Chinas fintech players

Daxue Talks transcript #49: China’s fintech players: Large institutions, SME’s, startups or foreign companies

Find here the Daxue Talks episode 49. Our guest Steve Hopkins reminds us about China’s fintech players and discusses the role of large institutions, SME’s, startups and foreign companies.

Full transcript below:

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs, we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

Who is driving fintech in China? Large institutions, SME’s or start-ups?

So, it’s a difficult question to answer, because China is very special and the government dictates where it’s going to direct a lot of its capital investment towards. There is a lot of innovation happening all across the spectrum from top to bottom. So, we can just break it down by section. Large institutions have governmental connections, the resources and the operational scope to build and scale innovative products really quickly. Not only do they drive innovation in-house through organic product development, but they also play pretty important roles in injecting liquidity within the start-up environment, through typical investment positions and merger and acquisitions. Particularly here in Hong Kong where I’m based out of, a lot of the chatter lately has been about the first 8-digital banking license being awarded to some of the banks and fintech players over from Mainland that is trying to break into the Hong Kong banking market. So of these first-ever 8 licenses issued, 7 are at least majority-owned, if not fully owned by Chinese institutions like Ant Financial, Xiaomi, Tencent, Jingdong all of those, and so what’s very interesting about this are that a lot of these firms are not only coming from traditional financial institution backgrounds, but they’re also just playing fintech start-ups, they’re e-commerce companies, basically, the companies that have a lot of governmental connections, a lot of resources and a lot of capital just sitting around that they can allocate or keep more capital reserves, etc. so, besides that – remember the staggering figure that I came across was Ant Financial which is the fintech investment spinoff of Alibaba, it accounts for 35% of total global capital investment in fintech firms in 2018, which shows that A) there is a crazy amount of focus going on right now within China for fintech investment and B) that some of these bigger players have an insane amount of resources to leverage in whatever direction that they want to.

By contrast –moving on to the next stage, we’ll jump over to start-ups. China is pretty unique wherein most start-ups and smaller companies have a lot of operational and regulatory breathing room when it comes to product development and product testing. And of course, this helps by reducing the barriers to entry, encourages either rightly or wrongly experimental business models, products and services. It’s a pretty risky approach by the central government to allow this sort of operational grey area, operational breathing room – whatever you want to call it, but ultimately its resulted in a pretty flourishing fintech start-up community. An example of this would be the cryptocurrency industry. Depending which study you look at, Chinese investors account for anywhere between 60 – 80% of total crypto investment and even after the Chinese central governments ban on crypto investing, crypto trading, we’ll be one of the largest crypto exchanges that operate primarily within the mainland, for mainland investors – however you want to put it. They even experienced a period where they were opening accounts for 200 thousand plus customers in an hour, which is an absolutely staggering figure. And, besides this, many of the largest cryptocurrency mining companies, public chain companies are either Chinese companies themselves or they have their roots over in China and then once they got to scale, they moved offshore, but still continue to service Chinese clients.

What role do SME’s play in China’s fintech scene?

So, I guess that leaves the last of the three groups. SME’s and SME’s within China are where it gets a little bit more complex. They probably get the short end of the stick so to say. A lot of SME’s in China are pretty much like walking on a tight rope, and so a common saying over in China within their fintech circle is – when you’re small and unnoticed, you can do what you like – once you’re big enough to get noticed, you can still do what you like. And so, the logic behind there is that you have that sort of experimental and a trial period where you can test out your products, see if there’s a fit and then once you – if you’re one of those lucky few that scale-up, get really big, and you have the resources, you have the influence, etc. – to be able to keep on living. But SME’s kind of operate in that middle awkward teenage stage and that’s where in China you have the most risk and you can take a very common example – a very well-known example that a lot of people all across the world have heard of, and the Peer to Peer lender. They started off as a small Chinese P2P lending firm but quickly exploded. So, at their peak, they reached over 5000 employees were providing 500 million dollars USD in loans every month for 4 million buyers. But unfortunately, the company quickly found itself within – I guess you could put it as the crosshairs of Chinese officials and they had a conflict of interest there, between the central government and their own vested business interest, and so the result of that is almost overnight the government enacted a few policies, made it very operationally difficult for DM loan to continue operating and almost overnight the company had to lay off 2000+ employees and to date, it still has its – very existent threat. So these are some of the – I don’t know if you can necessarily say that one section of this between large institutions, SME’s or small more innovative fintech’s firms are driving innovation in China, I think it’s more like it’s an eco-system that all sorts of plays of each other, you know – the large institutions provide much-needed capital and liquidity to the fintech start-ups who are testing out these experimental products who go through this awkward growing stage and eventually turn into those very large institutions that provide the opportunities to begin.

Is there room for foreign companies in China’s fintech ecosystem?

It’s a good question and I’ll be pretty direct with this. At lower levels of operation, before you’ve really reached a high level of exposure, of influence, there’s definitely room for foreign players. It is a difficult operating environment particularly like we discussed because you’ve got cultural barriers, you’ve got language barriers, etc., and so the issue is that once a foreign fintech start-up reaches a certain point of scale, that’s when it kind of becomes tricky to navigate China’s more politically charged financial industry and so – China has made huge strides in opening up their financial industry to foreign players within the past couple of years particularly but they’ve still got a long way to go. And so the typical solution that a lot of these foreign fintech players take as their approach once they reach that certain threshold is to collaborate with a partner Chinese firm, separate operations between China domestic operations and international operations and obviously while this can be a daunting task, any firm that reaches that stage and sees the potential can – would realistically have the resources and the connections to do something.

But I would say for 99% of the players, within the international fintech community – A) the majority of them realize that China’s market while it offers a lot of opportunities, is pretty daunting unless you have a trusted partner that can help bring you over to the Chinese market, and B) even the ones that do, I think that they probably – the vast majority of them don’t reach the level of success where they would really reach the existential threat to them by again this politically driven financial industry.

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