Chris Pu, Head of China at strategic growth investors Telstra Ventures, shines a light on the expansion of the national Fintech market.
Regulatory reforms in China’s financial sector over the last decade, alongside the move to online payments and banking, has served to fuel a burgeoning Chinese Fintech ecosystem. A recent report by EY found that 87 percent of digitally active consumers in China access some form of Fintech service – the joint highest rate in the world along with India – and significantly above the global average of 64 percent.
Increasingly, many of the Fintech firms providing such services – in areas such as payments, insurance and investing – can no longer be deemed early-stage start-ups. The report notes that many of these firms have been through several rounds of fund-raising, increased their staff, created corporate departments such as human resources, accounting and legal, and expanded beyond their home markets.
Much of this activity has focused on e-commerce. Consumer-led e-commerce is well established in China and happens much the same as it does elsewhere in the world – via trusted platforms such as Alibaba or JD.com. And there are plenty of Fintechs that play in this space dedicated to moving money around the system more efficiently and making transactions easier and more secure.
Of course, the consumer market is important – especially in a country of almost 1.5 billion consumers. But venture capital firms such as ourselves are tasked with identifying the future growth opportunities – and these are increasingly to be found in China’s burgeoning B2B and B2B2C markets. It’s an area not yet as mature as the consumer sector but is growing quickly due to advances in areas such as cloud, network technology and artificial intelligence (AI) – technologies that are enabling innovative enterprise-focused Fintechs to emerge.
A key focus has been the small business and small enterprise segments – the SMBs and SMEs. The EY report looked at Fintech adoption among SMEs across five markets, with adoption among SMEs in China at 61 percent, significantly ahead of the US (23 percent), the UK (18 percent), South Africa (16 percent), and Mexico (11 percent). The report notes that the exceptionally high adoption rate in China is indicative of its “widespread use of financial platforms and ecosystems”.
So what type of Fintech is serving the Chinese SMEs? An example in the current Telstra Ventures portfolio is XTransfer, which provides a cross-border B2B financial network aimed at SMEs. It recently completed a US$138 million Series D funding round, which lifted it to ‘unicorn’ status. XTransfer’s technology connects SMEs with major global financial institutions, offering services such as global collections, payments, foreign exchange and treasury management alongside an AI-driven risk management system.
According to the company, SMEs account for 60 percent of China’s $4 trillion B2B cross-border trade. But, despite this, and China’s status as the largest exporting country in the world, many of the country’s SMEs are underserved by the big international financial institutions. The international banks are geared up to support multinational companies and therefore often have a prohibitively high-threshold for facilitating an SME that wants to export globally, particularly in light of tightening of anti-money laundering (AML) rules around the world.
This is where XTransfer plays, by validating the necessary credentials for these SMEs to interact with these global institutions, thereby significantly reducing the cost of global expansion and enhancing their global competitiveness. And it uses a lot of innovative tech to provide that service, including building a unified global multi-currency clearing network, and an automated risk control infrastructure.
Another example in our portfolio is Fintell, which provides intelligent risk management decisions and systematic solutions for banks and other licensed financial institutions. As financial regulations in China mature, licensed financial institutions are now required to develop fully in-house systems for risk control for their online lending business, without being able to outsource their operations wholesale. Fintell can provide the expertise and product required during this transformation of traditional offline lending to online lending business models. Its unique approach taps into mobile big data, using machine learning to create models based on unconventional data types such as e-commerce, location-based services, payments, and app usage.
The entrepreneurs and teams behind both these companies, in common with most Chinese Fintechs, are experienced financial industry professionals who have learnt how to harness the latest technology to build their companies – rather than tech entrepreneurs looking to tap into vertical markets, which is often the case elsewhere in the world.
This, coupled with more standards around areas including AI, cloud computing, blockchain, mobile finance apps and data privacy protection as well as more guidance for financial and governance mechanisms for finance in China, is seeing B2B Fintech truly taking off.
It’s true that the challenging geopolitical situation does create headwind for Chinese tech firms to expand internationally – at least into Western markets. However, the dynamic start-ups, those that have the strongest proposition will continue to stand out from the crowd and succeed internationally. There is a plethora of these exciting and innovative Fintech companies coming out of China that will create some significant investment opportunities over the coming years. Watch this space.
