul? (tell us in comments).

 Soul please tell us about your professional journey and what Dianrong does?

As a technologist and entrepreneur, I’m constantly looking out for new opportunities to harness the potential of fintech to solve every day financial challenges.  This is what led me to co-found, firstly, Lending Club in the US and, more recently, Dianrong in China.

Dianrong has quickly grown into a leader in online marketplace lending in China, originating more than $300 million in monthly assets for 3.7 million retail lenders. We offer individuals and small and medium sized enterprises a comprehensive, one-stop financial platform supported by industry-leading technology, compliance and transparency.

We developed a sophisticated and flexible infrastructure that enables us to design and customize lending and borrowing products and services, based on industry-specific data and insights, all supported by online risk-management and operation tools.  Dianrong’s specific offerings include loan originations, investment products and marketplace lending solutions.

 As I understand it, Chained Finance is designed to provide financing to the vendors who are further down the supply chain. Supply Chain Finance works well today for the vendors who supply to the corporates who are investment grade. As I understand it, Chained Finance will get financing to the vendors who sell to that vendor. Can you give us an illustration about how this will work?

The complexity and scale of supply chain finance has posed major challenges in ensuring adequate funding and efficient operations.  Chained Finance creates a unique ecosystem that will provide supply chains with easier access to funding at competitive rates. In return, supply chain operators will gain greater visibility of their suppliers and the many layers of finance embedded in the process.

 Is it only one link in the chain (i.e. vendor to vendor of investment grade corporate borrower) or multiple links in the chain?

Chained Finance’s ecosystem provides a better link between supply chain operators and their vast network of suppliers.  Additionally, new loan assets generated by Chained Finance will be available to Dianrong’s 3.7 million investors, expanding the company’s portfolio of diversified investment options.

How is the credit priced? Is it based on the buyer’s credit rating (as in traditional Supply Chain Finance)? Or is it based on the seller’s credit rating as in Factoring, Receivables Financing and other SME lending?

The Chained Finance pricing model is proprietary.

 What stage is Chained Finance? Have transactions already been completed. Can you share what sort of APR % the SME companies are getting and how this compares with other SME lending?

 Chained Finance successfully completed a successful six-month pilot with FnConn, which originated US$6.5 million (RMB45 million) in high-quality loans for supply chain operators, many of whom were unable to secure needed financing in the past.

The pilot was only recently completed, so it is premature to disclose representative APR data.

Please tell us why you use blockchain technology as opposed to some other distributed database technology and a bit about the technology?

 Blockchain technology allows both lenders and borrowers to gain unprecedented control and transparency of their records.

Lenders gain greater transparency of the financial history of borrowers, enabling them to make better lending decisions. This capability enables financial institutions to lower the risk of potential bad debts and problematic financial sources.

For borrowers, the technology provides a comprehensive track record of their financial history, which increases their creditability when applying for a loan. Borrowers also have greater control over who has access to their records, because borrower data can only be obtained with their approval.  That efficiently avoids borrowers’ personal information being abused by third parties, e.g. lead generation companies.

The primary benefit of blockchain is the transparency, and thus security, of the data transacted within the system.  At Dianrong, compliance and transparency are part of our DNA. This is why we are integrating blockchain technology across our entire platform.

Is this a permissioned or permissionless system?

Permissioned.

What blockchain technology do you use (e.g. Ethereum, Hyperledger). Please tell us why you chose this technology

Chained Finance was designed to be technologically (and geographically) agnostic.  That said, Dianrong is an active participant in the Hyperledger project.

 Soul, please give us your vision of where Chained Finance could go in the future.

By harnessing the power of blockchain, the Chained Finance platform is geographically agnostic. So, while Dianrong’s initial focus is on China, where 85% of SMEs have no effective access to funding, the potential for the platform goes far beyond China’s borders.

Blockchain for supply chain finance extends to any large company that has a complex supply chain and, as such, is enormous.  The electronics, garment and auto industries are a natural fit.

Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems.

Thank you, Soul

What questions should we have asked Soul? (please tell us in comments).

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

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Wrap of Week #5: Mainland China Fintech thematic week

The year of the Rooster is upon us and both the size of the market in China and the unique accelerated pace of fintech innovation beckons us to turn our head towards the East and pay attention to what is happening there.

You can start with our introduction and follow the order of our posts, on WealthTech, Smallbiz, Insurtech and MPL. Or you can pick what interest you the most.

Introducing China Fintech Week

Digital Wealth – Shùzì cáifù – in China

No score, no problem. The lenders opening up access to SME credit in China

The Zhong An IPO in China could be the Netscape moment for InsurTech

With Lufax, Marketplace Lending is becoming a 4 horse global race

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With Lufax, Marketplace Lending is becoming a 4 horse global race

 

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On Monday we profiled Ping An Insurance, China’s largest insurer by market value. 

Yesterday we looked at Zhong An, which has Ping An as one its major (12%) shareholders.

Today we look at Lufax, which is 49% owned by Ping An. Lufax is a P2P Lending Marketplace, matching borrowers with investors for a 4% fee, but they have recently branched out into other asset classes such as equities.

Lufax (whose official name is Shanghai Lujiazui International Financial Asset Exchange Co.) was founded in 2011 and raised 3 billion yuan ($483 million) from international investors in 2015.

China Marketplace Lending Consolidation

The Lufax CEO, an American born McKinsey alum called Greg Gibb, was vocal about the coming consolidation in Marketplace Lending in China in a 2015 article in Bloomberg.

“The vast majority of China’s more than 1,500 peer-to-peer lenders are going to fail, with as few as one in 20 surviving.”

In our Oct 2016 report on Marketplace Lending in China, Lufax ranked no 2 on both transaction volume and number of borrowers. They are clearly well positioned for the consolidation.

Greg Gibb of Lufax was eloquent about the small players disappearing;

“Their business models are turning into pyramid schemes. Some promise unrealistic returns to investors and lend without enough data to determine borrowers’ creditworthiness”.

We looked at these issues in more depth in this post.

The Cambrian explosion of Marketplace Lending helped the market expand. As per Bloomberg, from original research by Yingcan Group, Marketplace Lending grew almost 13-fold since 2012 to $41 billion in 2015 and grew more than six times faster than loans extended through banks.

Global 4 Horse Race

P2P Lending originated in the UK but took off in the USA. For a long time we talked about a two horse race in the USA, with Lending Club and Prosper, although there are other big players in the USA with slightly different models such as SOFI and Avant. With their recent $100m raise and already active in both UK and USA, Funding Circle joins this small global group. We profiled them in this Oct 2015 post.

Our thesis is that the globalization of Marketplace Lending will play out inexorably but in fits and starts, deeply impacted by regulation and politics. There are three  drivers:

  • Best practices and technology adoption. As Lufax’s Gibb put it “how do you create transparency and the right asset-scoring process?” The US and UK are mature consumer lending marketplaces, but the growth is in places like China, India, Africa and South America. The company that manages to bring global best practices and technology to these big growth markets will be a very big winner.
  • Marketplaces expanding globally. So far the US firms have stayed in the US market. It is a big enough market and the problems in 2016 constrained any more ambitious plays. Funding Circle is different. They operate in a small domestic market, so like other ambitious UK firms, they went global early. How the Chinese firms play in this game will be key as they have both a big domestic market and big ambitions. We expect 2017 to be big on the M&A front.
  • Lenders looking for global diversification. Most lenders have never had this opportunity before. Only big global banks could compare the risk/reward arbitrage across countries. Now any Hedge Fund can play and so even can Mrs. Watanabe and her global peer Joe Q Public. Entrepreneurs who make this easy by enabling global diversification will win. They may be acquired by the Marketplace Lending platforms or stay independent as a layer in the value ecosystem.

Lufax expanding into Equities

This article in South China Morning Post describes how Lufax is now also creating an international equity trading platform.

This goes against the grain of the Silicon Valley innovation model which is clearly focus, focus, focus. This is an example of how China is different. People used to the Silicon Valley innovation model assume that Lufax is doing rash  diversification by moving from Fixed Income into Equities. The mantra is that Consumer Lending is massive and complex, so “stick to your knitting”. That makes sense if it is a small founding team using step ladder VC funding. It is different when a firm is created by one or more big established firms, so that financial, human and other resources are not a constraint. It is also different in a fast growing market where consumer trust is critical and with many spaces where no incumbent yet has that trust. One of our mantras is that “bits don’t stop at category borders”, that digitization breaks down previously distinct categories if the user need is there. There is a real user need, for multi-asset strategies (such as some Fixed Income and some Equities).

Lufax is positioning to serve Chinese investors’ asset allocation around the globe. In 2007, China ruled that each mainlander is allowed to buy up to US$50,000 worth of foreign currencies a year. This gives Chinese people a legal channel through which to diversify their assets.

Lufax plans to offer an online wealth platform in 2017 to serve those needs. According to Lufax CEO, Greg Gibb:

“Demand for overseas investment among Chinese people and businesses is constantly increasing. Lufax hopes to leverage new technologies and models to provide clients internationalised services.”

Lufax has announced partnerships with two firms – eToro for  social trading and Denmark-based Saxo Bank.

Big bet on the Chinese consumer

The Chinese consumer demand for loans is high as the country transitions from being export led to becoming a consumer economy. This is leading to high growth with few big incumbents as competitors. Lending Club and Prosper have to compete with big, smart, agile banks in America. Imagine being able to bet on the American consumer 100 years ago, but with the Internet as a delivery tool.

Of course such opportunity does not come without risks such as lack of consumer finance models and a possibly overheated economy. Entrepreneurs look at these risks to guide their action plan.

Lufax has a clear bet on the Chinese consumer, both enabling them to borrow and to invest their excess capital.

However, the Chinese consumer is only one possibility in a global economy.

Along with Lending Club, Prosper and Funding Circle, Lufax is in a 4 horse race for the global consumer lending opportunity.

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The Zhong An IPO in China could be the Netscape moment for InsurTech

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InsurTech sprang from obscurity. We first started covering InsurTech in March 2015. Here, for the record, is our first post (basically saying that not much was visible yet, but “watch this space”).

Since then we have covered InsurTech every Thursday for what will soon be two years and witnessed a Cambrian explosion of innovation and funding. Just click on the InsurTech Category to see them all or subscribe to get our posts every day by email. 

By contrast, the disruptive Fintech ventures that challenge the incumbent banks originated in the wake of the Global Financial Crisis around 2008. So by December 2014, around 6 years later, we had our first major Fintech IPO for Lending Club which we called the Netscape moment for Fintech. Yes, Lending Club stumbled badly in 2016 and gave the whole Fintech sector a black eye, but it seems to be in recovery now.

The question is, what will be the Netscape moment for InsurTech?

This post argues that it will be the Zhong An IPO in China. We don’t have a date for this yet, only teasing PR, but read this to get a briefing before the circus starts.

Zhong An 101

Zhong An is a pure play full stack regulated InsurTech venture. Think of it like a challenger Insurance – digital first.

Zhong An was created by three established Chinese companies:

  • Alibaba (the A in BAT)
  • TenCent (the T in BAT)
  • Ping An (Insurance company)

They raised over $900m in a single round, so won’t lack for cash to execute their plans.

Zhong An first got traction from return-delivery insurance for buyers on Taobao.com (Alibaba online marketplace) but has now moved into most Insurance categories such as Auto and Health.

Zhong An sells direct, not via traditional insurance agents.

Flirting with IPO locations

A year ago, Zhong An was doing PR about a US IPO.

Then we read reports about an IPO in Hong Kong.

Now the PR indicates a listing in mainland China. This makes sense for three reasons:

  • IPO is a branding event and Zhong An wants to reach mainland Chinese consumers.
  • Smart money in US can invest in China and does not need a US listing.
  • They won’t want to compete with a US IPO for Ant Financial (owned by Alibaba, which is Zhong An’s largest shareholder with a 16% stake.)

There is no date set and the revenue numbers being shown are as follows (using 6.88 as the exchange rate of USD/CNY):

2015: $331m

2016: $596m to $827m

Some commentators see the move to a mainland China listing as backing away from selling to US consumers. I doubt that was a big factor in their plans as the market opportunity in China is so massive – with few legacy incumbents and big growth in middle class needing insurance. One assumes that the war of words with the new Trump administration and how that would affect US consumers and investors was a consideration, but focus on a huge home market was probably a bigger consideration. A move into Africa is probably next on their rollout as it has similar characteristics to China – few legacy incumbents, big growth in middle class – and Chinese firms are very active in Africa.

Return Shipping Insurance

Return shipping insurance for e-commerce is the top product for Zhong An – not surprising given their Alibaba and Tencent backers. Amazon covers shipping insurance directly in USA, but this is unbundled in China, leaving room for Zhong An to enter as an independent insurer. That is a big deal because clothing (which has a lot of returns) is the largest part of the $900 billion Chinese e-commerce market. Given the low product cost, the cost of shipping in China is about 20% of average transaction value.

Zhong An is now expanding into more highly regulated markets for higher priced items such as auto insurance.

Blockchain incubator & consortium

Zhong An is moving forward with both Blockchain and AI via an incubator and a Technology subsidiary as per this report.

Zhong An is also a member of the The Lujiazui Blockchain Finance Development Alliance that was founded in Lujiazui, Shanghai’s financial hub, in October 2016. It sounds like a mix between R3CEV and B3i. Reports indicate that they are using Ethereum. Without legacy processes, Zhong An may leapfrog the West in Blockchain adoption to reduce Settlement Latency.

Western Insurance going digital in Hong Kong

We have seen companies like Yahoo and Uber leave China and keep a minority position. That was a very profitable deal for Yahoo.

Western Insurance maybe doing the same deal. Reports are that UK based insurance group Aviva has signed a deal to sell stakes in its 160-year-old Hong Kong operation to Tencent, the Chinese internet company, and Hillhouse, a private equity firm.

The Hong Kong market is mature in comparison to mainland China, with big incumbents such as Prudential and AIA and an established network of agents. The idea is to attack this mature market as a digital disrupter, bypassing the agent network.

This indicates a market share war that is hotting up and an InsurTech space that is growing up fast.

No doubt Aviva will translate lessons learned in Hong Kongto  its core UK market.

The Zhong An progress to IPO will be worth watching for anybody in the InsurTech business.

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Digital Wealth – Shùzì cáifù – in China

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Heading into 2015, China had US$21 trillion dollars pent up in bank deposits. With such a large, investment hungry population with so much ready-to-invest capital, anyone with a WealthTech business idea can only start salivating.

Be careful and contain your excitement around this huge single market opportunity. There is no doubt that strong favorable winds are blowing in China because of:

  • Very high internet penetration
  • Reduced anxiety over data privacy
  • The internet of finance birthplace
  • Government support for innovation
  • A nationwide credit scoring system underway
  • Openness to Collaboration of restrained banks with fintechs
  • Capital looking for investments

On the other hand, look at who is already positioned in China to offer wealth management products and examine how they are delivering these services.

The Internet of Finance refers to financial services delivered through digital platforms (digital from birth).

Digital money-market type of funds

The money-market funds typically sold by the Charles Schwab’s or the HSBC’s in the West; are offered e-commerce giants in China. We are all familiar with the Yu’e Bao fund of Ant Financial (Alibaba when it was launched in June 2013), which by the way was met by the media with great skepticism since there were already more than 200 such funds in the Chinese market. Was it for small-size savers or was it for typical clients of wealth mgt services at banks?

To cut a long story short, the remarkable path of asset accumulation (summer of 2016 AUM 772 billion yuan (=$116 billion)) is even more stunning as the AUM growth occurred even though rates of return declined.

The fund started with initially offering 7.5% interest rates compared to 0.39% maximum interest rate that China’s national banks could give out. The Yu’E Bao rates are now only able to pay out an annual interest rate of 2.5%.

The fund is run by Tainhing Asset management and integration with Alipay, facilitated the growth of the retail user base. By mid 2016, there were close to 300,000 users reported.

Li Cai Tong’s fund by Tencent and Baifa fund offered by Baidu; are also major players in this space which continues to incentive users by offering better rates and better user experience.

Stock Trading apps

Broader Fintech type of activity in China is seen in the PFM space both from the e-commerce giants and the P2P lending platforms. Stock trading apps have been launched by several such platforms and are the first signs of integrated platforms that address investment and funding needs of individuals and their businesses.

These apps offer access to trade-invest in A-shares and mutual funds or structured products that are more diversified options. They are all heavily used by brokers (over 90% of usage) who form their end, tap into the growing customer base of these tech businesses. Some of the players are the ever present trio BAT, JD finance, Credit Ease, Wacai, and Tongbanjie. The latter two are standalone Chinese mobile apps. JD Finance is the financial subsidiary of e-commerce giant JD. They are in the process of following restructuring the organization and following pretty much the spinoff steps of Alibaba-Ant Financial. Credit Ease, run by publicly traded Yirendai (NYSE: YRD) was setup as both a lender (small business and consumer) and a wealth mgt business focused more on the middle and upper end of the wealth spectrum.

In addition to these local players, there are already noteworthy moves from foreigners positioning themselves through local partnerships in the stock, fund trading space. These strategic moves makes sense given the much anticipated increase of the limit for Chinese individuals for overseas investments and at the same, establishing a sensible presence in the local market.

Currently, Chinese investors can only trade overseas equities through the “QDII = Qualified Domestic Institutional Investor” framework which offers quotas to select institutions, which in turn channel to each Chinese citizen an annual exchange “allowance” of US$50,000.

Robinhood, the US-based free stock trading app, formed a partnership with Baidu in summer 2016 to tap into the mass market of Chinese citizens by offering them US stock trading access. They also launched their Chinese app, named Luobin Xia (罗宾侠), for US citizens in mainland China.

Another different partnership of two Asian Fintechs and an established global financial service provider originating from Europe, is that of Saxo Bank, WEEX, and Lean Work. The Chinese online trading platform WEEX of WallStreetCN, partnered last summer with Saxo Bank, the Danish-origin multi-asset trading business, and Fintech startup LeanWork to tap into the mass market of Chinese speaking users. Lean Work is a Shanghai based startup, focused offering cloud based risk management, back office, trading and brokerage solutions. The 15million monthly users of the WallStreetCN financial media business (a 3yr old financial content startup) will gain access to over 30,000 instruments via this integration.

Brokerage, social trading, robo-advisors

The lines between stock trading apps (linked to third-party brokers) brokerage businesses with bells and whistles, and robo-advsiors; are blurred. The grouping I have chosen is more for the sake of simplicity.

Tiger Brokers (Bejing based) is a 2yr old Fintech broker targeting the overseas investing market segment (Hong Kong and US). One of the largest mainland China brokers, Citic Securities (Shengzen based) participated in the Dec 2016 Series B funding round ($29mil) which will be used mainly to boost Tiger broker’s big data capabilities in financial advice. Xiaomi participated in the Series A round.

Jimubox (Bejing based) the Xiaomi backed marketplace Fintech, launched a trading app mainly to serve the overseas channel, the Jimustock app.

Snowball Finance (Bejing based) is a Fintech with a social information and investment platform that plans to add brokerage capabilities (Sequoia Capital participated in their $40mil series C in 2014).

ChaoTrade, is a newly launched social trading Fintech platform.

At the same time that Robinhood launched Luobin Xia, 8 Securities launched their free-trading app in Hong Kong, with an AI feature, Chloe, that can educate and help users in their investment discovery process.

In the summer of 2016 which is clearly a turning point for the Digital wealth space in China, CreditEase launched a robo-advisor in mainland China, ToumiRA. The offering allows overseas investing via ETFs instead of the expensive and non-transparent way of managed accounts. ToumiRA was launched in partnership with the US based B2B robo-advsior DriveWealth.

Pintec is the other significant player in mainland China. Pintec is a Fintech group that spun off Jimubox. XUANJI is their robo-advsiory offering launched also in summer 2016. They have an onshore and offshore version; and they have a B2C offering in addition to a white liable offering.

Digital apps using machine learning for investment advisory are:

Micai Fintech launched in Spring 2015

Clipper Advisor, launched out of California and with a motto “the Wealthfront of China”.

Our Chinese Fintech startup coverage in this post on wealth management is focused on the B2C segment. Hong Kong is booming right now with B2B offerings that mainly targeting the South East Asian markets (Indonesia, Malaysia ect). Another post will cover those trends.

Wealthtech China

China is leading in the integrated digital wealth management movement.

Credit Ease, is one Fintech launched with that mission; the PINTEC group is similar in its broad scope and aim to become a full range financial services provider. Alibaba, Baidu, Tencent, JD, the e-commerce tech giants, are spinning off subsidiaries and taking the lion’s share from Fintech funding (skewing global reality also, with the huge lump-size funding rounds) and dominating the financial services space. They are leading the way of digital cross-selling.

In a report recently published by EY and DBS on “The rise of Fintech in China” it is noted that:

“ The willingness of Chinese consumers to adopt FinTech services is striking. Forty percent of consumers in China are using new payment methods compared to 4% in Singapore. Thirty-five percent are using FinTech to access insurance products compared to1-2% in many Southeast Asian markets. There are also significantly higher rates of FinTech participation in wealth management and lending.”

Happy new year China.

Thank you April Rudin for tweeting the jewelry designs for the New year in case your gold allocation has some room.

chinese-jewelry

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Introducing China Fintech Week

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Happy New Year. 新年快. 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.

新年快

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:

  • 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.

Western banks are along for this ride as Ping An accepted investments from Morgan Stanley and Goldman Sachs in 1994 and from HSBC in 2002.

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.

Wealth management

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.

SME finance

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:

Tuesday WealthTech

Wednesday Small Business Finance

Thursday InsurTech

Friday Consumer Finance

Happy Year of the Rooster.

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