One of the most interesting facts I came across last year is that the market for mobile payments is 50 times bigger in China than in the US.
The Year UnPacked
In an excellent briefing for MIT Technology Review, Martin Chorzempa explains why the Chinese are so far ahead of the West when it comes to ‘fintech’ (i.e. financial technology).
Basically, it’s all about the apps:
“Ant Financial’s Alipay and Tencent’s WeChat have changed the way many people live their financial lives. They are one-stop shops that enable half a billion Chinese to access a dizzying array of services, from payments, loans, investments, and credit scores to taxi rides, travel bookings, and social media.”
Online financial services obviously exist in the West, but there’s nothing to match the scale or scope of the main Chinese apps – and the services thereby enabled:
“Because so much is sold via these apps, Alibaba and Tencent know the health (or lack thereof) of many small businesses across China. As a result, they can lend to companies that banks might consider too risky. Likewise, people with no traditional credit score can get cheap loans because Ant Financial has their payment and purchase history.”
Of course, that raises the question as to why these apps have become so important and powerful compared to their western equivalents. Chorzempa makes it clear that it’s not because China has developed cutting-edge technology not yet available in the West. The key fintech systems were developed elsewhere, it’s just that the Chinese have run further and faster with what’s available than we have. Furthermore, they’ve done it in an astonishingly brief period of time; Chorzempa reminds us that just 15 years ago only 7.3% of Chinese people used the internet compared to 65% of Americans.
The dark side of China's Social Credit System
But perhaps what really needs an explanation is not the speed of China’s fintech advance, but the lack of progress in America and other western nations.
Tech giants such as Google, Amazon and Facebook have built up their empires by dominating a particular field of online service provision – such as search, online retail and social media. But missing from that list of digitised and disrupted sectors is finance.
In the West, the online provision of personal financial services is more an extension of the ‘traditional’ industry than a disruption of it. Unlike, say, the high street retailers, the high street banks and building societies do not yet face an Amazonian existential threat.
As for the application of fintech by the established industry, that has been evolutionary not revolutionary – enabling rationalisation and centralisation (bye-bye, bank branches; so long, bank managers) as opposed to Chinese-style disruption.
When you consider the ‘value’ that Facebook has extracted from its access to our holiday snaps and social networks, it’s astonishing how little the banks have done with everything they know about our personal finances. Imagine the money that Silicon Valley could make if it controlled such a commercially-potent source of data – or rather, don’t imagine: just look at China.
As so often, it turns out that necessity was the mother of invention.
“In 2004, when Alipay launched as a simple payment option, Chinese finance was extremely low-tech. Clunky state-owned banks had nearly gone bankrupt from bad loans, and they cared little for average consumers. People had to travel to bank branches and wait in long lines to pay their bills; savings were eroded because the government set the interest rate on deposits below inflation; and barely anyone could get a credit card.”
In the West, however, the established banks are good enough, from a customer-point-of-view, not to drive people towards a disruptive online alternative. Unfortunately, from a taxpayer-point-of-view, we had to bail them out. So why should they bother innovating entirely new sides to their business models when they’re already too big to fail?
The traitors and thieves of Silicon Valley
Perhaps we should be grateful that we haven’t seen the equivalent of an Amazon or a Facebook disrupting the financial sector (or emerge from within it). While the biggest banks may be too big to fail, at least there’s a lot more than one of them. The tech giants, on the other hand, tend towards globalised monopolistic positions in the sectors they operate in.
A near total concentration of market power is unhealthy in any industry, but in finance it could prove fatal.