The story of China’s rise as an economic superpower needs no introduction. And although the current slowdown of the country’s economy is dividing opinion on what the future holds, since embracing free market principles and opening its arms to Western trade and investment in 1979 it has, on average, been able to double the size of its economy in real terms every eight years.
Deng Xiaoping, former leader of China and champion of the afore-mentioned reforms, famously summed up his stance on opening new avenues for economic growth by saying, “I don’t care if a cat is black or white so long as it catches mice.” Today, many argue, this ideological openness to new ways of working continues to shape the Chinese mind-set when it comes to FinTech.
A September 2015 report titled “Regulation of Digital Financial Services in China”, defined digital financial services as those delivered “through technologies such as mobile telephones, the internet and other electronic devices and channels.” This succinct definition of the FinTech sector was housed within an expansive analysis of how Chinese regulators are seeking to nurture innovation while establishing ground-rules that foster healthy progress.
As mentioned, China’s official approach to FinTech innovation appears to be one marked by encouragement—although that is currently a matter of debate. In 2014, the People’s Bank of China—one of the country’s major regulators—highlighted five ways in which digital finance had enhanced the economy. From promoting inclusion for unbanked rural areas and SMEs, to reducing transaction costs, the list seemed to encapsulate a level of awareness among those in power that FinTech is key to future economic growth.
Evidence of this mind-set bearing fruit appears to be evident in both the shift towards digitalization by China’s established financial institutions and in the rapid rise of FinTech service providers. The first internet banking service in the country was introduced in 1996, and since then the expansion of such services has been significant. Some banks report that online transactions have now replaced up to 85% of over-the-counter equivalents. In 2012 alone, according to the regulatory report, major Chinese commercial banks saw more than 100% growth in mobile banking users and more than 300% growth in mobile transaction value.
In terms of “non-traditional” FinTech success stories, companies such as Alibaba and Tencent have capitalized on the spread of new technologies and gaps in the market to achieve mind-boggling numbers. Alibaba’s “Alipay” platform, for example, is reported to have over 360 million active users in China, and handles over 80 million transactions each day. Their suite of services under the new “Ant Financial” banner covers micro-loans for SMEs, a crowdfunding scheme, and—as of June 2015—a new internet bank. Likewise, entertainment company Tencent has grown to become a serious force in the financial services market, and enables B2B and B2C transactions through their own “Tenpay” platform. Boasting a market value of $206 billion (compared to Amazon’s $178 billion), Tencent also launched their own internet bank this year, with a special focus on businesses who struggle to secure loans from state-owned institutions.
While the widespread adoption of FinTech services in China has proven the potential of the market, the relatively sudden impact of the sector has also highlighted shortcomings in the country’s regulatory framework. Key problem areas which regulators are striving to tackle include a lack of legislation on consumer rights (from privacy protection to inadequate compensation laws), and loopholes which have led to digital service providers flouting anti-money laundering rules.
Apparently determined to tackle the issues head-on, Chinese regulators drew up new guidelines earlier this year that they hope will add clarity and increased security for service users and providers. From better establishing the responsibilities of each regulatory body to creating a culture that actively promotes innovation in payment, lending, and new types of FinTech services, the guidelines have already spawned updated legislation.
So while the impressive statistics fueled by the FinTech sector in China are unlikely to be trumped any time soon, it’s interesting to remember that the legislative framework governing digital financial services in the country is only starting to come to maturity. Whether regulators can achieve their stated goal of encouraging innovation through reform remains to be seen. But amid concern about the slowdown of China’s economy and claims that the numbers of its biggest FinTech player, Alibaba, “might not get any bigger”, they’ll certainly hope their efforts have a part to play in enabling the continuation of their country’s digital success story.
In Part 2 of our Digital Dragon series, we’ll look more closely at some of the most prominent FinTech services in the Chinese market, and consider the debate over whether the country has the innovative spirit to create new financial services that can fuel transformation beyond its borders.