“I think China’s adoption came in the middle of the perfect storm of drivers that helped China become the number one country globally for FinTech investment.” – John Patrick Mullin
DISCLOSURE: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. Views shared by my guests are their own and cannot under any circumstances be interpreted as an official account of their employers.
In the wake of the global financial crisis, China emerged relatively unscathed, and has grown to be a dominant force in the global financial system. China’s largest banks, have become some of the largest in the world by AUM, but still a large portion of the population remains without access to traditional financial services. Helped by the rise of massive Chinese technology firms such as Alibaba and Tencent, FinTech applications have taken off as a way to provide financial services to billions of Chinese citizens. China has become the world’s hottest market for FinTech and doesn’t seem to show any signs of slowing down. China has traditionally been a very closed country, and while it may have started opening up in recent years, it still remains a particularly confusing and poorly understood entity to many in the Western world. Financial services in China have always been a rather opaque aspect of the economy, but with the opening of the capital markets, and Chinese FinTech applications drawing attention globally, it provides a unique opportunity to begin to understand an important aspect of the Middle Kingdom. Understanding China is more important than ever, and beginning with an understanding of the financial system and it’s unique cross-over with technology is a perfect place to start.
Ladies and Gentlemen,
It’s my pleasure to introduce you to my today’s guest who has indepth insights into the Chinese financial sector and FinTech sphere. Being one of only three foreigners in one of China’s top three largest investment banks, as well as the head of a FinTech cohort in Shanghai with over 100 members, he possess an incredibly unique perspective that few foreigners in China can ever achieve. Looking at his LinkedIn, you can notice that although he’s still young, he has achieved things well beyond his years in China’s financial markets. Without further ado, please let me introduce you to:
John Patrick Mullin
“As a senior buy-side research analyst at Guotai Junan Securities, my role is to identify key macro-aspects of emerging technology trends in FinTech, AI/Robotics, EVs, etc. and identify potential buy-side opportunities for our business lines. In my spare time, I am the Shanghai Location Coordinator forFinTech Connector, where I lead, nurture, and develop the local FinTech community by connecting innovators and enablers with our global FinTech Connector Cohorts. I am also a contributing writer for LinkedIn China, and an external collaborator for an EdTech startup in Hong Kong, called the Institute of Life.”
In this interview you will hear his views on:
- Why China is the world’s largest market for FinTech
- How China support FinTech innovation
- Insights into successful FinTech companies in China
- Why are Chinese so interested in Bitcoin and cryptocurrencies
- Are there other large FinTech companies besides Alibaba and Tencent
- How blockchain is the hottest business trend of 2017 in China
- Do FinTech companies in China pose a threat to China’s big banks
- Future of FinTech in China
Let’s get to it:
Q: Hello John Patrick, I’m really glad you’ve accepted my invite for the interview. Can you please introduce yourself and tell us your story how did you get to China and what is your speciality?
Thanks for the invitation Jiri, it is my pleasure to share a bit about my story and experience. I first moved to China in 2015 to finish my double degree Masters in Economics at Tongji University in Shanghai. I had always had an interest in Asian culture, but had previously never made it to Asia before. Upon first stepping foot in Shanghai, I was captivated by the dynamism and energy of the city. Since then, I started working at Guotai Junan Securities, one of China’s leading investment banks as an emerging tech researcher. I cover a variety of topics, ranging from EVs to AI/Robotics, but I am personally most interested in FinTech and its various applications. In regards to FinTech, I am personally interested in cryptocurrencies, and blockchain applications across financial institutions. Although, I must say I am a generalist in terms of my FinTech research.
Q: Thank you. Now let’s talk about China’s Fintech ecosystem that is according to research largest in the world. Can you please walk us through major catalyst that made China adapt Fintech on such scale?
Certainly, I would say that there were several factors that went into China adopting FinTech on such a massive scale, and with such fervour. I think China’s adoption came in the middle of the perfect storm of drivers that helped China become the #1 country globally for FinTech investment. The first factor would be the rising middle class. China’s economic miracle is no secret globally, and with the rise of millions of people out of poverty, there came a wealth of new potential investment opportunities. Coupled with poorly prepared incumbent financial institutions, there were literally millions of people who had no access to proper financial services and investment guidance. Now you add, China’s rapid digitalization into the picture, and you have the perfect storm for FinTech adoption. Case in point; Yu’E Bao from Ant Financial. Yu’E Bao has now recently become the world’s largest money market fund, which allows average Chinese citizens to invest, directly from their smartphones, with no minimum investment, and easy access to withdraw their money. According to the company, 75% of investors have balances of less than RMB 1,000 ($145) and 15% have less than RMB 10,000 ($1,450). However, when you consider that over 260 million people are investing through this platform, that adds up to significant amount. FinTech in China has allowed for hundreds of millions of Chinese to access the much needed financial services and investment opportunities they have been craving. Additionally, as I will talk about later in more detail, there has been robust government support for FinTech and internet finance in general. In China, without government support, even the best initiatives and trends will flop.
Q: If you could name a few Chinese fintech companies who it would be and why they are successful?
When thinking of FinTech companies in China, I think it’s impossible to not think of the BATs, or Baidu, Alibaba, or Tencent. While it can be argued that these firms are actually under the “TechFin” definition, or tech companies that engage in financial services, under more lax regulations, they can’t be left out. Take Alibaba and Tencent for example, where they leveraged their e-commerce site, and messaging app Taobao and WeChat respectively to help create payment systems and platforms like Alipay and WeChat Wallet respectively. They understood that the network effect could greatly help their cause, and they tried to create a “one-stop-shop” type of platform, where your entire life could basically be run through an app on your phone. While I think the BATs are beginning to be relatively well known overseas, another firm that has largely flown under the radar is Lufax. Lufax is a P2P lending marketplace, which is 49% owned by Ping An, the insurance group. I believe Lufax has done well in China, due to its links to Ping An, and the fact that China still has a large population of underserved consumers, when it comes to loans and credit. This is also partly why the shadow banking sector has thrived here, due to the fact that it is often very difficult, if not impossible to get the necessary loans from the larger Chinese commercial banks.
The competition across FinTech verticals in China is fierce, and the list could go on and on. With the right government support (I believe it is there), the FinTech market in China is ripe with opportunity.
Q: People in China are one of major investors in Bitcoin. Why do you think is it and what fuels this trend?
Yes, you are correct. Too be honest, I think the answer here is rather simple. Right now, Bitcoin and cryptocurrency exchanges in China are popping up all over, and regulation is rather scarce still. Additionally, Chinese retail investors tend to be rather speculative, and enjoy the act of trading. There is quite a funny picture that went viral of a fruit seller on the street with a computer trading and following the markets. As I mentioned before with Yu’E Bao, investment thresholds on Bitcoin are low, and this allows many average Chinese to try and capture some of the huge upswing Bitcoin and other cryptocurrencies have experienced in the past year. Generally speaking, people in China tend to lack the proper education about investing, and when they see their neighbours, and friends getting rich on Bitcoin, they all want to get in on the action. This was also the case before the Shanghai stock market crash in the summer of 2015, and in January of 2016.
Q: Are there beyond Alibaba and Tencent any other large Chinese Fintech players that will likely expand to the west countries and what makes them unique?
Lufax, the company I alluded to earlier is one that I would include in this category, as well as JD Finance, and Qufenqi. These firms have received massive funding rounds in the past year, which drove their valuations to all-time highs. Seeing as I already spoke a bit about Lufax or Lu.com, I will speak a bit more about JD Finance, which is the financial subsidiary of JD.com. JD.com is one of China’s largest e-commerce platforms, and this is one of the strong points that JD Finance leverages. JD Finance offers a wide range of financial offerings such as wealth management, marketplace lending, insurance, consumer lending and so on. One beneficial feature of many FinTech companies in China, is they are spin offs or subsidiaries of large Tech or E-Commerce companies. This gives them considerable resources and abundant cash if they look to increase their presence abroad. In particular for companies like Alibaba and Tencent, as Chinese consumers continue to go abroad and spend abroad, they need payment methods that fit them e.g. Alipay, WeChat Pay, and even Unionpay. You can see this is true, as Alipay and WeChat Pay have started to expand into other parts of Asia, the United States, and even most recently Alipay entered Spain.
Q: Can we talk now about status of Blockchain in China? Can you share with our readers some examples of blockchain use in China?
Blockchain has exploded onto the scene in China, and it is one of the most talked about tech topics of this year. This is partly due to the government prioritizing its use in an Informatization Strategy published in December 2016.
“The internet, cloud computing, large data, artificial intelligence, machine learning, blockchain… will drive the evolution of everything – digital, network, intelligent services will be everywhere.”
Basically, when the Central government endorses something, the people listen, and there will automatically be increased activity in the space. China had $5.5 trillion in digital payments last year alone, and this translates to huge monetary potential for blockchain applications. This has lead everyone from start-ups, to State-owned banks, to the People’s Bank of China (PBOC) exploring this new technology, which has become a buzzword in China. For example, the PBOC is testing a blockchain-backed digital version of the Renminbi (RMB) in cooperation with several of the Big 4 commercial banks as a way to reduce circulation costs, and also to increase transparency, reduce money laundering and tax evasion.
Q: When we are talking about blockchain in the west we are usually talking about three major platforms: Hyperledger, Ethereum and R3 Corda. Are these same popular in China or are there any local fast growing blockchain platform we should know about?
Good question. These platforms are certainly relevant in China. For example, take Hyperledger, which 25% of its members come from China now. In December of last year, Hyperledger announced Technical Working Group China, or TWG China, which has become a key contributor to the Hyperledger technical community and help to build the consortium ecosystem in China. Ethereum is another blockchain consortium that is gaining ground in China. In May of this year, Huobi, which is one of the three leading bitcoin exchanges alongside BTCC and OKCoin, officially integrated support for Ethereum trading. This was seen as an important milestone for Ethereum in the country, as up until this point, the market liquidity for Ethereum within China was substantially low due to lack of support amongst local exchanges. In regards to R3, they may have the strongest position within China in my opinion. Last year, the China Foreign Exchange Trading System (CFETS), who operates China’s interbank trading system joined the R3 blockchain consortium. Additionally, Ping An and China Merchants Bank have both joined the R3 consortium as well.Finally, I would like to highlight a local blockchain group, AntShares / NEO. Antshares, which has rebranded to NEO, and is oftentimes called China’s Ethereum, will support decentralized commerce, digital identities and the digitization of many different assets. Currently, those who hold ANS, will be able to automatically generate Antcoins (ANC) in their Antshares wallets, which is used as the gas on the platform. In Q3 of this year, the ANS symbol will become NEO, and a new UI will replace the current offering.
Q: What is the future of Chinese banking system? Is there likelihood some of Chinese banks will become global power on scale of Goldman Sachs and if so who do you think is best positioned and what impact Fintech and technology innovation will have?
While the idea of a global Chinese banking giant is still some ways away, I can tell you with certainty that this is a goal that many of the banks here are aspiring too. I’d rather not name any particular names, seeing as I’m working in the industry, but I can say that there are a number of very competitive firms, with forward thinking leadership in regards to technology, and with ambitions of being international full-service financial services companies. However, I can talk a bit about the impact of FinTech and technology innovation on these firms. I believe that the banks who take the most adaptive stance and are able to embrace technology the most here will be better positioned than their competitors. That being said, this is China after all, and all the large banks are still majority state-owned. This adds a unique wrinkle compared to Western firms, because here it’s not enough to just be the tech king, the proper relations with the government and key policy makers here still mean a lot.
Q: Where do you see the future of Chinese FinTech headed? Any interesting trends or ideas you can share with us?
I think there are two interesting trends or ideas that I see for the future of Chinese FinTech.
- Chinese B2C E-Commerce is already saturated by the likes of the BATs (Baidu, Alibaba, Tencent), and is clearly the most developed in the world. However, the B2B space is still relatively underdeveloped, and I think there is a lot of space and opportunity here.
- In many regards, it is impossible to compete with the BATs, because of their huge network effects, large/loyal consumer base, and breadth of product offering. However, this also allows companies to build complimentary FinTech services and businesses, which can be developed on top of the existing platforms of the BATs such as WeChat or Alipay. This gives direct access to hundreds of millions of consumers, and decreases competition, albeit only slightly, within the space.
Q: Do you believe Chinese FinTech companies pose a threat to traditional banks in China?
I personally don’t think so. Yes, FinTech companies in China will eat into revenues in certain areas, but at the same time, at least for the Big 4 Commercial banks, they tend to focus on different targets. The Big 4 banks tend to look to lending to other big state-owned enterprises (SOEs), whereas FinTech companies are more consumer oriented. Additionally, the big banks have always managed fairly well without having too much of their revenue mix come from retail business. For example, only 3% of the revenues of the top 10 banks in China comes from credit cards, which are still not widely used. There are only 0.31 credit cards per person in China compared to 3 per person in developed countries. Yes, China will get more credit cards per person in the future, but with the proliferation of Alipay and WeChat Pay, there will be less of a need.
On-the-other-hand, I do think that FinTech companies getting into the lending business could cause damage to the banks, however I believe it’s important to note that the lending business is a thin margin business, and figuring out default risk is of the utmost importance. As I previously mentioned, many FinTech lending platforms cater to people the banks won’t touch, so I’m not entirely convinced this will do in the banks.
Finally, as you can see through recent partnerships between the banks and tech companies, there is room for collaboration. Recently, Baidu partnered with Agricultural Bank of China (ABC), Alibaba (Ant Financial) with China Construction Bank (CCB), and so on. I think you’ll see as these partnerships develop, if anything it will only muscle out smaller players, as opposed to wiping out the big banks.
This article was originally posted on LinkedIn Pulse