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By Peter Franklin

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.

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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?

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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.

Easy enough, you might think – but try the following example, from a Bloomberg article by Lionel Laurent:

“[This business] lends $1 billion to small businesses in 12 months, holds $150 billion in corporate bonds, runs the world’s largest money-market fund, offers mobile payments and credit cards, and gives customers cash balances that can be topped up across thousands of homely bricks-and-mortar outlets.”

Surely, that could only be some kind of bank – except that it’s Google.

These days we hear a lot about ‘FinTech’ – i.e. when finance companies use hi-tech to deliver new services. However, we should also keep a watch on what I’m calling ‘TechFin’ i.e. financial services from tech companies:

“Google offers payments; Apple Inc. invests its cash in company securities; Amazon.com Inc. lends money and offers account balances in-store; Alibaba Group Holding Ltd. manages customer funds like an asset manager.”

Predictably, the ‘proper’ banks aren’t happy:

“Finance firms are lobbying heavily against an application by Square Inc., a fintech start-up run by Twitter co-founder Jack Dorsey, to be regulated as an industrial loan corporation, a kind of halfway house between bank and non-bank.”

As Laurent puts it, the established players don’t like the big tech companies “nibbling at the best bits of finance without actually taking on the burden of being a licensed bank.”

Banking may well have its burdens, but also has its privileges – not least the bail-outs that saved the sector after the credit crunch, not to mention less visible forms of corporate welfare like QE and state intervention to prop-up the property market.

If Facebook was facing bankrupcy would the US government bail it out? It seems unlikely – after all there’s no such thing as a ‘run’ on a social media network. If a tech company goes bust it doesn’t threaten the stability of the entire sector – or the economy as a whole. The loss of technical support may be a problem, but if significant numbers of people are relying on the company’s proprietary tech, it’ll probably be acquired by another company. As big as the big tech companies are, they’re not too big to fail.

However, that might change if their sidelines in financial services keep on growing and/or become part of the Jenga-stack that is the financial system.

Lionel Laurent indicates that were not at that point yet:

“One reason why shadow finance is so popular is the wave of rules brought in after the financial crisis designed to shrink the banking industry. If risk is being spread across non-systemic actors who are unlikely to need a government bailout if things go wrong, what’s the problem? Tech firms, along with funds and insurers offering direct lending, are filling a void left by banks – not destabilizing the system, reckons Norm Champ, a partner at law firm Kirkland & Ellis. They’re unlikely to go much further for now.”

The future could look very different though. FinTech has the potential to disrupt the sector – and have a lot more software engineers than the banks do. The likes of Google and Facebook are also sitting on enormous cash piles that they need to find a use for. Put the tech and the cash together (not to mention all the data they have on their customers) and you have the makings of a highly consequential challenge to the established financial institutions.

Perhaps instead of lobbying against new banks, the old banks could lobby against the tax avoidance that allows Silicon Valley to accumulate so much money in first place.

Of course, the bankers might think that too dangerous a thread to be pulling on.

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