The Secret to China’s Fintech Unicorns

BusinessThe Secret to China’s Fintech Unicorns

The Secret to China’s Fintech Unicorns

Chinese fintech company Ant Financial could soon be worth more than double Uber Technologies and have more customers, yet most people outside of Asia will likely have never heard of them.

The owner of mobile payment network Ali Pay, which has more than 520 million users, and the world’s largest money market fund, is looking to raise a reported $9 billion from investors, which would see its value jump to around $150 billion.

That would not only rank Ant Financial among the world’s most valuable companies, but also make it the world’s biggest unicorn, pipping Uber to the post. For those in the industry, the lofty valuation which has increased $50 billion in a month, not only reflects the opportunity that exists for financial-technology firms in China, but also serves as a reminder of the explosive growth that these firms have enjoyed over the last few years.

Chinese ‘Rock Stars’

“These companies are like rock stars in their own country but we in the West don’t really know them yet,’’ said Spiros Margaris, a venture capitalist and fintech advisor based in Switzerland. “Alibaba and Tencent with their success stories shed light on the potential of China and fintech is just a part of it.”

Alibaba, owned by Chinese billionaire Jack Ma, is the parent company of Ant Financial. It’s main competitor in China’s lucrative mobile payment market is Tencent, which offers a rival product WeChat. Together, they account for more than 90 percent of the country’s mobile payment segment.

Of the 27-odd fintech unicorns – that is private technology firms that are valued over $1 billion – globally, around nine belong to China versus 12 from the US, according to one estimate cited by The Brookings Institution, a public policy organisation based in Washington, DC. And they’re not only growing in numbers, but they’re also becoming more valuable too.

Number Crunching

In 2013, Chinese unicorns including those operating in financial services had a combined value of $24.4 billion, less than half that of the US, data compiled by CB Insights show, which is based in New York. By February 2017, their value had jumped to $271.5 billion compared to $369.9 billion for Silicon Valley. While data in the industry varies widely, it’s safe to say that those numbers would have only increased further.

China Money Network, an independently owned company based in Hong Kong, counts 138 Chinese unicorns valued at a staggering $682.5 billion. Of those, it says that 19 are in fintech including Ant Financial, which they value at $75 billion (based on the company’s last funding round in 2016).

“It is a phenomenal story, there is no doubt about it,’’ said Pat Patel, content director for Money 20/20 in an interview from London. “For years Chinese companies were seen as just replicating Silicon Valley, now they have moved beyond that.’’

Technology Ecosystem in China

So, what is behind China’s so-called fintech miracle?
It’s all to do with the “country’s unique technology ecosystem,” researchers Wei Wang and David Dollar wrote in a report for The Brookings Institution. They have a “tech savvy population, an underdeveloped banking system, and an initially relaxed regulatory environment.” Add to this China’s rapid urbanization and a rising middle class that are accessing financial services for the first time, and you have a potent recipe for success.

Last year, the Chinese fintech industry generated 654.1 billion yuan ($103.4 billion) in revenue, an increase of 55.2% in just 12 months, data compiled by iResearch Global show. By 2020, they estimate that revenue could swell to 1.97 trillion yuan.

“Fintech has been a blessing for China,” said Margaris, in a telephone interview. “It has allowed the expansion of banking and financial services to the whole of the country, digitally. Technology represents the future so the Chinese embrace it.”

The strong backing by the Chinese government has also been key, he said. “Without it I don’t think these companies could have the same kind of success.”

Cashless Society Agenda

A surge in mobile and internet connectivity across Asia has also helped. China alone has some 772 million internet users, more than the entire population of Europe, according to Brookings. Even more significant, 95 percent of those users access the web via a mobile device.

This high penetration of mobile internet use has not only fueled the mobile payment market in China, which last year notched up a record 81 trillion yuan in transactions, but it has also resulted in many consumers bypassing credit or debit cards all together, a system still so entrenched in the West.

Money 20/20’s Patel says it’s not only mobile payments that have lit a fire under Chinese fintech, but the blurring of services on a single app which has set the industry apart from Silicon Valley.  He says the creation of so-called “super apps” – technology platforms that combine several services in one like social media, e-commerce, lending and travel – that have been the game changer.

“It’s not happening anywhere else,’’ he said. “The numbers that these companies are onboarding as customers and the volumes in terms of transactions on these platforms are just ridiculously high. It frames their valuations.”

‘Just The Beginning’

And as the companies look to expand their services internationally, particularly in the heavily populated region of South East Asia, and Chinese tourists start to spread the word by using their services overseas, those numbers are expected to become even more compelling for investors.
Fintech in “China is huge,’’ said Margaris. “Yes it has the payment markets but there are a lot of other growth areas including in lending and asset management. This is just the beginning.”

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