Notes from a fintech tourist
Why is China so far ahead on fintech?
Guest author Richard Davies went to China earlier this year to see for himself. These are his findings:
Earlier this year, I had the privilege of a trip to China to visit the biggest names in (fin)tech there including Tencent, Alibaba / Ant Financial, Ping An / Lufax, and some other, smaller players.
This year has seen a greatly increased knowledge of these names in the West, to the extent that the Economist has brought this to a mainstream audience in a number of articles, and Ant Financial is seeking to acquire Moneygram in the US.
In my opinion, these firms are maybe three years ahead of what is going on (often to some arrogant west coast fanfare!) in the US/EU. Mobile payments in China are nearly 50x those in the US, and many more stats can be quoted as to how far ahead China is in fintech that the rest of the world.
In my opinion, these firms are maybe three years ahead of what is going on in the US/EU.
Jason Bates asked me for a few highlights on the Fintech Insider podcast in early September, which made me think that with the luxury of some time currently, it could be useful to share some of my biggest takeaways.
Carefully considered expansion plans
To get one thing clear before doing so, I wanted to dispel the myth that now people have heard of Tencent and Alibaba, they are suddenly going to rule the roost in all sorts of aspects of fintech in the US and Europe. This is not the case. They are following two very sensible patterns:
- a widespread, but limited, overseas presence (as did UnionPay or JCB for example previously), serving Chinese overseas travellers who already know/use their products,
- they have only made full entry into markets that have certain similarities to China in ASEAN & South Asia, typically by joint venture (JV) - given the critical need for local knowledge and government relationships – e.g. Ant Financial in India with PayTM, or in Indonesia with Emtek).
My 7 key takeaways for the big things that stand out for the Chinese giants:
- They’re targeting the 80% long tail of customers, not the affluent 20%
- They‘re going more than the extra mile for these customers’ ‘scenarios‘
- Working extreme hours to achieve this
- Aggressive internal competition is encouraged to develop the best solutions
- With an understanding that data is the core of everything
- A thorough understanding of the importance of risk management
- And owning the customer interface while allowing 3rd party marketplace services
Targeting the 80% long tail of customers, not the affluent 20%
The common theme across the companies I met was their focus on the 80% of customers that had previously not been addressed by conventional Chinese FIs. These are the consumers and micro enterprises outside of the top of the income / affluence bracket.
These customers represent massive scale in China (800m+), with substantial unmet needs, and were a low competition area at the start, as the higher net worth consumers and the bigger corporates were the target market for the incumbents.
The scale point is worth dwelling on – this just blows you away – one quote stands out in my mind: ‘If you haven’t got 10 million users on a new feature or app in 6 months, it’s a failure.’
To serve this massive volume of customers, over a very wide geography, clearly required a tech driven approach to enable the cost scalability. Interestingly though, I also heard the phrase ‘O2O’ used a lot. This is Online To Offline, which is about how to combine digital and physical infrastructure to maximise customer reach and the services enabled. I guess we are seeing some of this in infancy in the west with Amazon buying Wholefoods.
If you haven’t got 10 million users on a new feature or app in 6 months, it’s a failure.’
2. Going more than the extra mile for these customers’ ‘scenarios‘
Firms talked about ‘customer scenarios’, which initially I didn’t quite get the meaning of, but then realised it was about the contextual focus on the customer’s pain points and jobs to be done. I really like the phrase, as pain points can often be isolated from the context – putting the two together is the key.
To a large degree this focus on the customer experience first, and everything else second, is similar to all the best tech firms around the world. The difference here is the lengths that the Chinese giants have gone to, in order to address the critical customer scenarios of that 80% long tail.
Pain points can often be isolated from the context – putting the two together is the key.
For example, lets take a look at healthcare, where there are gaps in the public provision to the long tail. Ping An has hired 1000 doctors in order to provide online consumer patient diagnostics, while Alibaba has done painstaking bespoke integrations to local hospitals one by one to enable appointment booking and other services.
Meanwhile in India, a key problem is paying utility bills which means standing in line for an hour, so the focus for PayTM/Ant Financial is connecting to the government/utility providers to enable this from the app. Let's be clear these are not straightforward REST APIs, the Chinese players are sending engineering teams to work with the local government services and their systems. This huge investment in engineering bespoke integrations into a wide range of services that people currently find really difficult, drives the adoption and value of the whole mobile ecosystem that the Chinese giants are creating.
3. Working extreme hours to achieve this
Now, I’m no stranger to working hard, having started in an intense consultancy environment and often being told I’m a workaholic, but I was pretty stunned when told about the ‘9-9-6’ expectation at Alibaba. This is 9am to 9pm, 6 days a week, that people are expected to be in the office! Some will do more than this.
I can’t think of a firm in the west that has anything like as high working expectations! If you say the average western firm’s base expectation is maybe 40 hours a week, then Alibaba’s staff are putting in 80% more hours a year!
9am to 9pm, 6 days a week, that people are expected to be in the office!
And it’s not just Alibaba – at Tencent, they talked about how during the key period (the famous red packets) at Chinese New Year (CNY), the staff’s families come in and sleep in the canteen while their partners are in the office for maybe 48 hours.
You can well argue that the incremental hours are unproductive – indeed Jeff Sutherland, the author of Scrum, argues this point very strongly – but the difference is certainly stark and 9-9-6 is now imprinted in my brain (& maybe a cause of nightmares!).
4. Aggressive internal competition encouraged to develop solutions
This felt to me a little like organised chaos – with what was called ‘brutal internal competition‘ typically encouraged, but with some key principles underpinning this (e.g. re code standards, data storage), and a strong founder overseeing it all with a long term mindset. For example, I was told on two separate occasions how Tencent effectively had 3 different teams competing in building the origins of WeChat.
The model seems to be one of allowing people the freedom to get things going, whether or not it’s their specific remit, and then providing more funding and resource to those that show success. Lean start up with internal capitalism!
This was described as a ‘horse racing’ culture, and apparently has some traditional origins with past Chinese emperors.
Tencent effectively had 3 different teams competing in building the origins of WeChat.
5. An understanding that data is the core of everything
The emphasis on data was tangible everywhere you went, it ran in the DNA of all the companies both in terms of the use of data to underpin all services, and the importance of scalability and security of data services.
For example, the creation of new credit scoring capabilities at Lufax and Ant Financial to underpin lending activities to consumers and micro enterprises (including rural farmers - not your typical tech target audience!), or the use of machine learning on images to deliver 50% fully digital self service claims administration (via images) on auto insurance at Lufax.
The emphasis on data was tangible everywhere you went
The scalability is something else when you consider the payment activity – with Tencent handling in excess of 200,000 payments per second for CNY red packets, and Ant Financial not much less, both far in excess of peak credit card volumes for Visa/Mastercard. Perhaps where the Chinese giants have been slower than the US tech players, especially Amazon, is in commercialising their own cloud computing for external use.
6. A thorough understanding of the importance of risk management
I am often sceptical with some fintechs that it’s easy to put customers/loans on but at the cost of poor risk, which will always come back to bite (often fatally) in the medium term.
So in this regard I was impressed to see this was one of the critical areas of focus across a range of key risk areas for example:
- Credit risk management, utilising the vast data they have available, and clever end user controls to optimise risk to borrowers who had traditionally been excluded from financial services
- KYC, with a step up approach depending on what the customer was wanting to do, and making use of all available tools including government databases, biometrics, underlying bank accounts, and O2O
- Sophistication of customer segmentation, for example for wealth management products, again using data to assess this
- Security of data, with strong controls and audit capabilities around any employee or external access to different categories of data.
7. Owning the customer interface while allowing 3rd party marketplace services
The user bases are enormous (WeChat is nearing 1bn), and all the players I met are dominating that front end interface. They aim to be the ‘global lifestyle super app’.
Their services are a combination of directly provided integrations (such as payments) to key services people need (e.g. utilities or hospitals as described above), and then a number of 3rd party products.
This is the piece that is often less spoken about, but is critical to that ability to offer such a wide range of services that then creates a virtuous circle of benefits for users and the ecosystem.
For example, Ant Financial's asset management service Yu’e Bao has seen huge success since starting 4 years ago and is now the largest money market fund in the world at c.$200bn, and has third party underpinnings. The same partnership approach is true for Ant’s banking venture for China, MyBank, in which they own a minority stake (30%), along with select partners from the agricultural and industrial sectors to bring the bank’s digital services to their target customers spread around China.
Their services are a combination of directly provided integrations to key services people need
So where does all this leave us?
As I said at the start, I don’t see a sudden domination of US/European fintech by the Chinese players given the significant differences in markets… but with their enormous customer focus, energy, pace, and execution capabilities I would expect the Chinese players to make a huge impact across a range of developing markets that offer similar opportunities to use mobile and data to transform the lives of the long tail of customers.
I would expect the Chinese players to make a huge impact across a range of developing markets that offer similar opportunities to use mobile and data to transform the lives of customers.
This offers such exciting potential for that large swathe of the world’s population that for too long has not benefitted from such services, and can help to encourage economic growth and reduce poverty.
My thanks to McKinsey China for arranging such an excellent trip, along with a great bunch of people from many different financial institutions around the world.
Richard Davies has held senior roles at Barclays, OakNorth and HSBC, and is currently on garden leave prior to joining TSB, to develop and scale their services for SME clients. You can follow Richard on Twitter @rhb_davies and on LinkedIn, or you can catch him on Fintech Insider episode 130