CEO's Corner

On a recent trip to China, I was struck by the scale and pace of growth of China’s Fintech community.

China’s Fintech market cap valuation of US$69 billion dwarfs the USA’s US$31 billion and the rest of the world at US$11.5 billion. This rapid growth has its roots in the political reform that began in 1978. In parallel, Government-led modernisation programs increased consumption and drove investment, laying the foundations for the rise in online payments. The catalyst for behavioural change, however, was the 2003 SARS epidemic. Preferring to stay indoors to avoid exposure to SARS, people relied on the internet for information, communication - and payments.

The combination of these events led to the emergence of a new type of organisation – the internet banks. These gained traction when underpinned by legislation in 2011. So how do internet banks differ from traditional banks? There’s a key difference from a regulatory perspective in that internet banks can’t take deposits or open branches. There are also size and focus differentiators; internet banks typically have a tenth of the workforce of traditional banks and 50% of this workforce is focussed on technology.

There are more than 250 licensed internet banks in China, with three of the major ones - informally known as the BATs (Baidu, Ant Financial and Tencent) - dominating the scene. In fact, the BATs’ growth has been so rapid that they now process more than 95% of payment volumes, representing 10% of the value. Tencent’s success started with the launch of a WeChat Red Packet service. Tencent digitally transferred the long-held Chinese tradition of gifting red envelopes at New Year by making it possible through a mobile app. This promotion accelerated unprecedented growth in digital payments, increasing the customer base from 5 million to 500 million in two years. 

When I asked what the reasons were for the BATs vertical growth curve, they gave four: focussing on the customer experience; targetting the largely ignored low value, high volume market segment; circumventing the traditional infrastructure and connecting directly to the banks; and better balancing the tradeoff between security and convenience. 

In terms of customer experience, each of the BATs has focussed on keeping the customer on the platform. For Alipay, this has led to the development of a ‘lifestyle super app’. This app includes a wide range of services such as social networking, interactive entertainment, browsing, maps, medical services and online media. The host of services offered increases customer stickiness, while the payments feature is the glue.

I was amazed as I walked through shops and restaurants at how well entrenched the BAT apps were, seamlessly integrating ordering from a menu and payment. What caught my attention was learning about their pioneering credit rating tools which are unlike the traditional static sources we are all familiar with. The internet banks use automated, dynamic and regularly updated scoring that incorporates lifestyle indicators such as the websites visited, payments profiles, geo location information, and social media profiles. Customer scores are disclosed in a rating app which customers use for a range of purposes, from avoiding pre-authorisation deposits at hotels to dating profiles! The internet banks are now expanding into wealth management and lending.

The BATs’ success has been built on access to data, a compulsory national ID card and a supportive regulatory environment. As jurisdictions around the world all consider these core elements, it will be interesting to see how the future unfolds.