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Chinas's fintech ecosystem

Daxue Talks transcript #50: Understanding China’s fintech ecosystem

China’s fintech ecosystem

Find here Daxue Talks episode 50. Steve Hopkins shares his knowledge and helps you better understand China’s fintech ecosystem.

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.

What problems do fintech solutions attempt to solve in modern banking?

So, I think before you ask about what fintech and what problems fintech solutions are trying to alleviate in modern society, you kind of need to get a base of reference. So, fintech as a class sort of has its roots in the early 1900s where they’re very – what people think is the very first instance of fintech technology – not as we know it, but as the world saw it was as a transfer of orders for the purchase of stock or telegraph. And that happened in early 1900’s I think it was something like 1906 – 1908, and so you can kind of think about the 1900s early on, maybe even 1970’s – 1980’s as that first stage of fintech where you were more just trying to develop the concept of how to use technology to further everyday business operations.

Phase II is probably from the 1970s–1980s to the mid-2000s and so in 1972 you had the NASDAQ who was pretty innovative in bringing electronic quotations over to brokerages, the investment banks, etc. you had e-trade come on as the first online brokerage, so I think you can probably classify the stage II as sort of the internetization of fintech.

And then Phase III which is the mid-2000’s to current is really what we consider fintech. The digitalization of these products, of these services, which is really just focusing on getting more widespread adoption through working out the kinks in the system. And so, this has been characterized by Robo advisors, mobile payments, digital banks, that sort of thing. Things that are kind of common industry buzz words now, for everyone who is following the China’s fintech ecosystem. So just like that, I think that fintech as an industry, people try to oversimplify it by saying fintech does this – fintech does that and you know the realities that fintech does have at face value some simply used cases so yes – robin hood, a classic example in the States, they’re beginning to offer some digital banking services, they got their name as an online brokerage that focused on millennial clients, but – those sorts of concepts that we’re very familiar with. There’s also used cases of fintech solutions that are pretty convoluted that we’ll talk about a little bit more in this discussion and so – a classic example over in China is supply chain finance where you can use basically a blockchain-based platform to work out some of the kinks in supply chain finance and in a very much simplified term allow SME’s deep within big corporation supply chains, get them access to much-needed funding and capital liquidity. And so, this is all to say that fintech is just a very broad phrase for saying its finance + technology. Using technology to work out some of the kinks within the financial system as we know it.

What is special about the local fintech market?

So, I think that China is very unique in the broader sense that the Chinese market is pretty isolated. There’s a lot of cultural, language barriers – that means that it’s just a little bit more complex to break into for foreign entrants and because of that there are a few more complexities that you need to think about when you’re trying to operate within China, whether you’re a national Chinese firm or a foreign player trying to operate within the Chinese market. But within that there’s also along with these complexities there’s a lot of benefits within the operations of the Chinese market. So, if you’re already within the market, you have fewer barriers of entry into the financial industry; as opposed to a few comparable Western counterparts. There’s a lot of central support through regulations, through easy access, through capital and liquidity – as long as your fintech solution is aligned with the central government’s key areas of focus and the countries overall development.

And I think probably the last most notable one is that the Chinese domestic market is huge. Just think about the population of China – 1.5 billion people and yeah you can kind of segment that – how to say – well the vast majority of the fintech players aren’t going to be trying to access this entire market as a whole, but think about this – as of 2018, over 800 million Chinese consumers had internet access and 98 of that was through mobile devices. Which means this is a massive market of potential users that really brings an opportunity for firms that find the right channels to get their message out. Have a product that can actually provide some value to people’s lives. It brings them a huge opportunity for explosive work. The type of stuff that – the unicorn stories that you hear about are made of.

What have the US and other countries learned from China’s fintech scene?

It’s a good question. There is definitely an attitude of healthy competition between what I would call Eastern and Western fintech circles. But at the end of the day, I think that fintech, the whole purpose of fintech is that it’s a little bit broader than arbitrary borders and so everyone across the globe, whether you’re in the West or in the East, is handsomely studying each other, learning what they can from used cases and other companies successes and failures. So, on a broader level, I think the more interesting question is probably – what is the one or two main takeaways that have really unified players within the fintech market and so remember the players are not necessarily only start-ups or companies that are providing these fintech solutions, but also educational facilities, governments, etc.

I think probably one lesson really rings louder than most – on a very broad level, I  think a lot of countries across the globe are beginning to recognize that while regulation is certainly needed for consumer protections, particularly within the financial industry, it can directly impede innovation and so kind of the solution that regulators have come to try to walk that line is to establish regulatory sandboxes, which are just basically frameworks that are meant to spur innovation by lowering regulatory hurdles for innovators. And so, what this really means is that – the specific areas – the regulators within the specific areas will allow these companies to come, register with them, gain access to controlled environments where they can get relaxed exposure to legal limitations and restrictions. They can test their products and their services with a confined user base and they can basically have an easier operating environment for a said amount of time. And so, this kind of advancement of regulatory sandboxes are pretty important developments for not only the global fintech scene, but I would say probably the broader technology industry. In that, it just gives a little bit more breathing room to these firms that are already playing against the odds. It just gives them a little bit more freedom in operations and a little bit more autonomy to really try to bring innovation to the industry.

Where are China’s fintech hubs?

Yeah so China – every city really has its own pocket of fintech players, of a fintech culture, but I think if you’re just talking broadly there are a few main ones. Beijing which has … Guangzhou which has the big players obviously, Shenzhen, Chengdu which is an emerging start-up haven for fintech players and China – where at least the central government is putting a lot of time, effort and resources into developing what they hope is going to become the next central fintech hub, which is … it’s the city that’s a little bit South of Beijing. And so, all of these cities obviously have slightly different undertones. For example … because of its proximity to the government within Beijing is going to be better for some of the fintech firms that are dealing with a little bit more sensitive sort of products that need that sort of bureaucratic relationships, etc. and Shenzhen obviously is right across the harbor from Hong Kong and so they have a little bit international of a perspective, of market opportunities, however, you want to call it. But ultimately all of these places are really pretty well blossoming with fintech innovation.

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