Strategy Note /
China

China fintech growth drivers: ARPU, cost efficiency and financial inclusion

  • Chinese fintechs have shifted focus from user acquisition to user monetisation, operating efficiency and profit margins

  • The proportion of profitable fintechs has halved since 2020 on regulatory/ macro headwinds but should recover next year

  • Better financial inclusion and capture from incumbents will drive user growth; payments/ savings are key product hooks

China fintech growth drivers: ARPU, cost efficiency and financial inclusion
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Tellimer Research
14 October 2022
Published byTellimer Research

The Chinese fintech ecosystem is the largest and most diversified in the emerging markets world. In this series of reports, we map the progress of China’s fintechs and examine their strategies and plans. As one of the more mature markets, the country’s fintechs can also provide a blueprint for where other EMs may follow.

Our database of over 650 Chinese fintechs within 3,400 emerging market firms helps us position China in a broader EM context. The fintech sector is more mature in China than elsewhere, and the focus of many firms has shifted from growth to profitability; 40% of surveyed Chinese fintechs are already profitable, with almost half of the remainder expecting to break even soon.

Our Ultimate Guide to China fintech gives a more comprehensive overview of the sector and can be accessed here.

Chinese fintechs have posted strong profit growth but customer acquisition lags

Our detailed study of 215 fintechs across 14 emerging markets enables us to draw out key differences at the sector and market levels. Chinese fintechs are, in general, experiencing slower user growth than their EM peers, which makes sense due to the fintech sector’s more advanced state of maturity. Their strategic focus has seemingly already shifted from activity growth towards operational efficiency and user base monetisation, which is also evidenced by their superior growth in operating profit.

Meanwhile, average revenue per user (ARPU) and operating margins are increasing, whereas ARPU in other emerging markets is compressing. From this perspective, Chinese fintechs may be better aligned with the investment goals of more traditional investors than fintechs in other markets.

Fintech growth in China and emerging markets

40% of Chinese fintechs are profitable; this figure should double next year

Approximately 40% of the surveyed Chinese fintechs claim to be already profitable, which is a lower proportion than in most other emerging markets and below the 90% figure shown in our 2020 China fintech survey. This likely reflects the headwinds created by the more challenging regulatory environment in which these firms now operate, together with the strict zero Covid-19 approach taken by the authorities.

However, almost half of the fintechs in China expect to move into profit within the next year, much sooner than their emerging market peers. Despite making significant economic strides over the past few decades, China still represents one of the world’s biggest financial inclusion opportunities – over 130mn adults are still unbanked. Another factor in the expected bounce-back in profitability is that firms are optimising their business models for the new regulatory climate. There is also anticipation that the disruption caused by the Covid protocols will lessen.

Fintech profitability in China and emerging markets

Chinese fintechs are expected to gain market share in savings/fixed accounts and payments

We asked 900 consumers in 14 emerging markets about the types of providers meeting their current financial services needs, and those they expect to use in three years. This data allows us to estimate the current market share of the different industry players and likely future shifts.

Currently, fintechs have a 36% market share in China (versus 37% in 2020), against a global emerging markets average of 31%. Over the next three years, Chinese fintechs expect to gain 5% more market share, broadly in line with the average emerging markets increase of 6%. The improvement will come primarily from better financial inclusion and consumers’ lower reliance on incumbents.

Note that the survey responses are unweighted; we think traditional financial institutions would have a much higher share if our survey were value-weighted.

Financial services provider market shares in China

Over the next three years, Chinese fintechs are expected to post market share gains across all products, except current accounts and general insurance. The largest increases are projected for savings/fixed accounts, mobile payments, card payments and domestic money transfers. The mobile payments data is somewhat surprising, given fintechs’ existing leadership in this area; for example, in other EMs, consumers expect fintech payments market share to remain stable.

The data suggest that further digital wallet adoption in China could open up more opportunities for cross-selling and up-selling; this may be an approach payments fintechs in other EMs will also adopt. Other products where Chinese fintechs are already leading include current accounts, card payments and general insurance. Our survey indicates that Chinese fintechs may also, over the coming years, build leadership positions in savings/fixed accounts and domestic money transfers.

Fintechs' market share in China

Acknowledgments:

The authors thank Rabail Adwani and Gaurav Kumar for their assistance with this report.