Inclusion, Innovativeness and Stability – An equation to be solved for both China’s Fintech firms and regulators?

“We cannot manage an airport the way we managed a train station. We cannot use yesterday’s methods to manage the future...”- Jack Ma The $37bn listing of Ant Group, from the world’s biggest IPO to the world’s biggest suspended IPO , in...

We cannot manage an airport the way we managed a train station. We cannot use yesterday’s methods to manage the future…”

Jack Ma

The $37bn listing of Ant Group, from the world’s biggest IPO to the world’s biggest suspended IPO , in 48 hours, has become breaking news here in China and in the global financial markets this week.  Since its establishment in 2014, Ant Group has transformed the way that Chinese people and Chinese small business interact with financial institutions. The company’s Alipay app has become an essential payment tool for more than 730 million users, as well as a platform for obtaining small loans and buying insurance and investment products. During the Covid-19 outbreak, Fintech, through a broad range of non-contact financial service provision, played a critical role to uphold the level of domestic consumption as well as to solve financing and liquidity difficulties faced by small and medium-sized enterprises (SMEs) in the manufacturing and trading sectors in China. For instance, according to estimates by researchers from Peking University, every 1% annual growth of digital loans could reduce China’s business sector’s financial losses caused by the Covid-19 outbreak by 2,6%.[1]

This disruptive nature as well as the large-scale and profound impact on the “conventional” financial market and services make the suspended deal both interesting and important, far beyond the size of the deal (and the celebrity effect of Jack Ma). As some financial analyst put it “This would be the largest IPO in the world, and it is so important for Chinese technology companies and China…” In other words, this deal put a spotlight on the need for a deeper understanding of fintech’s role in China’s innovation development as well as the role of China’s regulatory environment and development for fintech – now and in the future. 

“We have full confidence in Ant Group colleagues’ ability to do a good job. Society has high expectations for Alibaba. We will continue to work hard to not only meet but exceed expectations and fulfil our responsibility to society.”[2]

Alibaba spokesperson

Having this in mind, we would like to share with you our observations and analysis of China’s Fintech, in terms of both market development and policy development in the following aspects: 

  • The rapid advancement and adoption of digital technologies in China’s fintech sector. 
  • Fintech regulatory development in China.

ABCD-empowered Fintech in China

Given China’s rapid transformation towards a digital economy as well as rapid advancement and adoption of digital technologies, an ABCD-empowered leap (i.e. AI, Blockchain, Cloud Computing and Big Data) has become a key feature and success factor for China’s Fintech industry in the recent years (See Figure below). Most recently, in addition to data collection, data storage and data analytics, data sharing based on data security and safe integration has become a new technology trend and innovation driver to achieve sharable and usable, but not visible and identifiable use of Big Data.

Figure: ABCD-empowered Fintech
Source: Office of Science and Innovation (OSI), Beijing

This ABCD-empowered leap has indeed given Chinese Fintech firms strong innovation- and competitive edges. For instance, Alipay could handle 300 deals per second in 2010, which was an obvious bottleneck to the rapidly growing online shopping business at annual volume of 461 billion RMB (approx. 599 billion SEK) with small-amount and high-frequency payment needs. In 2013, Alipay began to implement its proprietary cloud-computing technology, with peak processing volume exceeding 15,000 transactions per second. Continuous progresses were made, and the peak processing volume jumped to 85,900 transactions per second in 2015[3], far exceeding the previous record of 14,000 transactions per second held by Visa[4]. In a recent global patent ranking of Fintech companies, 8 Chinese companies are ranked as top 10 (See Table below).

Fintech and fintech-regulation – Learning-by-doing and learning-by experimenting…

Fintech development and adoption require concerted legal and regulatory reforms, which can be grouped into four main areas:

  • Enable new players and new approaches by incumbents to offer digital financial services.
  • Promote competition and a level playing field.
  • Safeguard consumer protection.
  • Fostering demand for digital financial services and customer confidence in digital financial services.

As in many other countries, regulatory development and reforms are lagging technology and market development in China. The urgent issues include financial risks assessment and management, consumer privacy and legal rights protection as well as market competition issues. In the Chinese context, policymakers and the regulatory bodies are developing Fintech-specific regulations and development strategies, given fintech’s central role in “leapfrogging” the way forward to modernizing China’s traditional financial institutions as well as in being an innovation driver for China’s overall digital transformation (See Box below).

At the same time, it is also important to recognize and acknowledge that an innovative and inclusive transformation of China’s financial market and its interactions with the real economy – having financial stability, efficiency and sustainability as bottom lines – is an extremely demanding task. Because of the immature nature of the ongoing policy- and regulation development process, unbalanced, uncoordinated and incompatible policy measures and regulations are common challenges. Also, given the strong focus on innovation development in China’ Fintech development, a particularly important aspect is the Fintech innovation risks that need to be prevented, regulated and handled (See Figure below).

FinTech Innovation Risks – An Overview
Source: Risks and challenges of innovation in FinTech, People Bank of China, science and technology department, modified by Office of Science and Innovation (OSI), Beijing.

China’s Fintech sector– what do we see now and what could we see in the future?

“Investors will be more inclined to strike a balance between ‘tech’ versus ‘fin’ valuation, which means lowered multiples. By how much is hard to say and depends on how quickly and effectively Ant Group deals with the challenge – but it is also a golden opportunity to show it can handle regulations.”

Kevin Kwek, Alliance Bernstein

A relatively closed and lagging financial sector in China, has paradoxically, become one of the “favorable” market conditions for a highly dynamic Fintech development. Combined with a highly digitalized consumer market and large platform-based Big Tech firms based on mobile internet, such as Alibaba and also Tencent,  we see a rapid development from narrow-defined e-payment services to more diversified and sophisticated financial services as well as a dynamic innovation capacity development in China’s Fintech sector. 

In terms of concrete policy measures, several regulatory bodies, led by People’s Bank of China (PBoC), Ministry of Industry and Information Technology (MIIT) and Ministry of Science and Technology (MoST) are making coordinated efforts in the fields of Fintech Product Regulation, Personal Financial Information Protection, Digital infrastructure and Research and Innovation on FinTech.

Given the accelerated digital transformation of the Chinese economy, not least in the aftermath of the Covid-19 Pandemic, Fintech will play an even more strategic role – as an innovation accelerator and a system-transformation enabler. Looking ahead, we see both stronger potentials as well as more complex challenges:

  • Enhanced inclusiveness through Fintech, but also increased innovation risks and “system risks”: FinTech has greatly contributed to financial inclusiveness of under-serviced consumers in the traditional financial market. As the next step, SMEs, not least innovative SMEs in both the manufacturing and service sectors will be the focus for China’s the FinTech industries, i.e. moving from “2C” to “2B”, supported by IoT infrastructure and industrial IoT. At the same time, both innovation risks and system risks increase when Fintech is even more deeply integrated with the real economy transformation – which have been highlighted by the financial regulators and other involved Ministries.

  • Big Data as Fintech innovation-driver – but in a different way: Over- collection and over-use of consumer data and financial information have already become a focus for the Chinese financial regulators. Hand-in-hand with the development of regulatory frameworks for personal data protection, secure data sharing and data security technologies are now rapidly becoming a new innovation driver in the Fintech industry.  

As a leading nation for fintech innovations and applications, it will be of a particular interest for Swedish policy- and market actors to follow the current and the future development in China. Given that the growth conditions are largely specific to emerging economies, the degree of internationalisation of Chinese Fintech firms is still limited and regionally constrained, due to differences in both market environment and regulatory framework. The same is true for the foreign Fintech companies who are interested in entering the Chinese market, particularly given the fact that the opening of China’s financial market is still in an early stage.  At the same time, the potential of a two-way openness between China and Europe in some “niche segment” , such as green finance, could be gradually emerging, given the mutual interests of accelerating the harmonization of taxonomy and standards and the common policy goals of better integrating Fintech with green and sustainable transformation.

Nannan Lundin, Linnea Yang

[1] For more information see. e.g. discussion on China’ Fintech development and Covid-19 outbreak. (in Chinese).




Theme image source:European Parliamentary Research Service Blog