Standing in line at a Starbucks in downtown Shenzhen, I suddenly realize that no one in front of me is paying with cash. They aren’t paying by credit card either. In fact, I can’t see a single customer holding a wallet or a purse. Instead, they just hold their mobile phones over a reader and – beep! – the latte is theirs.
“Almost no one uses cash here anymore,” says cafe manager Lily Li, adding that more than 80% of all payments in the coffee shop are made via mobile phones.
But it’s not just global chains that offer “m-payment” in one of China’s most technologically advanced cities. Out on the street, two women are selling noodles from a small stall during the morning rush. Amid the steam billowing from the big boiler and the smell of hot spices, I can hear the constant beeping of phones scanning the stall’s QR code.
While digital payments are dominated by debit or credit cards in many Western countries, China’s consumers have jumped directly from cash to mobile.
Of the country’s 710 million internet users – more than the United States and Europe combined – the utilization ratio of mobile online payments stands at 57.7%. Put in plain English, the majority of people who go online are using their smartphones to pay for goods and services, primarily through Alibaba’s Alipay or WeChat’s payment service, according to a November report by consulting firm Ernst & Young and Singaporean bank DBS.
“I can hardly remember the last time I used my wallet,” said Mofei Chen, founder and CEO of Money Bazaar, a peer-to-peer currency exchange platform.
He is one of many new entrepreneurs in a Chinese digital financial services industry that is undergoing explosive development. The EY/DBS report says China has leapfrogged ahead to become the undisputed center of global fintech innovation and adoption, outpacing London, New York, Silicon Valley, Singapore, Hong Kong and other global fintech hubs by a significant margin.
“Few foreigners realize how fast and advanced the development actually is in new payment features and mobile financial services in China,” Chen said.
Indeed, the world’s four most valuable fintech unicorns – a startup company worth more than US$1 billion – are Chinese. The largest is Ant Financial, an arm of e-commerce giant Alibaba, and is valued at US$60 billion. Second is the peer-to-peer lender Lufax (US$18.5 billion), followed by JD Finance (US$7 billion), a joint venture between e-commerce site JD and Tencent, and then instalment payment firm Qufenqi (US$5.9 billion).
China is also the world’s largest market for Bitcoin, accounting for 42% of all transactions using the digital currency during the first six months of 2016, according to Chainalysis.
The surge of fintech services is a growing headache for traditional banks which have been left painfully behind in the competition for e-commerce and new payment methods. These new services are dominated by the internet giants – Alibaba’s Alipay, which has more than 50% market share, Tencent’s WeChat Wallet, based on its popular instant messaging service, and the Google-like Baidu.
The big tech companies are also investing heavily in smaller startups to access the next generation of financial services, including blockchain technology, as used by Bitcoin, and artificial intelligence.
Foreign competitors are limited by government restrictions, while Chinese payment apps are being rolled out abroad, mainly in other Asian markets such as Hong Kong and Japan.
Meanwhile, China’s banking system remains relatively undeveloped. One in five Chinese adults don’t have accounts, while around 80% of small and medium-sized enterprises are not adequately served by banks. The new alternative financial firms, on the other hand, offer significantly better services and customer experience, lower fees and less bureaucracy.
“I hardly use my regular bank account anymore. My salary comes in at Alipay and I make most payments with the app. They also offer better interest rates than the regular banks,” said Allen Yu, a PhD in mathematics who runs MJL, a stock picking service based on quantitative analysis. “If I borrow money, I’ll go to a peer-to-peer platform, not a bank.”
The interview with Chen and Yu takes place at SimplyWork, a co-shared office in one of Shenzhen’s buzzing high-tech parks. Here, fintech startups blend with e-commerce and venture capital firms. Young entrepreneurs can be seen lying on sofas with laptops on their bellies, while others are having animated conversations in small groups; toys and skateboards are strewn across the floor, and fluffy pet dogs and cats are playing under the tables. Enthusiasm and creativity abound.
“The tech scene is booming. Finance technology has become a part of all aspects of life,” says Yu.
Still, China’s financial technology companies face many challenges, and so do their users. The government’s tightening grip on the internet, with censorship and individual control increasing significantly in recent years, threatens innovation and the development of new ideas. Also, thanks to the array of new digital financial services, it is easier for the ruling Communist Party to conduct massive intrusive surveillance.
Hong Kong-based news agency FactWire revealed in December that five Chinese mobile payment apps – WeChat, Taobao, Taobao World, Alipay and Tmall – already record sensitive information that people store in their mobile devices, which can be used to track and monitor personal activities.
Meanwhile, hustlers are flocking to the industry. Last year, about 900 peer-to-peer lenders went belly-up in China, with some owners taking the money and running. Authorities have conducted many crackdowns and introduced tougher regulations, such as against Bitcoin platforms to stop the digital currency being used to smuggle money.
Although venture capital has flowed into the sector, Chen says that investors have become more difficult to win over. “They are more rational today. Much risk capital disappeared during last year’s stock market crash,” he says.
On top of this, the technology is not always reliable. In demonstrating the efficiency of mobile payment apps, Chen offered to buy me a cup of coffee from a vending machine. After paying with his cell phone and pressing the button for espresso it was not coffee that came out – but milk.
“Oh, that was embarrassing,” he said, but quickly finds an explanation. “See, the machine is from Germany!”
China fintech facts
• Country is home to eight of the world’s 27 current FinTech “unicorns” – technology companies that investors value at more than US$1 billion.
• There were 710 million internet users as of June (more than the US and Europe combined), bringing the online penetration rate to 51.7%, from 1.8% in 2000 and 8.5% in 2005. At this pace, China will soon catch up with North America’s 89% penetration and Europe’s 73.9%.
• China is already the world’s largest and most developed retail e-commerce market, accounting for 47% of global digital retail sales – the result of a massive domestic retail market in a closed digital economy.
• The smartphone is becoming the universal internet access device. As of 30 June 2016, 656 million people, or 92.5% of users, were going online via connected devices, driven by the development of “Smart City” and “Wireless City” public access wireless networks in major cities.
• Individuals making online payments with mobile devices hit 358 million at the end of 2015. The 64.5% increase from a year earlier came despite rising concerns about the security of mobile finance activities. The utilization ratio of mobile online payments stood at 57.7%.
• Mobile banking continued to expand exponentially, with 6.3 billion transactions totalling 29.3 trillion yuan (US$4.4 trillion) in the second quarter of 2016.
Source: The Rise of FinTech in China, by Ernst & Young and DBS