Moving from “Fin” to “Tech”: Five key success factors in future China fintech

Chinese fintech has caught the eyes of investors around the world with its explosive growth in the past half-decade. In our recent report Fintech in China: Hitting the Moving Target, we dissect this explosive growth, examine the imminent shift in the underlying value driver, and delineate the implications for market participants and investors.

Since 2013, major segments of the fintech market — online peer-to-peer lending, online wealth management, digital insurance, and third-party payment — have doubled or even tripled every year. For example, the outstanding loan balance for online peer-to-peer lending platforms surged from RMB31 billion in January 2014 to RMB856 billion three years later.

Such growth triggered massive injection of venture capital into China’s fintech. After achieving a staggering CAGR of 300% over the past three years, at $6.4 billion in 2016, China has overtaken the US as the global leader in fintech venture capital activities and represents 47% of total such investments, according to a KPMG report.

Value driver shifting from “Fin” to “Tech”

China has had a structurally imbalanced financial system with an underdeveloped infrastructure when compared to established markets. The structural shifts resulting from the Chinese government’s recent financial reform efforts, coupled with the skyrocketing internet and mobile penetration, has created an opportunity for fintech players to bridge the gaps in traditional financial services and serve the long tail of Chinese consumers by capitalising on their strong online presence and loose regulation.

Nevertheless, the unregulated growth has led to several high-profile scandals. The Ezubao (E租宝) peer-to-peer lending platform made history as the biggest-ever financial fraud case in China after raising more than RMB1.5 billion in a Ponzi Scheme. Such incidents created growing concerns and prompted policymakers to incorporate fintech into the regulatory framework.

As the window of regulatory arbitrage closes, future fintech leaders will differentiate themselves by pushing the frontiers of technological innovation and disrupting traditional financial services business models through three key technologies: big-data analytics, the Internet of things (IoT), and blockchain. Together, these technologies will create significant disruptions along value chains and bring about distinctive values for each of the four major areas of financial services: financing, investing, insurance, and transaction.

Consider consumer finance as an example. The IoT created new, innovative sources of non-financial personal data that can be analysed using big-data analytics to aid the credit approval process, effectively expanding the “lendable” population.

What does it mean for China’s fintech market participants and investors?

The potential for growth in China’s fintech remains massive, and players of all sorts will attempt to penetrate the market. While there is no one-size-fits-all formula for success, we see five key factors that can increase its likelihood

1. Data abundance and application: Access to or ownership of large amounts of proprietary data and the ability to derive insights from them allow future fintech leaders to differentiate in terms of both products and pricing. 
2. Large customer base: A large customer base allows fintech companies to apply data-driven insights and directly monetise their customers. This in turn enables a fast accumulation of valuable data that can be further analysed to enhance product offerings.
3. Availability of proprietary and comprehensive products: Fintech players will need to develop adequate scale and obtain necessary licenses to enable a comprehensive and proprietary suite of product offerings. 
4. Strong knowledge of financial services and risk management: Financial services and risk management expertise remain a prerequisite of success, allowing for efficient identification of useful data and construction of effective risk models.
5. “Fin plus tech” organisation and culture: A lean, flat organisational structure with product-driven teams will allow fintech leaders to shorten product development cycles and maximise returns by offering tailored products.

Different types of players in the China fintech space will have to craft their own strategic agenda moving forward, considering their respective strengths and weaknesses. For example, incumbents would need to build data capabilities under a flexible organisational setup. This means leaner structure and culture with an operating model more suitable for fintech and innovation. Fintech players would need to apply for licences and find ways to monetise their user bases.

As the fintech market dynamics becomes more complex, investors need to avoid overvaluing regulatory arbitrage, explore the broader player landscape, assess potential downside, and capture the value from technology and surrounding infrastructure.

The fintech landscape in China is evolving fast, and only those who weigh it right would be able to hit the bullseye.