Why China’s fintech will change how the world thinks about banking

By Zennon Kapron for Forbes

With digitalization and FinTech high on the banking agenda, the disruption of financial services looks like a given. The question, however, is where will the real change come from. Will it be blockchain, real-time settlement, the highly competitive payment space, crowdfunding, or P2P lending?

According to Accenture, global investment in financial-technology (fintech) ventures tripled from about US$4 billion in 2013 to US$12 billion in 2014. There are no less than 20 fintech focused accelerators globally in traditional financial centers like New York and London and increasingly in places like Singapore and Bombay. Fintech has become sexy again, attracting the attention of banks, venture capitalists and consultants globally and introducing an element of innovation to the financial industry that was lacking.

Companies like Wealthfront, TransferWise, and Lending Club represent the potential ‘unicorns’ in the financial industry, promising to fundamentally change the cost structure of the industry. However, their progress pales in comparison to China’s Big technology companies Baidu, Alibaba and Tencent, collectively referred to as the ‘BAT’.

Alipay from Alibaba, the best known of the three, is ubiquitous in China, handling nearly 80 percent of all mobile payments in the country. Tencent has a chat application used by over 500 million people for daily communication and for payments and wealth management. Consumers use Baidu not only to search for wealth management products, but also to potentially purchase one of Baidu’s own funds, including a RMB 3 billion big-data based mutual fund that sold out within 3 days of launch in 2014. All three firms are now pushing from online to offline payments and transactions (O2O), threatening to disintermediate the banks and China UnionPay.

It would seem that fintech is the future of finance. Yet how this plays out is not at all certain, even in China.

The Oriental Pearl Radio & TV Tower, third from left, and other commercial buildings stand at dusk in the Lujiazui district of Shanghai, China. (Tomohiro Ohsumi/Bloomberg)

Based on a survey of 1,000 Chinese millennials that Kapronasia completed at the end of 2015, it still remains unclear how far this industry disruption will go. Millennials actually seem content with their current banking experience, with nearly 60% saying they are happy with their bank, even while they prefer using Alipay. Although Tencent and Alibaba haven’t announced any results from their digital banks, they seem to be growing more slowly than expected.

China’s regulators have had mixed reactions to fintech as well. On one hand, they have publicly recognized that innovation and technology are two of the key levers that they need to modernize one of the world’s biggest financial industries. On the other, it is clear that maintaining stability is key. Regulations earlier this year on P2P lending have been sensible and will support longer term P2P innovation and stability. Others, such as those under consideration for the regulation of digital payments, will likely hinder innovation by constraining digital payment business models.

Fintech is the next big growth opportunity for the financial industry globally, but the West will not determine the future of FinTech: China will. Three companies, 1.5 billion people and China’s regulators will change the pattern of global trade, the mechanics of exchange and the face of banking as we know it.

The article first appeared in Forbes