A Hundred Apps Bloom in China as Millions Bank on Their Phones
You forgot your wallet, and it’s four flights up to your apartment in Shanghai’s French Concession. No worries. You’ve got your smartphone. Open Tencent Holdings’ WeChat, the Chinese Twitter on steroids, and tap China’s versions of PayPal, E*Trade, Uber, Amazon, and TripAdvisor rolled into a single app, Bloomberg Markets magazine reports in its October issue. Order and pay for your taxi and then book a restaurant where you’ll split the bill electronically with a friend. With a few minutes to spare, transfer money into the mutual fund run by e-commerce giant Alibaba Group Holding. See a poster for a hot new movie? Snap a photo of it and let search engine Baidu find a theater and buy you tickets for later that evening.
Financial innovation is bubbling up around the globe, but China is where digital banking, investing, and lending have gone mainstream. Technology companies armed with financial apps are challenging banks and other intermediaries for a market with 1.3 billion people and $7.8 trillion of deposits. Tencent’s WeChat (called Weixin in Chinese), Alibaba’s Alipay arm, and Baidu are leading the way with digital wallets that let consumers manage their money via their phones.
“Financial innovation is being discussed everywhere—in New York, London, San Francisco, Hong Kong,” says Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia. “But mainland China is where it has gone beyond talk and is really having an impact. What we’re seeing here is the future of global banking.”
Traditional banking in China is balky, backward, and inefficient—creating ample opportunities for nimble tech companies such as Alibaba and Baidu. The huge, state-owned banks do some lending to consumers and private businesses, but they typically prefer making loans to state-owned enterprises that provide implicit government guarantees. For consumers, the government banks offer low interest rates on savings accounts, making new online funds and financial products with higher rates attractive.
Banking can be such a struggle in China that consumers tend to shun personal checks and instead tote wallets bulging with 100 yuan ($16) bills, China’s biggest banknote. “The inefficiencies of Chinese state-owned banks explain the innovation coming from the private sector,” says Duncan Clark, a former Morgan Stanley investment banker who founded and runs BDA China, a Beijing-based technology consulting firm.
Kapron, who has lived in Shanghai for 11 years, has experienced the digital revolution firsthand. “In 2004, whenever I had to pay my rent, I would go to my bank, queue, withdraw my rent as cash, walk it across the street to my landlord’s bank, take a number and queue, and then eventually deposit the money into his account,” he says. “Today, I pay my rent using Alipay from Alibaba. I invest using WeChat from Tencent, and I bought a mutual fund from Baidu. The landscape has completely changed.”
Kapron is among the 390 million people in China who have registered to use mobile banking. That’s more than the population of the U.S. and 40 percent of the people worldwide who bank by phone, according to consulting firm Accenture. Chinese companies that process online payments have lured even more converts. Alipay has attracted 400 million people worldwide who actively use the payment system on their desktops and mobile devices, the company said in July. It processed $778 billion of payments in the year that ended in June 2014.
Tencent’s QQ messaging service counts more than 815 million active users each month. Tencent says more than 100 million users have integrated their bank cards with its QQ wallet and Weixin Payment services. In contrast, PayPal, one of the first online payment systems, had 165 million users worldwide in the latest quarter. Internet-based peer-to-peer lenders, meantime, made at least $32.5 billion in loans in China last year, almost quadruple such lending in the rest of the world, according to U.K. investment bank Liberum Capital.
China’s big banks are fighting back. Industrial & Commercial Bank of China, the world’s largest lender by assets, launched its own e-commerce website in January 2014 to sell jewelry, electronics, and other retail goods along with some banking products. It also offers a mobile app. Today, ICBC is No. 3 in sales volume behind Alibaba’s Tmall and shopping site JD.com. Chairman Jiang Jianqing says it took ICBC 204 days to hit 10 billion yuan, far less time than the seven-year average for a startup to reach that volume.
The old-guard banks themselves say they can’t act quickly enough. Singapore-based DBS Group Holdings, Southeast Asia’s largest lender by assets, is already active in China. It sees a new opportunity from the explosive growth of online banking and is building an incubator in Hong Kong to find and develop finance startups. “An insidious consequence of the 2008-to-2009 global financial crisis is that our industry has been so preoccupied with issues of capital, liquidity, and ethical conduct that we’ve been unable to prepare adequately for the digital future,” says DBS CEO Piyush Gupta. “This has allowed nonbank competitors to make some of the biggest inroads into financial services.”
Western financial institutions want to find out how China’s digital leaders have built entire ecosystems around their users, says Albert Chan, Accenture’s Beijing-based managing director. Tencent, Alibaba, and others deliver scale that’s unimaginable—and deeply coveted—outside of China. “When I describe the numbers, jaws hit the floor,” Chan says.
China’s fintech arena has its own set of risks. Alibaba is investing in Jerusalem Venture Partners, an Israeli venture capital firm that runs a cybersecurity incubator, to work with startups and protect its payment business from hackers. Peer-to-peer financing is crowded with more than 1,500 lenders, not all of them sound. Yingcan Group, which tracks the nation’s lending platforms, found that 275 peer-to-peer lenders went bankrupt or had trouble repaying money last year. China’s yuan recorded its steepest two-day fall in 21 years after the People’s Bank of China said on Aug. 11 it will allow markets a greater role in setting the currency’s value.
Mobile and Internet banks have a major weakness: Clients need an account at a bricks-and-mortar lender because a human teller must verify their identity. Alibaba affiliate Zhejiang Ant Small & Micro Financial Services Group is teaming up with a startup called Megvii to work around that rule. Megvii offers facial-recognition software based on the 1.3 billion scans China’s public security bureau holds. These scans could potentially be used to identify online banking customers, Megvii says.
Regulators have indicated they’re open to innovation. For one thing, digital banking leaves a trail that cash doesn’t. And it might help the Chinese government get a clearer snapshot of economic activity.
In China, financial innovation can happen as a matter of necessity. When Jack Ma started Alibaba.com in 1999, the infrastructure for online payments didn’t exist. Alibaba invented Alipay to overcome skepticism about doing business online with strangers by putting payments into escrow accounts until both sides are satisfied.
Song Fuqiang, who lives about 370 kilometers (230 miles) from Beijing in Hebei province, owns a textile business and uses Alipay every day. The 31-year-old has even put about 40,000 yuan into Alibaba’s money market fund, Yu’E Bao. “Checks are so outdated, so few people use them,” he says. “I don’t bring money when I go out. I use Alipay to pay for everything.”
Consultant Kapron marvels at how China’s fintech revolutionaries have upended the cautious approach favored by Deng Xiaoping, the leader who began opening China’s economy in 1978. “Instead of crossing the river by feeling the stones, they’ve built a high-speed train,” he says.
This story appears in the October issue of Bloomberg Markets magazine. With assistance from Lulu Yilun Chen, Alfred Liu, Jun Luo, and William Mellor.
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