Financial innovation in China: leading the way and one eye on the future
In a wide-ranging interview, award-winning executive and fintech expert Richard Turrin spoke with Efma's Boris Plantier about the state of innovation in China and how the government there has been truly forward-looking in its technology promotion.
We hear a lot about the success of big tech companies in terms of innovation. What is their secret sauce? Do they innovate differently than the rest of the world?
Yes, they do innovate differently. I wouldn't call it a "secret sauce" but would say they are "cut from a different cloth." Big tech companies have innovation built into their DNA. They are continuously innovating because that is what they've done from the moment they launched. They have their entire culture and management structure built around innovation, so it comes naturally to them.
Compare that to a bank, where innovation was never part of the culture. What bank manager ever had innovation built into their KPIs until very recently? This is why you see so many in the financial services space looking to big tech to copy their approach to innovation. They are belatedly trying to integrate innovation into their institutions and find it very challenging. This is an issue I deal with in my book “Innovation Lab Excellence.” I say that “innovation can’t be bolted on to an existing non-digital company like training wheels on a child’s bicycle.” Instead, it needs to be instilled in the culture or DNA of the institution. It is a considerable transformation and one that is tremendously difficult because it is so expansive.
Ant Financial is often cited as a model in terms of innovation in financial services, but what about Chinese incumbent banks? Are they innovative?
Yes, the incumbents are quite innovative; they were forced to be. WeChat and Alipay disrupted China's banks in both payments and deposits, which forced incumbents to spring into action. According to the “2018 China Direct Banking White Paper,” 135 online direct digital-only banks, what we would call “neobanks,” were opened by commercial banks in about three years. They learned the hard way that their role in retail banking is not a sure thing and that they had to meet customers' digital expectations and fight back against digital competitors.
Besides setting up new digital banks, they’ve also been trying to build out internet platforms that allow their clients to do more than just bank on their websites. ICBC Bank, for example, now operates an e-commerce site called "Rong E Gou” that sells consumer items throughout China. It is a massive effort with some 10,000 merchants and reported sales of RMB 1.27 trillion ($US184 billion) in 2016. Buyers can get loans to help them purchase online and can improve their credit rating with repayment. A bank running an e-commerce operation may sound odd to Western bankers, but by building a platform of their own, ICBC is fighting back against tech giants like Alibaba.
Chinese executives made digital innovation a top priority because of the existential threat that big tech presented to their business. I would contrast this to many Western banking C-level executives who seem to live in a state of denial, even though GAFA companies are already entering into retail financial services. Not all Chinese banks are super innovative; some of the state-owned banks are playing catch-up as are some of the regional commercial banks. I talk about this in-depth in my new book coming out in April: "China's Digital Currency Revolution: Profit from Banking Innovation That Will Shape Our Future."
Are Chinese incumbent banks threatened by new players?
Absolutely and this threat is very much at the heart of their desire to innovate. In the payment space, Accenture predicts ongoing cumulative losses of $US 61 billion to China’s incumbent banks between 2019 and 2025 due to digital payment platforms. Currently, Alipay and WeChat Pay represent about 90% of the payment market. Meanwhile, the loan books of the neobanks have grown with incredible speed. The total credit on the books of the biggest neobanks owned by WeChat and Alipay at the end of 2017, was RMB 1.3 trillion, or 22% of all of China’s consumer credit. An impressive figure considering they did this within three years of launch. So yes, being threatened is undoubtedly an excellent motivator for innovation.
But there is an even more significant threat. Banking is becoming an afterthought. With the ease of digital payment provided by WeChat Pay and Alipay, most users don’t care much about the bank’s app or services, they are irrelevant, and banks are used only for storing money. Relegated to the role that some refer to as “dumb pipes.” Banking being considered an afterthought by clients is, in my view, what makes bankers in China cringe more than anything else. The thought that their bank is not “in mind” and not considered “at the heart” of their client’s financial world is a profound change for retail bankers.
What are the characteristics of Chinese customer behavior in terms of retail banking distribution?
The market for retail banking services has gone completely mobile. Not only is using mobile-based digital payments and banking more convenient than using cash or card, but never physically going to a bank is something that has made most of China’s banking customers jump for joy.
I am not exaggerating when I say joy, as going to the bank in China is a real experience. When Alipay and WeChat pay were breaking on to the scene in 2014, the average waiting time in my local branch of ICBC in downtown Shanghai was around an hour, if I was lucky. Every transaction accompanied by the mandatory stamping and processing of multiple sheets of paper, and in the end, no matter what the transaction, I always had a thick wad of documents to dispose of after leaving the bank. So, going digital represented a significant improvement in service that you have to live through to appreciate.
A trip to the bank for me now still takes quite a while, but I note that I am waiting with a group of people whom all have grey hair and consider a trip to the bank a social outing. There is much chatting with the bank employees and more than a few getting lessons on how to use their phones to do banking using WeChat or Alipay. The irony of bank employees teaching their oldest and most loyal customers how to use their competitor's app never ceases to amuse me.
What about the Chinese fintech ecosystem? Is it really promising and impressive?
Yes, I would agree that the ecosystem is both. Impressive because of the scale of fintech use in China. While fintech has undoubtedly gone mainstream in the west, it is better integrated into the life of ordinary people here. If you had asked me in 2016 when WeChat and AliPay use was taking off: "How likely is it that Shanghai, a city of almost 30 million, would go cashless?" I'd have said you were crazy. Cash was still used everywhere; the thought that it would be nearly eliminated in about two years is still mind-boggling to me. Now, according to Business Insider Intelligence "Global Fintech Landscape," China has the highest number of "digitally active consumers who use fintech" in the World at 69%. For comparison, the global average is only 33%, with India in second place at 52% and the UK in third place at 42%. So yes, the ecosystem is impressive because fintech is completely mainstream here, and developers simply build it into digital products everywhere. You don’t have to be a “fintech developer” to see an opportunity to build some new fintech function into your code.
It's also promising, and I'll give you the best example of how fintech has benefited China. China has the world’s largest unbanked population at around 225 million adults. The World Bank's Universal Financial Access 2020 program shows China's impressive efforts in bringing financial inclusion to its people. In the six years between 2011 and 2017, China increased the number of adults with basic banking services by an impressive 16% due to the use of mobile digital banking platforms. So that’s the promise of fintech, financial services for everyone.
In western countries, policymakers and regulation are often considered as a brake in terms of innovation. Is it the same in China?
The Chinese government does not receive anywhere near the amount of credit it deserves for liberalizing banking regulations. Fintech in China arose due to these changes, not because the government itself pushed fintech into existence as many incorrectly believe. The tech companies Alibaba, Baidu, and WeChat were explicitly granted online private banking licenses in 2014-15, even though their activities would compete with state banks. This is analogous to Google, Amazon, and Facebook being granted banking licenses in the US.
The liberalization of regulations was deliberate: it allowed fintech banks to serve retail and SMEs who were underbanked and often shut off from credit, at a time when China was transitioning to a consumption-led economy. Tapping into citizens' and SMEs' newly-found credit-fueled buying power would float all boats. The plan worked and exceeded all expectations. So, kudos to the Chinese government for having the prescience to let big tech acquire banking licenses, it was a bold move.
Now, we again see the government taking two equally bold positions that are going to have international repercussions. The first of these is a nationwide program promoting the adoption of blockchain recognized at the presidential level. Can you imagine that happening in many other countries? The second of these is, of course, China' new Central Bank Digital Currency or as it is referred to locally, the Digital Currency Electronic Payment. So, these are all fabulous examples of the government promoting fintech.
With the launch of Libra, Facebook promotes itself as the western defender against China’s cryptocurrency. How is it perceived in China?
Yes, China has voiced complaints about Libra. Most stem from the ability of Libra to be used in cross-border payments and the potential effects on "monetary policy and financial stability." China believes strongly that currency is the domain of governments and that currencies must be issued by central banks who control the ebb and flow of payments. That's why China's new CBDC flows through the central bank. Clearly, Libra falls outside of this requirement, as does Bitcoin.
Now onto Libra. Libra is at best a concept rather than a real product, and a mutable one at that. It was first conceived as the savior of the world's developing nations and has now morphed into the savior of American global financial supremacy. Libra’s pivot followed a drubbing by politicians and regulators across the globe who see Libra as a threat to their sovereign currencies. China’s objections to Libra appear to have good company with others like EU antitrust regulators who are investigating Libra.
Libra is now touting itself as a counter to China’s Central Bank Digital Currency (CBDC) as a means of trying to secure its own future. By reframing the debate to a 1960's China-versus-US cold war struggle, all amid a withering trade war, Facebook is trying to fan nationalistic flames to get Libra approved. I find this disturbing because it signals that Libra was so poorly conceived from the start, that it cannot survive on its own merits without resorting to gamesmanship.
One final thought: Libra has had only minimal impact on China's CBDC program. It is essential to understand that research on China's CBDC started in earnest in 2014 and that China's CBDC was well underway before Libra and is in no way a response to Libra. If anything, Libra should be thanking the PBOC for all its hard work.
Be sure to check out Richard's upcoming book to be released in H1 2020, entitled: "China's Digital Currency Revolution: Profit from Banking Innovation That Will Shape Our Future."