By Srijoy Das in Mumbai, June 13, 2019: A not very old saying in west was “Chinese are coming” and like a prophecy gone awry – the west today face their biggest threat in China in terms of it’s looming economic and military might. No wonder, Tony Blair (ex-UK prime minister) predicts that the second half of 21st century will belong to the three giant economies – US, China and India.

However China can claim to have become the world’s most exciting and fastest growing hub for technological innovations based on Internet and mobile technologies that are revolutionizing traditional industries such as banking, payments and money transfer. Being a banker, an active investor, and a programming enthusiast, one such area that amazes me is the rapidly growing Fintech (short for “financial technology” and refers to the application of technology within the financial services industry) industry in China.

This writeup is not about deconstructing China’s rampant economic growth in terms of size and rate but this article attempts to study and decode the factors such – as wider and enhanced benefits to customers, innovation and use of technology and government policies – that have contributed to make Chinese Fintech a game changer. Further this article concludes by recommending other countries such as India to replicate best practices learnt from Chinese Fintech to build and grow a thriving Fintech industry.

Transforming traditional services and customer experience:

Fintech companies are rapidly earning a customer-centric reputation by bridging the gap between what financial services firms currently offer and what customers wish. They are improving customer experience by merging financial services seamlessly with daily activities to make banking and other financial services practically invisible and seamless.

Take for example, the anecdotal experiences of an American – Martin Chorzempa (a research fellow at the Peterson Institute for International Economics (Washington, DC)) who visits China frequently as a scholar. Martin recalls during his earliest visits during 2013 to China – while he would frantically search for an ATM for cash, his chinese friends used their phones’ Alipay or WeChat app to split restaurant bills. And while his chinese colleagues invested their paychecks with the click of a button to start earning interest immediately, he had to wait in line at a bank.

According to Martin, Fintech firms such as Alipay and Tencent’s WeChat have changed the way many Chinese people live their financial lives. These apps (Alipay and Wechat) are like one-stop shops that enable half a billion Chinese to access a dizzying array of services, from payments, loans, investments, and credit scores to taxi rides, travel bookings, and social media.

Fast forward to 2018, even Americans and Indians are witnessing heavy use of mobile apps for services such as online lending, payments and money transfer, online investing. As a banker, I am even more fascinated by Fintech firms competing and even rapidly growing in traditional areas of banking services such as loans and lending. As Martin Chorzempa observes that because so much is sold via these apps, Alibaba and Tencent know the health (or lack thereof) of many small businesses across China. As a result, they can lend to companies that banks might consider too risky. Likewise, people with no traditional credit scores can get cheap loans because Ant Financial has their payment and purchase history.

Innovation via technologies: AI, Biometrics, and Big Data

Leveraging technology is key to making our lives smoother. While we have discussed the dizzying benefits of Fintech revolution, let’s take a look at the modern and innovative technologies that are behind Fintech. According to an industry expert (Executive Director and CEO of China CITIC Bank International), the technology within FinTech can be categorized as ‘ABCD’, that are Artificial Intelligence (AI), Biometrics, Cloud and (Big) Data.

First one, AI–is defined as the field of study that gives computers the ability to learn without being explicitly programmed. In other words, AI enables computers to learn highly repetitive tasks and perform them with remarkable accuracy and efficiency. For example, AI enables bank to save time and money by automating tasks such as account opening, anti-money laundering (AML) checking and user acceptance testing. Second one, Biometrics (short for identifiers that are the distinctive, measurable characteristics used to label and describe individuals) solutions such as fingerprints, face recognition, voice recognition have enabled customer authentication that traditionally relies on the physical presence of the customer at a branch, a signature on paper etc.

In digital world, for example via mobile mobile banking, using Biometric solution, customers will be able to access their banking applications without having to memorize and input various login IDs and password. Third is Cloud computing (technology that allows people access to the all kinds of applications and even data storage services through the internet) offers the possibility of a more cost-effective infrastructure, leading to high efficiency, low cost and secure data access. And finally Big data (that refers to extensive and huge database) that may include all the customer-related information necessary, allowing a detailed and personalised analysis on customers and predicting their behaviour using machine learning and AI tools.

Interestingly the Chinese Fintech industry has “technology-centric” firms that specialise in these four (“ABCD”) technologies. These firms are also rapidly growing along with the financial services oriented firms.

Government policy that fosters Fintech

Regulating any nascent industry such as Fintech is a dynamic balancing act and regulations may constantly evolve through trial and error. However the Chinese government has played a huge helping hand in promoting its Fintech industry. For example, the Chinese government gave its tech giants far more leeway to innovate than American regulators would allow. Further China left the online payments market virtually unregulated for years, and the central bank governor gave those companies freedom to grow before any rules would be imposed.

Overwhelmingly, the most significant factor that limits the mass application of financial technologies is regulation. We have seen how American regulators forced young fintech startups to comply with the full rulebook, though its application to their new models was not always clear. For example, PayPal had to go state by state to apply for money transmitter licenses. The US regulator has also long kept a separation between banking and nonfinancial businesses. In India the regulators have been dithering too and fintech startups (based on blockchain and cryptocurrencies) are finding it difficult to anticipate future policy directions.

On the other hand, a brief timeline of regulation of chinese Fintech underlines the rapid and proactive steps taken by the government and the regulators. In 2016, Chinese government laid out a comprehensive policy framework for regulating the internet finance industry across all verticals, namely lending, insurance, crowdfunding, payments, fund distribution, consumer finance. Next in 2017, a centralized clearing house (Wanglian) for all third-party payments was established, enabling regulatory oversight on fund flows, that were previously circumvented by FinTech players. Finally later in 2017, Central bank also set up a FinTech committee to act as overall coordinator of all FinTech efforts and policies.

Why Fintech is the future in China?

According to a Chinese consulting firm ( China’s Fintech miracle lies in the country’s unique technology ecosystem: a tech-savvy population, an underdeveloped banking industry, and an initially relaxed regulatory environment (see section – Government policy that fosters Fintech). In fact more than 95 percent of China’s internet users—or 772 million people—access the web via a mobile device. All the above, the unique environment cultivates Chinese users’ to be heavily reliant on mobile payments (In 2018, mobile payment saw vigorous volume growth, up 7.4 percent at the first half of the year, reaching 566 million people according to a report by the China Internet Network Information Center (CNNIC)), that in turn drives the development of online lending and its adoption.

Furthermore Fintech firms have noticed the surplus of underserved chinese individuals (rural and urban consumers) and SMEs and have stepped in to fill the void left by the under-developed banking system. According to the certain World Bank’s Survey, Chinese SMEs received less than 25 percent of the loans extended by Chinese banks even though SMEs accounted for over 60 percent of China’s GDP and 80 percent of urban employment. This gap in lending was attributed to the lack of qualified collateral and credit histories among SMEs. FinTech can play a significant role in helping close the gap between the financing needs of private enterprises and banking products at the time when banks might become more reluctant to address this issue amid downward pressure, according to experts and officials.

Challenges ahead

Notwithstanding the immense benefits of Fintech, a few readers might also be aware of the pitfalls and potential dangers of Fintech. Firstly, Fintech is a disruptor and can potentially displace the traditional business models of banking that may lead to large scale job losses and unemployment. Secondly, data privacy is a huge issue as Fintech firms collect and control far more customer-centric data and see into more of their users’ lives than any individual companies. This data is not only prone to hacking and related data thefts but also such information could be used against the wishes of the consumer.

We have seen that every new technological progress (whether it was the textile machines or the internet) has caused few pains to the society while bringing more benefits. While all the above challenges don’t seem like motherhood and apple pie, societies have to adapt to new trends and acknowledge new problems before tackling them through use of technology and government policies and regulations.

As Fintech gains more strength, the traditional businesses either will be wiped out or have to adapt to changing trends. Similarly the society will have to adapt to newer jobs by re-skilling themselves and governments have to support societies through skill development programs and appropriate social-benefit schemes. Likewise those who are less tech savvy or those who depend on cash will have to adapt to the new world of Fintech or risk being shunned.

The data privacy issues have to be tackled through a combination of better technology, tools (such as data and internet/mobile security softwares) and government policies and laws that can better protect the consumer’s data.

What can India (and other developing states within India) learn?

India as a country has many similarities with China in terms of demographics, economy and related problems. In context of developing a Fintech ecosystem in India (and its states), we can draw several parallels between China and India such as – a large number of digitally savvy users and high mobile phones penetration (using internet/mobile phones), a pro-business government with an agenda for economic development, an underserved (but aspirational) and under-banked society.

While India is no alien to Fintech industry that is making rapid advances (A few Indian Fintech firms e.g. Paytm, MobiKwik, PhonePe), its still a very young industry compared to that of China. Furthermore compared to that of China, Indian banking systems are more developed and similar to western counterparts such as USA (with a mix of domestic and foreign banks), additionally the Indian customers are more conservative in their financial preferences, therefore the disruptive potential of Fintech may be muted. However the traditional banking and financial institutions can leverage their existing customer base and adopt Fintech based products. Moreover, the fintech firms can accelerate the much needed modernization of the traditional banking sector, reducing costs in the process and increasing the size of the customer base.

Therefore the build-out and growth of Chinese Fintech industry can serve as a great template for India. As in China, Fintech can play a significant role in helping close the gaps in the banking and financing needs of Indian private enterprises (mainly SMEs) and of the vast rural and semi-urban consumers. The current Indian government can also borrow a leaf out of the book of its Chinese counterpart with regard to framing policies that are pro Fintech and providing a more nurturing regulatory environment for Fintech firms.

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