China's Fintech Explosion, by Sara Hsu and Jianjun Li (chapter 1)

SARA HSU AND JIANJUN LI

CHINA’S

FINTECH

EXPLOSION DISRUPTION, INNOVATION, AND SURVIVAL

c h a p t er on e

Overview of China’s Fintech Industry

FINANC IAL T ECHNO L O G Y, or fintech, increasingly boasts innovations that incorporate big data analysis, blockchain, and cloud computing, all of which have amplified the performance of traditional internet transactions, into financial services. These innovations have much transformative potential, especially in China.

China’s fintech industry has grown massively in recent years, taking shape from an industry providing electronic payment and risky loan services to a more integrated system with major banks and better regulation to control risks. Fintech has grown not only to complement traditional banking services in China but also to fill the gaps that the mainly state-owned banking sector could not fill. The state-owned banking sector has preferred to cater to larger and state-owned firms, carrying out government policy directives as needed. State-owned banks have not been able to provide loans consistently to smaller firms and poorer individuals, and fintech has stepped in to address these needs.

The growth of fintech has supported China’s structural change process as the nation has become more consumption oriented. The Asian nation has moved away from its focus on production of low-value-added

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Overview of China’s Fintech Industry

goods as a source of growth to a focus on consumption. As it has done so, incomes and standards of living have risen. As such, people are demanding better access to funding and financial tools.

Fintech began in the West, with the online checking account offered

by Wells Fargo in 1995; the first virtual bank, ING Direct in Canada, in 1997; the launch of PayPal in 1998; and the launch of Prosper and Lending Club in 2006 and 2007, respectively. The global financial crisis of 2008 has been widely viewed as a financial industry disruptor that changed the way consumers viewed banks. Banks lost their footing and were forced to comply with new regulations, and simultaneously, consumers lost their faith in banks. This loss of faith, coupled with the advent of new internet financial firms without the same regulatory and capital constraints, paved the way for the rise of fintech.

Millennials have been quick to embrace the new technologies, using fintech apps such as Venmo and Apple Pay in the United States, and obtaining lower interest rate personal loans from lending platforms like Lending Club and Prosper. Traditional banks have been forced to add online components to compete with fintech companies. For example, in October 2017 TD Group set aside $3.5 million to finance fintech endeavors, and other banks are doing the same. Banking has increasingly become a non-physical-consumer experience.

All of this is happening in China as well. Fintech has exploded in the Asian nation and has received an increasing amount of attention and funding. By 2016, China represented 47 percent of global fintech investments. One aspect of Chinese fintech, peer-to-peer (P2P) lending, has grown from 31 billion renminbi (RMB) in January 2014 to 856 billion RMB in January 2017.1 In three years, P2P lending increased twenty-seven-fold. By 2017, the total amount of P2P loans hit 1.2 trillion RMB. Notably, fintech in China has helped to make up for an underdeveloped financial sector that has been unable to accommodate all consumers and firms that demand financing. Individuals and small and medium-size enterprises (SMEs), for example, frequently were unable to obtain sufficient loans to carry out business or personal activities.

Additionally, unlike nations in the Western hemisphere, China did not experience a diffusion of credit card usage. Most people had to rely on cash or debit cards and were not privy to lines of credit. Individuals could not easily access credit for consumption or emergency purposes. Finally, some elements of finance are lacking in China, particularly profitable

Overview of China’s Fintech Industry

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financial investments. Even China’s stock market is dominated by stateowned or -related institutions, and both government intervention and a lack of institutional investors have kept a lid on real profits. Firms and consumers have needed alternative investment products that can earn them a better rate of return than a bank deposit account.

For these reasons, fintech has been wildly popular in China. Fintech firms have rushed to assist a swathe of consumers and small firms with little to no bank credit history and high levels of demand. Fintech firms generally strive to stay out of the deposit-taking business and to offer customers better returns on investment than other outlets.

Customers have flocked to these firms, seeking loans, ease of payment, and investment profits.

This book focuses mainly on mainland China and its experiences with fintech, although some information is included on the Hong Kong fintech industry as well, which is also booming. In terms of location, the types and performance of the firms sharply contrast, and this provides us with somewhat of an alternative paradigm.

The sector is quite new and has undergone massive changes. It’s hot right now, attracting lots of private investment as well as public support.

There is much to chronicle, and, as such, this book provides a story of China’s fintech industry based on several primary and secondary sources. Primary sources include interviews with fintech industry insiders, including firm CEOs, and newspaper articles. Secondary sources include government and private sector research reports and academic articles written about the industry, written in both Chinese and English.

In the book, we will cover the topics of digital payment systems, P2P lending and crowdfunding, credit card issuance and internet banks, blockchain finance and virtual currencies, online investment and insurance, disruption of traditional banking, and risks of fintech and regulatory technology. We find the subject massively interesting, and hope that this passion is reflected in this work, one of the first publications on the industry as a whole.

Stages of Growth in Chinese Fintech A clear guide to China’s fintech industry’s stages of growth does not exist, but we can make some generalizations. We can classify the periods of development into three stages: early growth stage (pre-2013),

PRAISE FOR

CHINA’S FINTECH EXPLOSION “China has emerged as a leader in the global fintech industry, but there has been limited insight into this development. This book provides a wonderful summary of China’s fintech development, covering topics such as digital payment systems, peer-to-peer lending, and online consumer credit. From this book, we can understand how these emerging fintech businesses are changing the way Chinese consumers pay, borrow, and invest, and we receive a roadmap for the future of China’s fintech industry.”

—BOHUI ZHANG, E X ECUTIVE ASSOCIATE DE A N A ND PRESIDENTIA L CHAIR PROFESSOR, CHINESE UNIVERSIT Y OF HONG KONG, SHENZHEN

“Fintech started in the West, but to fully understand its adoption and innovation one must look East. This book does precisely that. It is an informative and comprehensive guide to the fast-moving area of fintech in China.

This book goes beyond the techno-provision of credit to the underfunded and covers all areas of fintech, neatly blending contemporary information with analysis, case study, and research review. It is a must-read for the scholar and the student as well as those who wish to understand fintech in China.”

—KENT MAT THEWS, SIR JULIA N HODGE PROFESSOR OF BA NK ING A ND FINA NCE, CA RDIFF BUSINESS SCHOOL, WA LES, A ND NOT TINGHA M UNIVERSIT Y BUSINESS SCHOOL NINGBO, CHINA

“While most writing on fintech takes a vertical approach to the field, this book’s integrative approach will become more valuable as point-solution start-ups begin to build the more multifaceted solutions long offered by incumbent financial-services firms. It is also accessible to anyone looking to gain a better understanding of the current state of affairs of fintech in China—certainly a good text for fintech courses in undergraduate and graduate programs.”

—DREW DAVID PASCARELL A, ASSOCIATE DE A N FOR MBA PROGR A MS A ND FOUNDER OF THE FINTECH INTENSIVE, SA MUEL CUR TIS JOHNSON GR A DUATE SCHOOL OF M A NAGEMENT, CORNELL UNIVERSIT Y