China key to banking and payments innovation

Financial services organisations in China are expected to shine a light for the rest of the world when it comes to innovation in the banking sector in the coming years, with the primary drivers being non-traditional companies that are looking to develop new payment solutions and platforms.

This is according to a new report by InnoTribe, which stated that financial technology pioneered in the country is set to change the way consumers around the world think about banking. It noted that instead of merely imitating business models from the West, Chinese firms are disrupting and redefining the industry, with an emphasis on ecommerce, mobile and peer-to-peer payments.

“Western banks are pursuing digital transformation projects that are dependent on a vendor community that may or may not understand the direction of change,” the report stated. Chinese firms, on the other hand, are investing in “highly scaled internet and mobile platforms” with architectures that are well-suited to digital banking.

A transformed environment

Despite the recent slowdown in the country’s economy and the associated difficulties this is bringing about, the report noted China’s transformation over the past 30 years has been nothing short of spectacular, as it has become the world’s second-largest economy and is threatening to overtake the US to claim the top spot.

The financial services industry has had a key role to play in this growth. While in the past, protectionist policies and almost limitless support for state-owned banks was the primary driver, this is now changing. The key catalyst was a series of measures passed in 2013 that made it easier to set up privately-owned competitors – something that China’s key tech players, such as Baidu, Alibaba and Tencent (BATs), have been quick to take advantage of.

This is unsurprising, as the boom in technology has been one of the major transformations in the country. At the turn of the millennium, just 1.8 per cent of the country’s population – some 22 million people – had access to the internet, and e-commerce and online payments were non-existent. By August this year, however, almost half the population was online, equating to 668 million people, or more than double the entire population of the US.

Tech firms lead the way

As a result of this, it’s unsurprising that it is technology companies that are leading the way when it comes to disruptive banking and payments solutions. Baidu, for example, while known primarily as a search engine, is also able to use the huge amounts of data it collects to forecast stock markets. In 2014, it launched the Baidu Baifa 100 Index fund with the China Securities Index Company. The fund not only sold out within the first morning, but has consistently outperformed the market since.

Meanwhile, Tencent has taken advantage of its large existing audience to offer financial products. For instance, its WeChat messaging app has over 549 million users – including almost 100 per cent of the country’s Millennials – and has leveraged this to offer them payment services. By adding such offerings to the app, the company has successfully built a platform that encompasses almost any day-to-day payment its users may wish to make.

“This platform approach is key and a unique difference in China,” InnoTribe stated. “In western markets like the US and UK, FinTech innovation is focused on singular applications. Lending Club provides P2P lending, TransferWise provides international payments and remittances, but no one is aiming for the extraordinary economies of scope delivered via a singular platform that is now the norm for BATs.”