China: Number One Fintech Country In The World?

As major global financial and innovation centers compete to become the “world’s Fintech hub”, China has not only caught up, but rather leapfrogged major cities such as New York, Silicon Valley and London. Many people are even claiming that clusters of cities such as the Pearl River Delta in China are becoming the “new Silicon Valley.”  While this comparison may not be totally valid, it is not unfounded.  China is unique in the fact it has multiple financial and innovation hubs that offer different yet complementary value to the Chinese Fintech ecosystem.  Shenzhen is the home of Tencent, Hangzhou, home to Alibaba, Shanghai is the country’s financial hub, and Beijing, which has a lot of the country's largest startups and VCs - all provide different but beneficial traits to the ecosystem.

So, where to begin with the Chinese Fintech revolution?  Why has it occurred on such scale and with such speed in China as opposed to other countries?

Underserved population

To begin, let’s look at the massive scale of unmet needs from the Chinese population. Due to China’s relatively new capital market structure, a lot of legacy systems in place in Western countries just aren’t present yet in China.  On top of that, the major Chinese banks are all state-owned (ICBC, ABC, CCB and BOC). They’ve made a living off lending to other large state owned enterprises (SOEs), which has left a large section of the population, in particular small and medium sized enterprises (SMEs) without the proper access to loans and credit.  Therein stepped the Chinese tech giants; Baidu, Alibaba and Tencent (BATs). In a country where smartphone penetration is similar to that of Western Europe, but has exposure to the local banking system similar to that of more developing countries (approximately 20 percent of total loans are consumer), Chinese technology companies were well positioned to capitalize on this underserved population through Fintech applications.

Chinese Internet connectivity

Another driver of the Fintech revolution in China is the massive amount of Internet and smartphone users. China has well over 700 mln Internet users, or more than double the entire population of the US.  Combined with a propensity to use smartphones and mobile payments thanks to WeChat and Alipay, Chinese consumers have spectacular adoption rates of Fintech applications in comparison to other nations. For example, 40 percent of consumers in China use non-traditional payment methods such as Alipay, compared to just four percent in Singapore.  This doesn’t just stop with payments, but continues into InsureTech, and also using Fintech platforms in wealth management and lending.

Chinese e-commerce

With major e-commerce platforms such as Alibaba’s Taoball and Tmall, and JD.com, there has been a need for quick and easy e-payments, which can be done using Fintech applications such as Alipay. Not only has this created opportunities within the payments vertical of Fintech, but also within lending, insurance, investment and wealth management. Fintech firms in China have been able to capitalize on Chinese e-commerce trends and are leveraging big data from e-commerce, messaging, search, social media and other Internet-based services, to personalize the customer experience, provide new services and leverage operational efficiencies.

In response, some of the more progressive Chinese financial institutions have launched their own digital and Fintech platforms, which include e-commerce, e-payments, and online lending and wealth management services.  Additionally, incumbents are partnering or acquiring the technology of early-stage Fintech firms to reach traditionally underserved customers, which would not have been possible without user and merchant information, and the online banking capabilities of large e-commerce players.

Blockchain and cryptocurrencies in China

Traditionally, Blockchain in China has been left to the world of academia and research institutions - however, this is changing. There has been an emergence of Chinese Blockchain alliances and consortiums such as the China Ledger Alliance, Financial Blockchain Shenzhen Consortium, and the Qianhai International Blockchain Ecosphere Alliance as proponents of some of the industry’s best practices. Additionally, new Chinese Blockchain and cryptocurrency players such as NEO and Bitshares have began turning heads in the crypto-world.

Specifically in regards to Bitcoin, where it is still in a legal gray area, China remains the undisputed world leader in Bitcoin mining. Chinese mining pools control more than 70 percent of the Bitcoin network’s collective hashrate, where massive mining farms are able to take advantage of cheap electricity and real estate in some of China’s poorest regions in the western part of the country.

Additionally, the Chinese government has put an emphasis on exploring Blockchain technology.  They have even began testing and exploring Blockchain use cases for social management and as a way to tokenize the RMB.

The future

It is no surprise that China has emerged as the world leader in Fintech. With the world’s largest population, high Internet and mobile proliferation, and high adoption rates, the Middle Kingdom looks poised to continue its dominance in the Fintech space for years to come.