Changing landscape
According to a report from consulting firm Accenture released in February, financial technology (fintech) funding in China plunged 72% to US$2.8 billion last year from a record $10 billion in 2016.
But China is poised to leapfrog developed nations and move to a digital financial marketplace. Initially focusing on the under-banked or unbanked populations of small and medium enterprises and consumers with unmet needs, fintech is also targeting the growing middle class with its demand for investment management, insurance, and private banking.
I recently interviewed Ming Shu, partner at Lingfeng Capital and former chief strategist at Ant Financial, for CFA Institute’s Take Fifteen webcast series. We talked about the most recent fintech developments in China – focusing on what is referred to as the ABCD of fintech – artificial intelligence (AI), blockchain, cloud computing and big data.
Mr. Shu believes that recent developments in AI is closely coupled with that of data technology; both are different sides of the same coin. AI only works well if there is enough data to draw upon.
Certainly, this is a worldwide trend, as the adoption of AI is increasing in areas where a vast amount of data processing is required to make decisions. AI also enables personalised financial products and services such as insurance underwriting, e-wallets, and customised investment research and management.
AI, specifically machine learning or different branches of machine learning such as deep learning and transfer learning, is enabling areas such as credit analysis and fraud detection, which are critical for wealth management decisions.
Mr. Shu believes that growth in cloud computing is exemplified by companies such as AWS and Tencent in China. They are successfully attracting a raft of younger companies that want to be part of their cloud platforms for two reasons: first from a computing resources perspective, and second, from the data security perspective.
Cloud computing offers huge advantages for the financial services industry. Its enormous storage capacity lowers the cost of storing data. It also has an “off-peak” computing power that Mr. Shu compares to electricity which costs more during times of peak usage.
It is the same for cloud computing; companies can use the cloud to run certain applications at non-peak time, resulting in lower costs. This has reduced the barrier for some young financial services companies that can use the power of the cloud rather than building their own information technology infrastructure.
Blockchain is still at an early stage of development compared to AI, cloud computing and the use of big data. It allows the identification and tracking of financial transactions digitally, and the sharing of this information across a distributed network of computers. The distributed ledger system offered by blockchain provides a transparent and secure means of tracking ownership and the transfer of assets.
Of course, the early ‘killer app’ for blockchain were bitcoin and other digital currencies, says Mr. Shu. Now, the Chinese market is looking for other ways to use the technology outside of digital currencies.
He cites a Beijing-based company which has been using blockchain technology successfully to increase the efficiency of cross border trades between Guangzhou province and Vietnam. He also says there have been start-ups in China using blockchain to trade commercial papers, and to split or make the transfer of supply chain finance instruments more efficient. These are at an early stage, but he sees a promising future.
We know that consumer finance has long been enabled by technology. For example, in China, fintech is leveraging mobile technology to allow people who were previously under-served by the existing financial infrastructure to use and receive products that are suitable for their financial needs.
Mr. Shu believes that China, like many other countries, still has a long way to go. Its insurance market, for example, is still relatively under-penetrated. Yet, property, life and health insurance are going to be very important to China, he says. We are living longer and longer and so have more need for health and medical services.
Therefore, health and life insurance will be an important part of our lives, and it just takes the right products to awaken people’s needs. Mr. Shu sees good prospects for companies that can really innovate with fintech in these areas. This is why many insurance companies are adopting digital technology and using AI to offer robo-advice via chat bots and similar online tools.
For investment managers, China is gradually maturing with hundreds of millions of people now accumulating wealth. Whether that is housing-based or through other monetary means, there is a huge need for asset reallocation and investment services. This will create a major opportunity for financial services and fintech going forward.
When it comes to competition between fintech companies and traditional financial services, Mr. Shu believes it will be a combination of challenge and collaboration. In the same way that electronic brokers ended up changing the industry, fintech companies are showing the way forward, and then either collaborating with financial institutions or being acquired.
Leading domestic technology companies are underpinning China’s fintech dominance, setting out to own entire customer journeys across both financial and non-financial activities.
Cloud platforms enable them to capture data and use it to offer ever more services with significantly better and more comprehensive customer experiences than traditional financial services players.
The relationship between traditional financial companies and technology start-ups is helping to fuel the rapid innovation and expansion.
It is clear that the winners in the financial market tomorrow will be those that embrace fintech today.
* Larry Cao is content director at CFA Institute, Asia Pacific