China has become the global leader in fintech innovation in the last few years. Its meteoric rise can be attributed to a number of factors, including massive platform distribution and customer data sets, a supportive regulatory environment, and hyper-local initiatives.
For that reason, it was a major focus at the CB Insights Future of Fintech conference in New York last month, featuring a panel discussion on China with representatives from Zest Finance, CreditEase and DST. The panel explored many interesting themes, but an overarching insight emerged: a culture of innovation, determination for speed, and trust in financial services is fueling China’s growth.
As in any emerging market, a lack of financial services and physical infrastructure eliminates the cumbersome need to revamp and renew old systems. When considering this dynamic in China, it is important to keep in mind that until the mid-1980s, China’s banking system still lacked services considered basic in most countries, including checking accounts and bank credit cards. Currency restrictions did not allow non-Chinese banks to offer consumer services in-country until approximately 2002. These highly regulated banking dynamics, combined with the advent of mobile banking via smart phones and cloud technology, have resulted in a culture that is trusting and open to sharing data.
Trust at the Center
We see similar themes emerging regarding China in both the Financial Services and Technology Sector cuts of the Edelman Trust Barometer. Of the 28 markets the Barometer surveys, China ranks as the third-most-trusted market for both financial services and technology (among the general population). In fact, China is one of only seven markets where blockchain technology is trusted.
At the conference, Ning Tang, CEO of CreditEase, echoed China’s ease-of-use for financial technology: “Over the next decade, sectors like crowdfunding, robo-advisors, insurance tech, blockchain and blockchain-driven applications will emerge,” he said. “Some are behind marketplace lending by three years, some by five years, and some are behind by even 10 years, but I think all will go through a similar process in China.”
Regulation as a True Partner to Innovation
The Chinese embrace an entrepreneurial culture. They are willing to grow fast and break barriers for the greater good, which includes many Chinese companies “leapfrogging” the card stage and moving directly from cash to mobile.
They also do not let good get in the way of perfect, which includes a willingness to put products into the market and learn how to improve them via direct customer feedback. China’s regulatory environment supports this by getting out of the way of innovation. Regulators take a backward view; they watch and learn before deploying regulation, which results in greater efficacy.
Take, for example, the HKMA sandbox, China’s pilot scheme launched in September 2016. It allows banks to try out new fintech products without the need for full regulatory approval. Major players such as Citi and Standard Chartered are already running trials under this softened regulatory regime. Compared to this approach, it is no wonder the regulatory regimes in the United States and Europe are often seen as quagmires, notable not for their innovation but rather for a lack of clarity and a need for new processes and (re)evaluations.
Collaboration Is King
In this sense, speed and scale are best achieved via local partnerships and offices. Chinese efforts must be collaborative to succeed; implementing production and experimentation outside of the country will not only result in missed regulatory tailwinds, but also the potential scale of companies such as Alibaba and Tencent.
When it comes to entering the market, partnerships are the only way that non-Chinese companies can do so. Chinese companies want to understand the value add that non-Chinese partners. In this scenario, trust is the most critical component to make a partnership work. By establishing a local office presence and accessing talent (in an area maxed on competitiveness), non-Chinese companies can bring trust — and ease — to partnerships.
Additionally, the sector’s ambitions are by no means limited to the Chinese mainland. Companies are globalizing and investing heavily in many other countries, including India, Thailand, South Korea and the Philippines. China is increasing its global influence, so when collaborating in-market, it is integral to understand a company’s global ambition.
China has a firm grasp as the next frontier of fintech. It is not difficult to see the opportunity to bring new products, services and innovations to hundreds of millions of new consumers in the world’s third biggest economy. Also clear is that the investment dollars — VC-backed fintech startups in China raised more than $5.1 billion in 2016 — are pouring in.
Deidre H. Campbell is global chair, Financial Services sector.