Strategy Note /

China fintech success under threat; why investors' best days may be behind them

  • Chinese fintech unicorns account for 60% of the global pie by value; investors in these firms have reaped rich rewards

  • Heightened regulatory uncertainty will temper entrepreneurial spirits, hurt dealflow. Ant Group offers a salutary lesson

  • China fintech is more mature than in most other emerging markets; future growth could be less explosive than elsewhere

China fintech success under threat; why investors' best days may be behind them
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Tellimer Research
9 February 2021
Published byTellimer Research

China is undoubtedly one of fintech's success stories. Product penetration is c50% higher than in other emerging markets we have surveyed. And Chinese fintech unicorns account for more than half of the global sector's valuation. But clouds are building, in the shape of increased regulatory scrutiny. With better growth prospects elsewhere, early-stage fintech investors could shift their sights to other emerging markets.

China's fintech pioneers lead the world

China comfortably qualifies as a fintech powerhouse. Of the 63 fintech unicorns identified by the Hurun Research Institute in August 2020, 29% of them were in China. If we consider the valuation of these companies (based on their most recent funding rounds), Chinese fintechs account for 60% of the global pie, including four of the 10 most valuable firms (Ant, Lufax, WeBank and Suning Finance).

Global fintech unicorns mix by geography

This data suggests investors in the biggest Chinese fintechs have enjoyed outsized returns, given that funding and deal flow in the country has typically averaged just 7% of the global total, according to Pitchbook data.

Top 10 fintech unicorns

Regulatory uncertainty is likely to temper investor enthusiasm

However, the potential ramifications of new regulations, as outlined here, and the current environment of heightened uncertainty, will likely stem investor enthusiasm. Our adjusted valuation range for Ant Group is broadly in line with the last VC funding round, which valued the firm at US$150bn). Another high-profile fintech, Lufax, was able to successfully list its shares recently. However, its current market capitalisation of US$38bn is also in line with that firm’s last VC funding round.

Accordingly, such early-stage investors could take the view that the era of outsized returns from China fintech investment has ended and therefore shift their focus to other markets.

Chinese fintechs could experience slower growth than elsewhere

Our proprietary Chinese consumer survey indicates that fintechs have already established a good level of awareness and usage (37% unweighted market share, versus 24% as the global EM average); consequently, consumers believe their usage of fintech products will increase by only 4% points (versus a 12% rise projected in our global EM consumer survey). This suggests the growth outlook for Chinese fintech firms will be more modest than elsewhere in EM.

Financial services providers market share estimates