Opinion: How China grew so fast in fintech and what we can learn

Photo credit: Pixabay.

Nowadays, the so-called Fintech Hill is occupied by Chinese giants: Alipay, Lufax, ZhongAn, and JD. These companies are notable not only due to their huge customer bases, operations, and funding but also because they continually expand their product lines and significantly increase the value proposition for end users.

How did China grow so fast in the fintech space? I’ve discussed this a lot in my new book The First Fintech Bank’s Arrival. Many local large players —tech giants, traditional banks, insurance companies, as well as funds and financial holdings —realized in time the enormous potential of China’s fintech market. They play the big game by providing massive investments in several companies, being open to M&As, and actively facilitating these kinds of deals.

Investments to China

Due to the comparative maturity of the Chinese fintech VC market (followed by India), 25 percent of all deals in Asia are at series B, C, and above, which is quite a high share and shows that the market is growing up.

Forty-five of the biggest checks (series B, C, and above or over US$15 million) went to companies in India and China, where lending, payments, and insurance represent 80 percent of all companies. The second biggest checks (series A and B or US$3 million to US$15 million) went to Indian startups in lending and big data industries.

Early-stage deals (pre-seed, seed, pre-A, and series A or US$0.1 to US$3 milion) mainly went to India and Singapore, though they remain very mixed and saturated. Wealth management and payment startups dominate in the early stage but hold only 35 percent of all investments.

I believe that the country has succeeded so much in fintech for a number of reasons:

• The Chinese have balls. They prefer action to empty talks about fintech.
• All market players (the state, large companies, startups, venture firms) are very synchronized. They support each other at every growth stage.
• The state supports the new industry very quickly both in terms of regulations (fintech companies are clearly separated from traditional banks and are given full freedom in implementing new ideas and technologies) and funding (direct and as a leverage for small and large VCs). And it’s a big game for them, as they have never intended to “try” (spending millions) but instead set toward becoming leaders (spending billions).
• Due to the large unbanked population, fintech companies don’t fight with each other and traditional banks. Instead, they have immediately become mass solutions for millions of people who had previously only used cash.

Problems for fintech startups in Southeast Asia

In Southeast Asia, there are plenty of startups but all of them are small. They also develop roughly the same products. In the US and Europe, startups rely on unique ideas and technologies, but startups in Asia rely on localization and distribution. As a result, there is a strong disproportion where there are few acquirers or strategic investors and too many startups that don’t differ much from each other. So, the acquirer sets the price and brings it down.

Moreover, a lot of startups in Southeast Asia are local. More than 90 percent of them operate in only one market, and they are more eager to win its own market than to scale to others.

Cannibalism is one more problem. Startups in Southeast Asia spend much effort in competing with each other instead of fighting for the ‘blue ocean’ of opportunities.

Suppose that Alipay or WeChat Pay would like to acquire similar companies in each country in the region. It would require integration of more than 15 different teams, corporate cultures, and technologies, which can destroy the processes of the acquirer or strategist. At the current stage, their customer bases and turnover may be larger compared to their local competitors. But in comparison with their foreign competition, the share will be very small. Additionally, due to the early growth stage, there will be a disproportion between the costs for a launch and accumulated indicators over the period.

Cannibalism is one more problem. Startups in Southeast Asia spend much effort in competing with each other instead of fighting for the “blue ocean” of opportunities.

It would be logical to expect organic growth for a while, but this is not the case. Due to the lack of infrastructure for scaling (such as pan-regional banks with open APIs for fintech or BaaS platforms), starting in a new market will not be cheaper than the first launch in terms of money, time, or the number of people involved.

What investors from China are looking for

In summary