China’s Ant Financial Group announced in January 2017 that it will acquire the second biggest global money transfer operator, US-based Moneygram, for $880 million. This sizable new deal spotlights the global ambitions of China’s internet finance giants. The Alibaba Group, with which Ant is connected, together with Tencent Holdings and Baidu, are among the six largest internet companies in the world today by revenue, after Amazon, Google and Facebook. Meanwhile, the success of these players in their Chinese home market has been receiving increasing attention outside China: as one example, I wrote this blog last August on TenCent’s WeChat payment service following an Economist magazine cover story recognizing their innovations and how far they had evolved beyond emulating peer internet companies outside China.
At Digital Frontiers Institute, we had a growing interest to understand better the story emerging from China: after all, what do digital financial services look like when they reach large scale and move at high speed? If China is indeed ‘ground zero’ of much digital finance innovation today, then today’s digital financial professionals need to understand at least the headlines of that story, much as they need to be able to explain the success of Kenya’s MPesa mobile money service or indeed the evolution of the offering of Paypal as an early global fintech pioneer. Last year, during China’s presidency of the G20, we were delighted to have the opportunity to partner with the Chinese Academy of Financial Inclusion (CAFI), a newly established institute at Beijing’s Renmin University Business School. Located close to Beijing’s Zhongguancun innovation district, increasingly a global fintech hotspot, Renmin University brings a perspective on private sector business as well as public sector policy which are both essential ingredients in China’s story. Dr Bei and Professor Li of CAFI, together with other colleagues of theirs, have been undertaking research of their own into the status and evolution of China’s digital financial inclusion. And they have helped us at DFI to get a clearer perspective on the developments in their country.
The immediate outcome of our cooperation is a new three week online course on DFS in China, which DFI will first offer in partnership with CAFI in April 2017 and then later in the year. The course aims to provide an overview of what is in fact happening in DFS in China, and understand the different factors—consumer attitudes, business models and policy environment—which have led to this. As I have delved into a range of local and foreign sources to understand better the Chinese story so as to place it in a global context for the course, I remain impressed by two main factors. First, the speed of digital finance developments in China—after all, China’s card payment association China Union Pay was set up only 15 years ago, and now is being leapfrogged by smart phone-based payments which bypass the massive installed card handling infrastructure. Second, the breadth of product development in China is striking: while internet payment services like Alipay and WeChatPay have attracted hundreds of millions of registered users, they have also supported and enabled the proliferation of a wide range of digital financial services. P2P lending and digital credit offerings have taken off; money market mutual funds which accept very small savings like Ant’s Yu’ebao are already among the largest in the world; and even ‘insuretech’ shows signs of taking off in China. It is already possible to buy online a microinsurance policy for a fraction of a dollar which insures a buyer against the risk event (costing under $2) of having to pay for the return of goods ordered over the internet.
This proliferation of service offerings is exactly what one would expect in a market during its take-off phase. However, a take-off phase also usually comes with excesses and abuses which lead to failures: China started to see its share of those, especially among P2P lending platforms in 2015. Those very public failures prompted government to issue for the first time a broad policy framework on internet finance in 2015. In 2016, the various sectoral financial regulatory agencies started to promulgate new regulations to cover sectors which had largely been un- or lightly-regulated—not surprisingly, covering non-bank internet payment companies and P2P platforms first. These regulations are currently at an early stage of enforcement. However, they have the effect of stabilizing the expectations of current players and their clients, as well as creating barriers to entry for new players. The bigger existing players stand to benefit, and the competitive effects of their growth and increasing dominance on the retail banking system remain to be seen in the years ahead.
In China last year, I heard several people, including Ant Financial’s Chief Strategy Officer Long Chen, refer to this time as ‘a golden age’ for digital finance. Based on what I have seen so far, I would agree. During China’s historic golden age under the Tang and Song dynasties (around 600 to 1400 CE), Chinese innovations like printing, gunpowder and the magnet spread worldwide and fundamentally changed the world as it then was. Similarly, the ripples from the current golden era of internet finance are likely to be felt well beyond China’s borders—whether through off-shore expansion like Ant’s acquisition of Moneygram; or through demonstration of working models which can and will be widely emulated by regulators and innovators in other markets. Whichever the path of influence, the ongoing developments in this area in China are too important for today’s fintech professionals not to follow and not to try to understand. We hope that the new course will help them start the process.
By David Porteous