The suspension of the Ant Group IPO has put the global spotlight on Chinese fintech. But aside from Ant there are hundreds of other fintech firms making up what is one of the world's most advanced fintech ecosystems. In this report, the latest in our series on the risks and opportunities in the world's key fintech markets, we analyse China. We draw on the results of three proprietary surveys we conducted of 20 Chinese fintechs, seven incumbent firms and 100 consumers, allied to desk research into a total of 1,018 local fintech firms.
China fintech landscape
Source: Tellimer Research, Crunchbase
We examine the fintech landscape in China, fintech success factors, future strategies, innovations and growth constraints, and the impact of fintechs on customers. We also study listed financials, telecoms and technology sector incumbents in the country to assess how they are responding to the fintech threat. And lastly, we analyse the results of our survey of Chinese consumers to ascertain their current financial product preferences and future expectations, and what these mean for Chinese fintechs.
We conclude that:
The country’s fintech ecosystem is profitable and well-diversified, and it has reliable access to funding;
China is showing clear global leadership qualities in up-and-coming segments, such as blockchain applications; and
Customers value Chinese fintechs for, above all, product quality, responsiveness to their needs and strong (and improving) security.
Looking ahead, Chinese fintechs are likely to gain customers both by increasing the size of the pie (enfranchising financially excluded customers) and/or by taking market share from traditional providers. Our research shows that the key strategies to drive this growth include raising operational efficiency, enhancing management expertise and investing in technology, (including innovations targeted at easing the customer onboarding process, incorporating blockchain technology into the business and developing chatbots to provide automated customer assistance).
Growth constraints to watch include competition from the informal sector, access to funding and, of course, broader market trends.
The fintech landscape in China
Thousands of Chinese fintech firms are engaged in a wide range of activities, such as:
Blockchain: for example, Onchain, which provides digital wallet, identity authentication, data collaboration and data storage services
Financial exchanges: for example, BitOcean, which makes bitcoin ATMs that let consumers deposit and receive bitcoin through ATMs
Software as a service (SaaS): for example, JD Digits, which applies machine learning, behaviour recognition and other artificial intelligence to help traditional industries operate with higher efficiency
China’s fintech boom has helped raise financial inclusion levels, with listed behemoths such as Tencent offering financial services to a mass market that has traditionally been poorly served by incumbent firms. As well as the large target population, a previously favourable regulatory environment has helped foster China’s large and diverse fintech ecosystem. However, the recent suspension of the Ant Group IPO has now generated some uncertainty regarding the regulatory outlook. We touch on these issues below.
The level of fintech sophistication is high
To evaluate the level of China’s fintech sophistication, we assessed the country relative to six other emerging markets (Brazil, India, Indonesia, Kenya, Mexico, South Africa) across a range of metrics (fintech density; scale of fintechs; ecosystem diversity & profitability; funding access; positioning and strategy).
Compared with other emerging markets, China is the clear leader and is a top-two market across four out of five categories. Indeed, we think China should be considered a global leader, and not just an EM leader.
The country’s fintech ecosystem is well-diversified. 82% of fintechs are outside the lending and payment sectors (versus 56% as the EM average). Profitability is also strong, with 90% of surveyed fintechs claiming to be already profitable. There is good access to funding, and the most successful firms have become commercial giants. Versus some other EMs, we think China has a lower density of fintechs per capita; in some ways, we think this reflects the greater maturity of the industry, as evidenced by the observation that a few fintechs (notably in payments) have gained considerable market share. Listed titans such as Alibaba and Tencent have successfully developed their own digital ecosystems, providing a one-stop-digital-shop where customers can message peers and businesses, and buy a wealth of goods and services (ranging from mutual funds to clothes to food delivery) via suites of mini-programmes. China is also showing clear leadership qualities in up-and-coming segments, such as blockchain applications.
Funding analysis: China ranks first on number and diversity of deals
China raised US$1.8bn of funding in 2019 across 146 deals. Among emerging markets, China ranked second in total funding received (India being first) but ranked top for the number of transactions. The largest transactions in China last year were Ouyeel (US$293mn, a steel transaction platform), WTOIP (US$225mn, a corporate services provider) and Edaili (US$200mn, a crowdfunding platform).
We think it is instructive that these deals were not in the payments and lending areas, which have dominated the largest transactions in many other emerging markets. This is a reflection of the greater diversity of the Chinese fintech scene and could presage a future shift in interest away from these two sectors in other markets.
The fintech customer value-proposition: Quality, responsiveness and security
According to Chinese fintechs, the top values they provide to their customers are product quality, responsiveness to customer needs and increased security. This differs from fintechs in other emerging markets, which, in addition to product quality, also cite faster approvals and convenience as their key values.
Product quality is a catch-all term, in our view, which includes factors such as ease-of-use, product innovation, seamless execution and speed of service. This may explain why it is mentioned as the top value by both fintechs and consumers. Some Chinese fintechs mentioning this as their key value proposition include Ant Group (payments) and Qingsongchou (blockchain).
Responsiveness to customer needs: This was the second most important value mentioned by fintechs in China. We think many incumbent firms are failing to address customers’ specific needs (due to difficulties in tailoring products/services), which is opening up opportunities for fintechs such as WeChat Pay, Ant Group, Duanrong (lending) and Yeahka (payments).
Increased security: Cybersecurity is a key concern for the financial services industry; both fintechs and incumbents need to continually enhance their security protocols to protect consumer data. Blockchain technology improves transaction security, making it more difficult for hackers. Blockchain fintechs could see strong future growth as more use-cases emerge. Fintechs mentioning increased security as one of their key values include Qulian Technology (blockchain) and Jimubox (lending).
Key factors for fintech success: First-mover, management expertise, competitive pricing
The top three success factors cited by Chinese fintechs are capturing first-mover advantage, management expertise and competitive pricing. Funding access, unique offerings and operational efficiency are also considered important. These top success factors are broadly in line with what we have observed in other emerging markets.
First-mover advantage. When consumers become familiar with using the product (such as in insurtech, where insurance plans can range from one month to lifetime) and as the userbase of a particular network grows (eg a payments product), it becomes more difficult for customers to switch. Examples include: Ant Group, which provides mobile-based money transfers, payments, and micro-financing services; Qulian Technology (blockchain); and OneConnect (SaaS).
Management expertise. This particularly important for blockchain fintechs (due to challenges in implementation), and investech firms (where developing the products to match clients’ and regulators’ needs benefit from extensive industry experience). Fintechs that succeeded because of their management expertise include Duobaoyu Insurance (insurtech) and Qingsongchou (blockchain).
Competitive prices. This reflects customers’ price-sensitive mindset; our Chinese consumer survey indicates that, for 53% of them, pricing is a very important factor in their purchase decision. Fintechs can offer low prices given their greater automation and focus, use of outsourcing, and innovative distribution. Fintechs citing this success factor include PingPong (payments) and BitKan (blockchain).
Fintechs’ plans: Improving efficiency, management expertise and technology
Our survey showed that the top three strategies for Chinese fintechs are: 1) increasing operational efficiency; 2) enhancing management expertise; and 3) technology investment. Compared with those in other emerging markets, Chinese fintechs are less focused on introducing new products and expanding into other geographies, perhaps reflecting the sizeable opportunities in their home market.
Increasing operational efficiency: As China is a relatively mature market (compared with other EMs), we think this contributes to their fintechs having a more profitability-focused mindset. Operational efficiency also allows them to price competitively. Companies targeting operational efficiency include WeChat Pay (payments) and Qingsongchou (blockchain).
Enhancing management expertise: Since the Chinese fintech ecosystem is already well-diversified, improving management expertise is one way for firms to outperform their peers. Fintechs focusing on this area include Duanrong (lending), Cobo (blockchain).
Technology investment: Technology such as machine learning (ML) and artificial intelligence (AI) can improve the speed, cost and quality with which services are delivered to consumers. Pingpong (Payments) and BitKan (blockchain) are among the companies that plan to invest in technology.
Fintech innovations: Chatbots, easier onboarding and blockchain
Considering their plans over the next three years, Chinese fintechs are focused most on introducing chatbots and virtual assistants, easing the customer onboarding process and using blockchain technology. In other emerging markets, digital banking (encompassing the full suite of products offered by traditional banks) is more targeted than in China.
Chatbots and virtual assistants help enhance the customer experience by automating customer service/education. Chatbots and virtual assistants are already being used by many fintech companies to improve customer experience and reduce the need for human intervention. Fintech companies with plans in this area include PingPong (payments) and Duanrong (lending).
Easier customer onboarding: Any complexities or difficulties in customer onboarding can lead to a bad first impression, resulting in lower business volume and less customer loyalty. Due to regulatory requirements, customer onboarding is traditionally often a lengthy process, but companies such as WeChat Pay (payments) and Duobaoyu Insurance (insurtech) are using technology to smooth the process.
Blockchain technology: China is already a world leader in blockchain, with large numbers of listed specialist firms in this area. Blockchain products have various use-cases, including improving operating efficiency and the customer experience. Fintechs targeting blockchain technology include Ant Group (payments) and OneConnect (SaaS).
Fintechs are likely to gain market share
In our consumer survey, we asked which kinds of providers were meeting their current financial services needs, and which ones they expected to be using in three years. We used this data to estimate current and likely shifts in share of wallet for different types of firms. Currently, fintechs have a 37% share in the overall financial services industry in China, well above the 26% average for EMs.
Looking ahead, the data suggest Chinese fintechs are likely to gain 4ppts market share in the next three years (compared with a 5ppts average gain for EM fintechs); the shift is likely to come from both current non-users and formal financial institutions (elsewhere the shift is more dependent on bringing non-users into the market).
Key constraints to fintechs’ growth: Informal sector competition, market dynamics and funding
Competition from the informal sector, overall market size and growth, and access to funding are the three biggest growth constraints cited by China fintechs. This is broadly in line with what fintechs in other emerging markets are also saying.
Competition from the informal sector: Informal enterprises can benefit from lower operating costs, giving them a pricing advantage. Chinese fintechs highlighting this growth constraint include Duobaoyu Insurance (insurtech), Pingpong (payments).
Size and growth of the market: It can be difficult for early movers to outgrow the overall market, particularly as the number of competing fintechs rises. We think market size is impacted by customer awareness; for example, insurance is a less-penetrated product in low-income countries and blockchain is still an area where companies and individuals have very limited understanding. Some Chinese fintechs facing this constraint include Ant Group (payments) and Qulian Technology (blockchain).
Funding/capital: Depending on the business model they employ, funding is essentially the lifeblood of lending fintechs, but it is also important for fintechs active in payments, investech and insurtech. Recent funding flows have declined due to the coronavirus outbreak, exacerbating the problem. Fintechs citing this constraint include Ant Group (payments) and Jimubox (lending)
Fintech regulatory hurdles: Capital requirements and deposit insurance
In terms of regulations, capital requirements and deposit insurance regulations are the key hurdles for fintechs in China, as in other emerging markets.
Capital requirements: In general, fintechs tend to favour capital-lite business models; any regulations that challenge this approach can have a serious impact. This has been brought vividly to light by the last-minute suspension of the Ant Group IPO. Fintechs citing this regulatory hurdle include Jimubox (lending), and Duobaoyu Insurance (insurtech).
Deposit insurance: This challenge is cited more frequently by fintechs active in payments and lending. Since digital wallet accounts are one of the most frequently used financial products for low-income customers, they play a key financial inclusion role in emerging markets. This is drawing the attention of local regulators, who are understandably concerned about protecting customers’ balances. Affected fintechs include Duanrong (lending, China), and Ant Group (payments).
How incumbents are fighting the fintech threat: Investment in technology and data analysis
Technology investment is the main tool used by incumbents to fight the fintech threat, followed by data analysis; this is true both in China and in other emerging markets. Also, for Chinese incumbents, reaching new customer segments is a popular defensive strategy. In other emerging markets, cost-cutting is a more prevalent approach.
Investment in technology/automation: To boost process efficiency, financial institutions are adopting SaaS applications in areas such as accounting, human resources and KYC verification. They are also using cloud technology for data storage and security. The Postal Savings Bank of China and Glodon Ltd are among the companies that are increasing investment in technology.
Better analysis of existing datasets: In theory, incumbents have a big advantage over new entrants as they have large customer bases with long and relevant transaction histories. But often the data is not accessible in one place, and/or is difficult to work with. With the help of AI and ML, incumbent firms are now working more closely with this in-house data to offer more personalised and targeted services to their customers, and to make better-informed strategic decisions. Companies following this strategy include the Postal Savings Bank of China and China Telecom Corp.
Reaching out to new customer segments: Expanding into new customer segments supports volume and revenue growth, and improves diversification, but typically requires some up-front investment. Incumbent firms targeting this approach include China Telecom Corp and Glodon Ltd.
Innovative fintech practices
In the table below we highlight some innovative practices by Chinese fintechs based on our desk research: