China's fintech market is unique and booming
Zennon Kapron is often said to be the top expert on Chinese fintech. The founder of both China Fintech, a Shanghai-based industry group, and Kapronasia, a consulting firm, his deep knowledge of the Chinese fintech scene is widely sought after. In conversation with AltFi, he discusses the Chinese market, what's exciting about it and where it's heading.
The People’s Bank of China (China’s central bank) launched a fintech committee last week. Will it make a difference?
The Chinese government’s approach to fintech has very much been wait and see. If you look at the regulations around P2P lending, the government watched what was happening, but didn’t overly regulate. Now that fintech has gained momentum and organisation it’s natural that the PBoC got involved.
One of the challenges that the industry faces is that the regulation around fintech is split. Some falls under the PBoC, but plenty doesn’t. A PBoC fintech committee should hopefully bring some clarity to regulation around fintech itself.
You’ve said in the past it is very difficult to be a bank in China these days. Why?
The rise of digital payments offered by the tech giants known as “the BAT” (Baidu, Tencent, Alibaba) have eaten away debit and credit cards. We calculated that lost fees cost banks about US$20 billion in 2015, which is a huge chunk. One of the directors at one of the banks we’ve spoken to said, “look, our payments business is gone.”
The default now is Alipay and WePay for many people they conduct their daily transactions using them. The digital lifestyle is very much embedded in the day-to-day lives of the Chinese.
Are China’s fintech companies profitable?
There are some tremendously profitable fintechs in China. The ones that are doing very well are not necessarily the ones you hear about all the time. We know a payday lender here in China that’s privately held. I believe they were originating about 1 billion renminbi per month last year. Their platform is scaling rapidly and they have a very good system for assessing credit.
Tech startups in China have always tended to be a bit more gritty than places like Silicon Valley. It tends to be the stereotypical 20 guys in a small room coding — no free drinks, no free snacks, no shared spaces. It is much more do or die and intense in China.
Do you think fintech will become dominated by the tech giants Baidu, Alibaba and Tencent?
It certainly is right now. When you look at their control of the digital payments market and the way they’re moving to wealth management and digital finance.
On Alipay, I can book a taxi, invest in wealth management products — any number of things on one platform. When you have these platforms and all the data that they’re collecting you have a pretty compelling value proposition and your ability to bring specific products is greatly enhanced.
How damaging have these well-reported cases of fraud been to China’s P2P industry?
It’s difficult to say because not a lot has been reported. There is a lot that we don’t hear about. Anecdotally, someone I know lost a few thousand renminbi in a product that blew up on one of the P2P lending platforms and they got back some of it.
We went through a cycle where a fireworks company were starting a P2P lending platform. It was like one of those moments when your grandmother starts talking about a particular stock, and you know it is time to get out.
A lot of Chinese platforms and startups guarantee the return and principle as a way of attracting investors. As I understand it is not strictly lawful but the companies find ways around it.
I don’t know how they get around it. But when the government cracked down on P2P lending last year it was one of the things they were very focused on: insuring that they were no longer guaranteeing these products. The result of the crackdown is that this sort of thing is less of a reality now than it was a couple of years ago.
When you have a stock market that over the course of a year returns 40 percent, people expect large returns. Real estate here in Shanghai is another example. When P2P got going promising 14+ percent returns that was not, for a lot of people, that strange.
What in Chinese fintech excites you most?
Some of the lending in the SME space and consumer space has been quite exciting. To give an example, there is a simple fintech that provides the equivalent of US$100 credit to migrant workers in big cities to allow them to buy a mobile phone as soon as they arrive to the city. The interest rate is high on those loans, but for the migrants who go from making a few hundred renminbi in rural areas, to making a few thousand renminbi when working in Shanghai, that loan is very helpful especially when they first arrive to the city.