China Tech Threat To World’s Banks

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The disruption of financial services is a given but where will the definitive changes come from? Will it be distributed ledger technology, real-time settlement, the highly competitive payments space, the rise of crowd-funding, P2P lending or new secondary markets for crowd equity projects?

China’s tech giants may pose more of threat to banks than Apple or Google

Picture: Full moon under a clear sky at Central Hong Kong by Pasu Au Yeung Released under Creative Commons 2.0

“What if it were none of these, and yet all of them, under the umbrella of companies totally new to finance: China’s tech giants?” That’s not only a question but the conclusion of a new white paper commissioned by Innotribe, the innovation arm of SWIFT, and co-authored by industry advisors Zennon Kapron and Haydn Shaughnessy, scheduled Sibos 2015 speakers.

Bigger Impact Than Google, Apple And Western Fintech Unicorns

Chinese Internet giants Alibaba, Baidu and Tencent — along with Xiaomi, a Chinese maker of mobile handsets — have all recently obtained banking licenses. China’s new fintech entrants could potentially have a bigger impact than Google, Apple and Western fintech unicorns, say the authors.

Since they have very scaleable Internet and mobile platforms with an IT architecture that coincidentally is primed for digital banking, the BATs (Baidu, Alibaba and Tencent) can be considered the world’s first true digital banks, the paper says.

From day one they have more customers than the world’s biggest bricks and mortar banks. Alipay from Alibaba is ubiquitous in China, handling nearly 80% of all mobile payments. Assets under management at Alibaba’s Yu’E Bao reached Rmb599bn ($96 billion) by the end of 2014, making it China’s largest money-market fund, according to the Financial Times. Tencent, which operates online bank Webank, has a chat application used by over 500 million people for communication and for payments and wealth management. Consumers use Baidu to not only search for wealth management products, but potentially also purchase one of Baidu’s own, including a RMB 3 billion big-data-based mutual fund that sold out within three days of launch in 2014, notes the white paper. Xiaomi has announced a new money market fund that triples the yield offered by the country’s big four state-owned banks.

“How the BATs expand globally remains to be seen, but it is clear with their initial forays overseas like Alipay in India, they have global designs,” Kapron said in an interview with Informilo.

Chinese Internet Giants Have Shown An Extraordinary Appetite

The financial platforms of China’s big tech companies are “powered by Big Data, informed by automated feedback loops from customer activity, driven by business experimentation rather than IT and function at an unprecedented scale and operate at a new degree of service integration,” the paper notes. And they are protected from global competition through China’s use of the omnipresent Great Firewall, selling to consumers who are captive to the China Internet environment.

“It is not so much innovation on new product and services — peer-to-peer online finance, for example, is done in other markets — it is the way they are leveraging Big Data and the tailored solutions they are developing that correspond to what the millennials want from their banks,” Kapron says. Research for the white paper included surveying 5,000 millennials in China in September.

The Chinese Internet giants have shown an extraordinary appetite, over the last three years, for using their technical dominance in Internet services to move into adjacent businesses.

They have secured their position as a utility provider of infrastructure in transport, logistics, taxi booking, home deliveries, ticket purchases and many other services all integrated into a one-stop platform enabled by payments and an increasing array of banking services.

It is part of a trend. Businesses are moving towards platform-based services that integrate information, billing and payment into the transaction itself. This is expected to force banks to pivot to a more integrated service model either as partners of platforms or as platforms in their own right, the report concludes.

COMPANY HEADQUARTERS MARKET CAP ($ BILLIONS) NUMBER OF USERS/ BANK ACCOUNTS*
Apple Cupertino, CA, U.S. 654.16 800 million (iOS users)
Google Mountain View, CA, U.S. 428.36 1.4 billion (Android users)
Alibaba Hangzhou Zhejiang, China 148.84 350 million
Tencent Shenzhen, China 153.04 1.5 billion**
Baidu Beijing, China 46.77 630 million
Xiaomi Beijing, China 45.8* 56.5 million ***
Industrial and Commercial Bank of China (ICBI) Beijing, China 201.67 260 million
Wells Fargo San Francisco, CA, U.S. 264.27 94.7 million
HSBC London, UK 149.51 54 million

* Estimate based on most recent funding round.
** QQ, Tencent’s instant messaging service, had 843 million monthly active users at the end of the second quarter of 2015. The Qzone social network had 659 million monthly active mobile users.
*** Handset sales in 2014
Sources: Apple, Google, STL Partners, Brett King’s Breaking Banks, Baidu

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