Fintech – Old Wine in a New Bottle

A different take on a technological trend in finance

Fintech is increasingly becoming an important part of the global economy, with China so far leading in its development. The rapid adoption of new mobile payment systems like WeChat Pay and Alipay have forever changed how people think of finance and banking. Despite these recent alterations to the banking sector, Dr Oliver Rui, a professor of Finance and Accounting at the China Europe International Business School (CEIBS), offers a different perspective, arguing that these changes are nothing special. It is only ‘old wine in a new bottle’.

By any measure, China is a world leader in fintech. Venture capital (VC) investment in fintech increased more than 600 per cent from 2014 to 2015. The Chinese investment fund Yu’e Bao (余额宝), established by Alibaba’s Ant Financial, is now the world’s largest money market fund with US dollar (USD) 165.6 billion in assets as of Q1 this year. The adoption of mobile payment services Alipay and WeChat Pay, used by anyone who shops at a convenience store or dines at a restaurant in China, is evidence of the rapidity with which fintech has taken off. According to figures compiled by iResearch, mobile payment transactions in China totalled USD 5.5 trillion last year, far ahead of the United States (US).

As mobile commerce, big data analytics, and artificial intelligence plays a larger role in banking and financial services, we have started to see more headlines touting China’s fintech revolution. Having a mobile payment system is actually a fairly simple way to pay one’s bills, however in many ways fintech is basically ‘old wine in a new bottle’. Most customers still require the same services from banks and financial institutions; the only thing that is changing is the tools used to access them. Instead of walking into a bank branch and handling a transaction with a teller, consumers are increasingly banking online via mobile phones. Analysts estimate that, since 2009, e-banking has replaced 80 per cent of traditional bank transactions in China. A typical transaction with a teller costs the bank USD 4.00, while an ATM transaction costs USD 0.85 and a mobile banking transaction costs just USD 0.08; so clearly the lower transaction costs benefit their bottom line.

Fintech will not put traditional banks and financial institutions out of business. It is simply changing the structure of how they operate. As they adapt they will ultimately thrive, and their customers will benefit as well. In fact, the largest impact we will likely see from fintech in China is the acceleration of inclusive finance.

The big data analytics that drive most of fintech’s innovations make it easier for lenders to assess credit risks when deciding on loans. In China, this not only benefits the banks and financial companies, but also the small and micro-enterprises and entrepreneurs that have historically been unable to get financing through traditional institutions. Small and medium-sized enterprises provide approximately 80 per cent of the country’s jobs and have received 65 per cent of the new patents. Yet according to the Report on 2016 China’s Small- and Micro-Enterprises, one third of the country’s 56 million small- and micro-enterprises, along with individually owned businesses, are in debt and only 11.9 per cent of these businesses can receive loans from banks.

Ant Financial and online peer-to-peer lending platforms are filling some of these gaps. Ant Financial’s big data capabilities give it a leg up in being able to accurately judge an applicant’s ability to repay a loan, because it can tap information from the many different components of the ‘Alibaba ecosystem’. For example, when a merchant with a small shop on Taobao (淘宝网), an online shopping platform, needs a loan, Ant Financial can see the sales volume and transaction size of their Taobao shop. It also has access to the merchant’s personal spending habits if they use Alipay to top-up their mobile phone plan, buy groceries, or purchase flight tickets. As a greater number of small merchants, entrepreneurs and consumers use Alibaba’s e-commerce and mobile payment services, Ant Financial has more transaction data to build lending models for assessing credit risk.

Fintech is also driving efficiencies in supply chain financing, as big data enables manufacturers to be nimbler in response to market trends, and supply chain financing platforms can better assess lending risk and timing of payments in order to lower transaction costs.

Regulations currently prohibit Chinese banks from entering the mobile payment market, and transaction limits mean that consumers can only use Alipay and WeChat Pay for relatively low-cost products and services—92 per cent of the transactions they handle are for amounts less than 500 yuan—so bank-issued debit cards are not going away anytime soon. This also means that banks can focus on higher-value clients and more profitable services.

China’s popular mobile payment platforms are beginning to go global. These payment services can now be used by Chinese nationals in 28 other countries and regions, including the United Kingdom, Austria, France, Germany, Belgium and the Netherlands. However, to date, these payment platforms have been focussed mostly on following Chinese tourists to their favourite holiday and shopping destinations abroad rather than trying to attract European users. This presents an opportunity for European banking and finance companies, as regulations in most countries will require Alipay and WeChat Pay to operate with a local partner.

European companies with products to market to Chinese consumers may also benefit from working with Alipay and WeChat Pay in order to learn more about Chinese consumer preferences.

Yet at the end of the day, until someone figures out how to grow money on trees, whether you are handing over cash, swiping your debit or credit card, or flashing a QR code on your mobile phone, payment is still simply an exchange of money for goods and services; there is nothing revolutionary about it. Fintech does not change the essence of finance which is to identify and price risk. However, fintech can create some breakthroughs in insurance and wealth management with the development of blockchain and artificial intelligence (AI).

Oliver Rui is a professor of finance and accounting, holding the Zhongkun Group Chair in Finance at the China Europe International Business School (CEIBS). He is also the director at the CEIBS Centre for Wealth Management and is the co-director at the CEIBS Centre for Family Heritage. He is professionally designated as a certified financial analyst (CFA) and financial risk manager (FRM). CEIBS, a joint-venture for management education, was co-founded by the Chinese Government and European Union in 1994. It is the first business school on the Chinese mainland to have been accredited by both EQUIS and AACSB and the only business school in Asia to have simultaneously made it to the Financial Times’ top 30 list of MBA, EMBA and executive education programmes.