By Coco Kee
As I travel back and forth frequently between the U.S. and China, I have a first-hand view what is happening on the other side of the pond. In particular, in the past few years I have witnessed the FinTech boom in China.
FinTech in China is more than a buzz word; people breath it. FinTech provides more and more convenience and benefits to people because historically banks have served them poorly, from payment to lending to borrowing, etc. Let me share with you a couple examples.
Most of us have experienced the situation when, after getting into a taxi or sitting down in a restaurant, we notice that we forgot to bring our wallet.
In China, however, Chinese consumers are getting used to cashless even cardless transactions thanks to the advancement of digital payment technologies dominated by Tencent and Alibaba, which offer WeChat Pay and AliPay, respectively. The adoption of the digital payment is reaching a scale that cash and credit cards are at risk of becoming obsolete in China.
WeChat Pay or AliPay is an app that links a consumer’s bank account to mobile payment platform supported by Tencent or Alibaba. Whenever a consumer needs to make a payment he simply opens the app to let the vendor scan the bar code and QR code that are unique to his account. Same for receiving payment.
In the case of taxi ride, when he gets to the destination, the passenger simply opens the WeChat Pay on his cell phone and lets the taxi driver scan the bar code and QR code to charge the taxi fare. The transaction takes seconds. His cell phone receives a confirmation and his WeChat Pay account debits his bank account and records the transaction.
Mobile payment technologies are not only changing Chinese consumers’ behavior, but also changing how business is done in China. It is hard to imagine how a business, big or small, can survive nowadays in China if it only relies on the traditional payment of cash or credit payment. Most significant, small and micro businesses take advantage of the technology to minimize transaction and operational costs while maximizing efficiency.
The owner of the store in the photo has been selling dried dumpling wrap, as thin as tissue paper, for decades in a town in Southern China. The sign on the counter tells people that this micro-sized store offers WeChat Pay and AliPay services. Though the owner himself is far from tech-savvy, his daughter in her 20’s has helped him set up digital payment and manages the marketing using WeChat on her cell phone.
The digital payment, together with the marketing tools offered by WeChat, helps the owner to sell his products all over China, even overseas. Without those tools, he would not know how to reach out to customers beyond his own town, nor does he have the knowledge or resources to offer the product through eCommerce channels, let alone create a website and set up credit card payment.
Another phenomenon that is comparable with mobile payment technologies is P2P lending. It is transforming how Chinese lend and borrow.
It is estimated that by the end of 2016, there were more than 2,000 P2P lending platforms in China. P2P platforms offer 15% annual return on average. Among them Lufax is one of the leading players with 23 million registered users and accumulated trading volume of $15.9 billion as of June 2016. In January 2016 Lufax raised US$1.2 billion with a US$18.5 billion valuation.
In addition to the unicorns like Lufax, smaller platforms specialize in lending to underserved Chinese such as students or blue collar migrants who do not have bank accounts. The loans to them can be as small as a couple hundred U.S. dollars.
The biggest challenge facing P2P lending in China is the battle with fraudulence and scams that have wiped out many investors’ accounts. Despite the high risk, Chinese continue to be drawn to P2P lending to access loans and for a much higher return than banks offer. Chinese are learning to lower their risk through diversification, using multiple P2P lending platforms.
FinTech is one of the fastest-growing and most promising business sectors in China. Many factors are driving this growth. One is Chinese banks, especially state-owned ones, are dinosaurs, fat and slow. Second, a surprisingly low number of credit card holders and the corresponding use of them. Third, China has estimated 700 million smart phone users, which has been a key driver for innovation and development in mobile technologies. Just as mobile technologies allowed China to leapfrog a landline telephone network, FinTech is transforming China’s financial and banking system.