As US fintech pulls together after valuations fall, China leaps ahead? – Tearsheet
Not long ago, the FT reported that almost half a trillion dollars was wiped from US fintech valuations, leaving the industry in a state of panic – even though over 30 new fintech companies have been listed in the US since the start of 2020. The pandemic created a possibility of higher interest rates, lower valuations and financial uncertainty. That may be the obvious cited reason behind the failure of fintechs, but perhaps it’s time to rethink that premise.
As fintech companies in the US fail to retain their value, the center of fintech is gradually shifting eastwards – hint: China?
People in China share restaurant bills, invest their paychecks with a click to start earning interest immediately, get a shared ride and pay for lunch by scanning a QR code – all through mobile apps like Alipay, WeChat Pay and DiDi.
The world’s second largest economy has pioneered mobile payments, and is largely cashless.
What would happen if Amazon and Google actually wanted to make money from banking? If Apple opens a bank account or if Twitter has a channel to pay bills? They would likely shake up the payment landscape – as did China’s big tech.
Payments are king in China’s fintech landscape
In 2014, two of China’s major tech companies — Tencent, the parent company of messaging app WeChat, and e-commerce platform Alibaba Group, which spun off its fintech holdings into Ant Group — entered the payments space. Today, Alibaba’s Alipay is the world’s largest mobile payment platform.
Mobile connections in China corresponded to 113% of the total population in January 2022. The number of mobile connections in the country increased by 29 million between 2021 and 2022.
Moreover, China’s fintech market size is estimated to reach $85.7 billion by 2022, according to China’s Fintech Development Plan 2022-2025, released by the central bank.
The big techs that entered financial services by using platform-based technology to facilitate digital payments subtly expanded into other areas, such as lending, asset management and insurance services. This move threatened the banking sector in China – and the banks’ credit card revenues fell as people replaced them with mobile transactions. However, banks remained relevant by investing heavily in digital capabilities, and by launching fintech services to compete with big tech offerings – while smaller banks relied on partnerships with big tech companies.
Alipay is a mobile wallet that allows users to store debit or credit card details to make online and in-store purchases using QR codes. It works in the same way as Apple Pay or Google Pay. Since Alipay works with Visa, Mastercard, American Express and more than 180 other international FIs, it remains the most popular payment gateway for all of China.
WeChat is a super app that people treat as a social media platform like Facebook, Twitter or Instagram to connect socially. It can also be used for payments, asset management and lending – together with other services such as carpooling, food ordering, travel booking, paying electricity bills, paying in shops and so on.
WeChat Pay and Alipay work in a similar way.
In 2020, Chinese regulators investigated the internet finance industry, leading to Ant Group’s $37 billion IPO being suspended.
“In my book, Cashless: China’s Digital Currency Revolution, I mentioned ‘analog regulators met digital fintechs’ – and if analyzed correctly, what the Chinese regulators did before the cancellation of the IPO was an attempt to make progress for fintech companies ,” said Richard Turrin, best-selling author and fintech advisor.
Banks are traditionally slow to comply with new regulations. When dealing with digital platforms that expand by the month, regulators couldn’t keep up. It was hard to believe for many that Alipay and WeChat Pay, launched in 2014, would become tech giants within three years, and all major cities in China would become cashless by 2020. When the Ant IPO was canceled, tech institutions had had already become so massive that regulators could not keep up at the time.
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