Business of Fintech, Member Exclusive

While the US fintech gets its act together after valuations tumble, is China leaping forward?

  • As the fintech industry expands in China, will the US stand out from the rest of its competitors?
  • The pandemic caused higher interest rates, lower valuations, and economic uncertainty – which has been cited as the reason behind the failure of fintechs – but maybe it is time to rethink that premise.
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While the US fintech gets its act together after valuations tumble, is China leaping forward?

Not long ago, the FT reported that almost half a trillion dollars were wiped off from US fintech valuations, leaving the industry in a state of panic – although over 30 new fintech companies have been listed in the US since the start of 2020. The pandemic created an opportunity for higher interest rates, lower valuations, and economic uncertainty. That may be the obvious cited reason behind the failure of fintechs, but maybe it is time to rethink that premise.

While fintech companies in the States fail to retain their worth, is the center of financial technology gradually shifting eastwards – hint: China?

Folks in China split restaurant bills, invest their paychecks with the click of a button to start earning interest immediately, get a shared ride, and pay for lunch by scanning a QR code — all through mobile apps like Alipay, WeChat Pay, and DiDi.

The world’s second-largest economy has blazed a trail for mobile payments, and is by and large cashless.

What would happen if Amazon and Google actually wanted to make money in banking? If Apple opens a bank account or if Twitter has a channel to pay bills? They would likely shake up the payments landscape – so did China’s big tech. 

Payments is king in China’s fintech landscape

In 2014, two of China’s major tech companies – Tencent, the parent company of the messaging app WeChat, and the e-commerce platform Alibaba Group, which spun off its fintech holdings into the Ant Group – entered the payments space. Today, Alibaba’s Alipay is the world’s largest mobile payment platform.

Mobile connections in China were equivalent to 113% of the total population in January 2022. The number of mobile connections in the country increased by 29 million between 2021 and 2022.

Moreover, China’s fintech market size is projected to reach $85.7 billion by 2022, as per China’s Fintech Development Plan for 2022-2025, released by its central bank.

The big techs that entered financial services using platform-based technology to facilitate digital payments subtly expanded into other areas, such as lending, asset management, and insurance services. This move threatened the banking sector in China – and banks’ credit card revenue slumped because people replaced it with mobile transactions. However, banks stayed relevant by investing heavily in digital capabilities, and by launching fintech services to rival big tech offerings – while smaller banks relied on partnerships with big tech companies.

Alipay is a mobile wallet that allows users to store debit or credit card details to make online and in-store purchases using QR codes. It works similarly to Apple Pay or Google Pay. Since Alipay works with Visa, Mastercard, American Express, and more than 180 other international FIs, it remains the most popular payment gateway for all of China.

WeChat is a super app that people treat as a social media platform like Facebook, Twitter, or Instagram to connect socially. It can also be used for payments, wealth management, and lending – together with other services such as ride-sharing, food ordering, travel bookings, paying electricity bills, paying in shops, and so on.

WeChat Pay and Alipay function in a similar way.

In 2020, Chinese regulators probed the internet finance industry, which led to the suspension of Ant Group’s $37 billion IPO.

“In my book, Cashless: China’s Digital Currency Revolution, I’ve mentioned ‘analog regulators met digital fintechs’ – and if analyzed properly, what the Chinese regulators did prior to the cancellation of the IPO, was an effort to make headway for fintech companies,” said Richard Turrin, best-selling author and fintech advisor.

Banks are traditionally slow-footed in complying with new regulations. When dealing with digital platforms that expand by the month, regulators couldn’t keep pace. It was hard to believe for many that Alipay and WeChat Pay, which launched in 2014, would become tech giants in a span of three years, and all the major cities in China would go cashless by 2020. When the Ant IPO was canceled, the tech institutions had already become so massive that regulators couldn’t keep up at the time. 

 


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