China leads way in financial technology investments

Traditional banks rattled by rapid success of start-ups and players such as Alibaba in targeting non-branch transaction market.

BEIJING // China led the global trend in FinTech investment last year, contributing 45 per cent of the US$9.5 billion poured into the business segment, new figures reveal.

The year saw a 75 per cent annual growth in worldwide FinTech investments, bringing the total to $22.3bn, a new study by Accenture revealed yesterday.

Last week, Nielsen, a US multi-platform audience ratings firm, signed a deal with Sina Weibo, the Chinese version of Twitter that has 265 million subscribers. The move is designed to provide companies with a more accurate way of targeting markets within Chinese social media.

Global investors are increasingly keen on the emerging sector in China. Alibaba’s Ant Financial raised $4.5bn to invest in its payment system Alipay last month. The country’s second-largest e-commerce company, JD.com, raised $1bn from backers for its consumer finance subsidiary, JD Finance. A peer-to-peer (P2P)start-up, Duanrong, raised $360 million in January.

There has been explosive growth in FinTech-driven transactions outside the branch-centred banking system in China. P2P transactions grew 205 per cent between 2014 and 2015. Mobile payments jumped 163 per cent, and internet payments rose 55.4 per cent in the same period. Crowdfunding using FinTech platforms rocketed 429 per cent between 2014 and 2015.

"The growth has been tremendous because the new players focused on people who had not been fully served by the traditional banks," Oliver Rui, a professor of finance at the China Europe International Business School in Shanghai, told The National.

“These people deal in small amounts. Research showed that the highest level of payments made by online finance companies was 5,000 yuan [Dh3,059].”

But within China, the rapid rise of FinTech has led to an intense battle between traditional banks and start-up companies with no background in the financial sector. What makes this disruptive technology attractive is its c ability to cut the cost of financial transactions by up to 90 per cent, and enables the financing company to deal with thousands of customers at the same time.

For instance, a transactions at a bank branch can cost $4 whereas a financial transaction over mobile internet could be as little as 8 US cents, according to Guotai Junan Securities Research. The cost is 17 cents for online banking and 85 cents for use of ATMs.

Mr Rui said traditional banks quickly jumped on to the bandwagon and invested huge sums in FinTech. They have managed to move 80 per cent of their business to online and mobile payment systems, reducing their costs and addressing the challenges the new players pose.

“The new FinTech companies have managed to grab less than 1 per cent of the retail banking business in value terms,” Mr Rui said. He pointed out that the Industrial and Commercial Bank of China, for instance, employs more than 10,000 engineers on its FinTech facilities.

Still, the retail banking market has expanded with the new players drawing in millions of new customers and involving them in more frequent transactions than traditional banks. But the big banks have used their stronger financial capability to retain high-value customers.

“The scenario is changing dramatically in China’s financial markets,” Yunying Liu, an analyst with the consulting firm, Z-Ben Advisors, said yesterday. “We expect [traditional] banks to mainly focus on high net worth individuals and institutional customers. Retail banking will be led by online and mobile distribution systems.”

However, signs of the competitive potential of the new banks has not gone unnoticed in Beijing. Government agencies have shut down 100 of 400 P2P finance businesses and kept another 150 on their watch lists. In effect, just about 150 of the 400 such companies have been declared to be above suspicion by both central and provincial government authorities in China.

Concerns over FinTech are not limited to China. Citibank recently said the “tipping point” for disruption [for traditional banks] was not far away in the United States and had already been reached in China.

Chinese online finance companies are already eyeing opportunities abroad. Last week, Alibaba’s Ant Financial Services, appointed the ex-Goldman Sachs banker Douglas Feagin as a senior vice president in charge of international business.

Mr Feagin previously specialised in working with clients from the banking, finance, technology and insurance sectors across the US, Latin America and Asia.

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