The rise of financial technology in China has transformed how businesses operate, as Japan eases into it amidst existing cultural and institutional norms
Online payment (think Alipay), virtual currencies (Bitcoin), credit lending (Lending Club) and transport (Uber) are some of the sectors that financial technology, or Fintech, companies have grown large enough to attract the attention of traditional institutions such as banks and insurance companies, as well as policy makers and regulators.
With Internet connectivity, crowdsourcing, mobile applications or apps and entrepreneurs with a out-of-the-box mindset, the growing population of mobile device users worldwide, especially China’s, is being offered a platter of tools that encourage a lifestyle of convenience and spontaneity by just pressing buttons on their smartphones.
According to a PriceWaterhouseCoopers survey of 500 senior-level management and C-suite executives in financial services in March 2016, respondents believed that more than 20 percent of their market share could be whipped away by technology-focused startups and innovative new market entrants by 2020.
The report states that consumer banking, funds transfer and the payments sector are the most likely to succumb to disruption. The most vulnerable are funds transfer and payments which, within five years, could see its ‘old guard’ give up 28 percent of its business to Fintech players. Insurance and asset or wealth management is seen as the next sector to be challenged, with up to 22 percent of the business susceptible.
Connected lifestyle
China’s sheer population size and openness to embrace technology have helped Fintech companies. According to Andres Cham, Strategic Business Partner, Ding Sheng Wealth Management, the population of China currently stands at 1.328 billion people and the country has one billion mobile users and about 700 million Internet users. For comparison, he shared that the United States has 324 million people, of which 283 million people are Internet users and 207 million are mobile users. This indicates that China has five times as many mobile users as the United States and 2.5 times more Internet users.
“China is definitely the place to grow in terms of wealth management and Internet. So, every corner I turn and every business I speak to, there is always a Fintech strategy in place,” he said at the panel session entitled Japan and China: The emergence of Fintech and e-Commerce on August 19, 2016 at the 6th Annual SKBI Conference 2016 – Fintech and Financial Inclusion.
The session was held at the Singapore Management University with moderator Professor Takeo Hoshi, Director, Japan Program at Walter H. Shorenstein Asia-Pacific Research Center, Stanford University. He was joined by panellists Zennon Kapron, Director, Kapronasia; Haiyan Shi, Economist, African Department, International Monetary Fund; Masaaki Tanaka, former Deputy President, Mitsubishi UFJ Financial Group, as well as Ikuma Ueno, Digital Strategist, Mizuho Financial Group.
Kapron agreed, as he has seen the digital landscape change and advance in China.
“In 2004, I was working with Intel in China. I could bank with any bank, as long as it was ICBC. When I needed to pay my rent, I used the first form of ‘mobile payment’. I went to my bank, I took out my renminbi in a paper bag, I walked across the street and deposited it into my landlord’s bank. Today, I invest in products by Baidu, pay my staff using Alipay for their expenses and share my dinner costs with friends with WeChat,” he said.
“A week ago, I ran into a streetside vendor whom I have not seen for six months. He was selling little bicycle models made from wire. I stopped and had a chat with him. He had discovered Taobao and started selling the bicycles on Taobao. He said he could sell five models in a day before he started going online. And now he sells a couple of hundred a day using this online platform.”
Japan’s tale
Despite the conservative nature of traditional banking institutions, regulators and cash-based transactions, China has digital platforms and entrepreneurs who have made it big in their ventures.
“We used to hold 100 percent of cash in China but the rapid development of Fintech has changed consumers’ habit,” said Shi.
However, this is not the scenario in Japan due to cultural barriers and a generally conservative society.
“I have done some study in Japan and I have found that the regulations supporting Fintech is not the problem for the growth of the sector," Shi observed. "In May 2016, the Japanese government has changed regulations to be more supportive of financial innovation. It has changed the bank law to regulate and recognise virtual currencies. It has also relaxed restrictions on banks’ investment in inventions, which is extremely important to encourage financial innovation and more capital flow into this sector.
“Currently, 52 percent of Japan’s financial assets are holding onto cash. The bank’s interest rate and deflation make it more preferable for people to hold cash. There was also a lack of trust by the Japanese on online payments. About 20 percent of Japanese bank online and 33 percent of online transactions are paid using cash. It would be difficult to change the culture of people holding cash.”
To boost the change in culture, Japan could take a leaf from China’s hungry entrepreneurs who are learning from their counterparts in Silicon Valley to carve a market for themselves in the retail and mass market sectors.
“Japan’s issue is not regulations but more importantly we do not have entrepreneurs in Fintech. We need more entrepreneurs and participants in the sector. Japan has to bring more Fintech companies from abroad to open up the Japanese market and engage companies in Fintech,” said Tanaka.
For Japanese banks, consumer demand for convenience has prodded them to rethink their service offerings, while waiting for legislators to make moves towards Fintech.
“For the ease of regulations in Japan on crypto and virtual currencies, banks are forced to create innovation and provide convenience on services for customers,” said Ueno.
“It really depends on how and when banks are ready to embark on current businesses to force ourselves to change the legislative systems. In general, the legislation in Japan is pretty much positive but somewhat waiting for the other regulations in the world to make a move.”
Coupled with Japan’s ageing population and labour shortage, Fintech might be an innovation to help ease the labour market, said Professor Hoshi. “In Japan, the problem is not so much about unemployment but labour shortage. Japan is facing an ageing population and in some areas companies do not have people to work for them. Any help from technological progress in many areas would actually help.”
Working with Fintech
According to a report by Accenture, global investment in Fintech ventures in the first quarter of 2016 reached US$5.3 billion, a 67 percent increase over the same period last year. The percentage of investments going to Fintech companies in Europe and Asia-Pacific nearly doubled to 62 percent.
The report says the so-called ‘disruptors’ may compete against banks at first, but often end up aligning with them through investments, acquisitions and alliances, such as digital bank BBVA’s £45 million (US$59.5 million) and 29.35 percent stake in Atom, a mobile-only bank developed in London, the United Kingdom, which launched in April 2016.
But while a growing proportion of collaborative FinTech ventures have emerged, the report cites ‘relatively low participation’ in venture-investing by banks, which in 2015 invested US$5 billion of the US$22.3 billion of reported investments. That compares to an estimated US$50 billion to US$70 billion that banks spend on internal Fintech investment each year.
In Asia Pacific, the report finds Fintech investment more than quadrupled in 2015 to US$4.3 billion. The lion’s share of those investments took place in China (US$1.97 billion) and India (US$1.65 billion). In the first three months of 2016, APAC investments increased by 517 percent compared to the same period last year – US$445 million to US$2.7 billion – driven almost entirely by Chinese Fintech investments.
Rather than seeing Fintech has a force to be reckoned with, financial institutions could leverage on it to offer a new lease of life in their products and services for a better customer experience. This may come in a form of investment into or acquiring Fintech companies.
“Japan’s government is making progress. It has recently changed its banking law to allow major banks to acquire, on some conditions, Fintech companies, such as providing capital to the companies. In order for the Bitcoin industry to grow, Japan’s government has decided to help regulate the businesses and monitor the activities. Japan has started working on this issue to see how it can cooperate with business partners,” said Tanaka.
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Last updated on 27 Oct 2017 .
