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China and the United States have always been ambitious. That’s a good thing. Now, the race is on to see who will lead the world in such areas as artificial intelligence, supercomputing, biotechnology and space. If this competition between the two largest economic powers yields a race to the top, not the bottom, when it comes to measures of inclusiveness and broad impact, that could indeed be a very good thing. This is true too in the area of fintech. The development and application of innovative new financial technology, or “fintech,” is upending traditional ways of banking and financing, and beginning to transform how businesses, industries and individuals interact.
From alternative finance platforms, cryptocurrencies such as Bitcoin and Ethereum, and Initial Coin Offerings (ICOs) that allocate “tokens” as a new means of crowdfunding capital, to an evolving mobile payments industry that has pushed us toward a cash-free society, the language and disruptions of fintech can seem overwhelming. That is true in both China and the United States.
China already has one of the highest fintech adoption rates, according to a 2017 report by consultancy EY. The report found that 69% of digitally active consumers in China use fintech services, compared to 33% in the United States. According to a report by McKinsey & Company, the market size of China’s fintech industry had already exceeded $1.8 trillion at the end of 2015, with payments contributing close to 90% of that value.
Additionally, China’s fintech deals and fintech initial public offerings (IPOs) in particular continue to make waves because of their size. Much of the venture capital in Asia has predominantly flowed into China, particularly amongst a handful of large tech companies. This remains the case even as neighboring countries have worked hard to position themselves as fintech hubs, according to my colleague Jackson Mueller, associate director at the Milken Institute’s Center for Financial Markets, a nonpartisan institute which seeks to improve understanding of financial markets. For instance, total global venture capital investment in fintech in 2016 reached $13.6 billion in 2016, buoyed by Alibaba Group affiliate Ant Financial's $4.5 billion funding round. According to KPMG, that single deal accounted for more than half of total fintech funding raised in Asia that year.
The influx of private capital has led to several Chinese fintech companies going public. In 2017, six Chinese fintech companies were among more than a dozen businesses that went public in the United States. Qudian, one of China’s largest online lenders, raised $900 million in its IPO. ZhongAn, a Chinese online insurer, raised $1.5 billion in Hong Kong.
So much capital is flowing in Asia that the amount of investment in startups from Asian investors is nearly on par with investment from American investors. Investment in startups by Asian investors was 40% of the $154 billion in total global venture funding last year – up from 5% a decade ago, according to analysis by The Wall Street Journal. Investors from China represent more than a quarter of global venture capital investment alone, while U.S. investors represent less than half.
But beyond the multi-million-dollar headline-grabbing investments and public offerings, what does fintech actually mean for the people of China and the United States? Current assessments of fintech must go beyond counting fortunes made, the number of users, and projections of the technology’s potential. Assessments of fintech must also include a measure of the people helped. We must not forget that the human element and benefits of financial technology beyond the fintech hype.
For policy makers and entrepreneurs, the benefits of addressing the digital divide and of harnessing the power of fintech can seem clear-cut in their combined ability to increase the level of access to capital and financial inclusion. As examples, WeChat and AliPay, the two largest Chinese mobile payments platforms, rightly take pride in reaching China’s extensive rural population. Alibaba plans to invest $1.6 billion through 2019 to build 1,000 county-level and 100,000 village level service centers, which would help rural residents get connected and set up their own online shops. Already, some 30,000 villages have reportedly benefited from this program.
The value of Chinese third-party mobile payments more than tripled to ¥38 trillion ($5.5 trillion) in 2016, according to estimates by iResearch in China. WeChat Pay and Alipay, the payment service operated by Ant Financial, dominate the market. In the United States, mobile payments rose 39% to $112 billion, according to global firm Forrester Research, with the market dispersed among rival groups including Apple, Google, Samsung and PayPal.
However, as much benefit as there is in moving finance to digital, the evolution of finance poses challenges to existing business models and processes. There is also the lingering threat that technological advancements could simply lead to greater exclusion rather than a financial system capable of catering to all. Taizo Son, investor and founder of Mistletoe (a hub for startups and overall entrepreneurial ecosystems) told me that his company was a strong believer in the power of fintech innovation, but recognized that such technologies also hold the potential to further extend the already widening income gap in our society. “As entrepreneurs and architects of innovation we need to be aware of the important role we play in building a society that remains empathic and inclusive to all people in this era of increasingly autonomous technology,” he said.
Inclusivity will remain a critical issue at a time of growing inequality worldwide. In China, at the recent National People’s Congress, Premier Li Keqiang announced a national commitment to modify or abolish rules that “sap the inspiration for innovation” as well as a commitment to increase access to high-speed broadband and free Internet. China is understandably focused on boosting the development of a “Digital China” and widening financial inclusion. Expanding access to financial platforms and digital products could indeed dramatically change the lives of tens of millions of farmers, micro-entrepreneurs and small business owners.
Yet, fears also persist that if left unchecked, financial innovation could dramatically change these lives in a negative direction. “China’s laissez-faire attitude toward regulating innovative platforms, services, and models at the outset led to the rapid, unchecked rise in use of peer-to-peer lending platforms and cryptocurrencies that ultimately led to significant fraud and financial harm, which forced the government to intervene,” Jackson Mueller said.
Importantly, the sustained benefits of fintech, whether in the United States or China, will only be realized if a proper ecosystem is created and maintained– one that addresses the concerns of regulators while benefiting innovators and, most importantly, consumers. The true measure of success for fintech should not be the deal size or quantity but the expanded horizons. And that is where America’s and China’s ambitions should aim – toward unlocking the broad-based benefits of fintech for all.