Murugan is the owner of a small cloud kitchen in Shanghai. He speaks fluent Tamil, passable Mandarin, and a bit of English. The 41-year-old small time entrepreneur supplies Indian food to universities and office establishments in the city.
“I do it all on WeChat,” says Murugan, explaining how he runs a WeChat group called Murugan’s Kitchen where he posts a daily menu, takes orders and receives payments. “Most of my expenses are managed through WeChat,” he says. He serves between 100 and 200 customers daily.
If you want to gallivant about the galaxy, the Hitchhiker’s Guide to the Galaxy recommends getting a towel. But if you ever go to Beijing, a smartphone will do just fine.
Besides the ability to help you with obvious things, what makes the smartphone truly powerful here is that you can pay for everything using the phone. Not just in China’s large cities like Shanghai or football field sized shopping destinations such as China Mall in capital Beijing, but also in small towns and villages and tiny establishments.
Millions of entrepreneurs like Murugan, do business on mega platforms run by Alibaba and WeChat. China’s fintech growth, on the back of these platforms, has been unprecedented. With a record $12.8 trillion in mobile payment transactions in the 10 months to October last year, China even surpassed the United States, at only $49.3 billion during that period.
Mainly two apps – WeChat and Alipay – make all this possible. These apps owned by Chinese internet giants Tencent and Alibaba, respectively, control 93% of the country’s mobile payments market. As China pursued an industrial policy that made it the factory of the world and millions of Chinese came out of poverty, these apps played a big role in making their lives easier in the mainland.
Both Tencent and Alibaba, have reaped economic benefits of this growth. Tencent, which became China’s first company to cross $500 billion in market cap, is now valued at $374 billion. Alibaba has a market cap of $377 billion. Founders of these companies have also become immensely wealthy. Pony Ma, the founder of Tencent, is the world’s 14th richest person with a net worth of over $50 billion. Jack Ma is worth over $34.7 billion. Both are also members of the Communist party in China.
Next, they, along with dozens of hyper-funded upstarts, have designs on the world. They are quietly taking over the global fintech market at a scale that’s unheard of before. “If you said in 2010 that software is eating the world, in 2018, you should say Chinese software is eating the world,” says Nikhil Kumar, a volunteer with Indian software products think-tank iSpirt who was recently in China to learn more about the fintech ecosystem there.
The idea is not only to export technology crafted in China but also play a part in running fintech businesses in South East Asia, Africa and India where millions of users are coming online.
Of the Chinese companies, Ant Financial is the most aggressive when it comes to going global. Its first stop was South East Asia. The company, an affiliate of Chinese e-commerce major Alibaba, valued at over $150 billion, is already a lead investor in nearly every major mobile wallet company in the developing world.
A company document that FactorDaily reviewed lists eight major mobile wallet players in South and Southeast Asia among Ant Financial’s investee companies. These are Easypaisa in Pakistan, BCash in Bangladesh, TouchnGo in Malaysia, Kakaopay in South Korea, GCash in the Philippines, Ascend in Thailand and Emtek in Indonesia. And, of course, Paytm in India.
With an investment from Ant Financial, comes a whole lot of technology transfer. The investee companies also tend to run their applications on top of Aliyun, a.k.a Ali Cloud, the cloud infrastructure owned by Alibaba. Besides the infrastructure, now, Aliyun has plans to offer to design and run fintech applications and even core banking software for big banks.
“We see ourselves as Amazon plus IBM,” an Ant Financial executive told FactorDaily requesting anonymity. Recently, the company built and launched an internet finance platform for the Bank of Nanjing, a mid-sized Chinese bank, making a case for potential banking customers.
Alipay claims that it can process 256,000 transactions a second compared to 65,000 transactions that leading payments providers in the world can process. It also says that fraud loss rate on Alipay is less than 0.01 basis points (BPS) as opposed to 3 BPS at “world leading online payment company.” (Presumably, Paypal).
Ant Financial promises the same nimbleness to potential customers.
But South East Asia isn’t big enough to satisfy the appetite of the Chinese companies. For instance, in Indonesia, one of the biggest South East Asian markets, by one estimate, there are about 500 Chinese fintech firms. As a result, the country has seen a surge in its digital transactions and loan disbursement volumes. The value of digital transactions grew sixfold between 2012 and 2017 to $840 million and the amount of P2P loans disbursed doubled to $430 million between January and May 2018.
That’s only a fraction of what Chinese fintech majors are used to. Ant Financial, for example, lent nearly $95 billion to consumers from the beginning of 2017 until March 2018, making its loan book 3.7 times bigger than that of China’s second largest bank, the China Construction Bank Corp., a report by Bloomberg said.
It takes just three minutes for a borrower to fill out a loan application on Alipay. The loan is approved in one second and with zero manual intervention. This is the basis of the ‘310’ catchphrase at Alipay.
“Indonesia is an easy but small market. There are already hundreds of players competing in a market where smartphone penetration is only about 20%,” says Amit Jangir of 01VC venture capital firm, adding that India seems like the logical next step for expansion.
The Chinese playbook prioritises growth numbers as rule number 1 of expansion in a new market and South East Asia just isn’t that big. According to a July 2018 report by KPMG, in addition to Ant Financial’s $14 billion fundraise, China saw four other $100 million-plus mega rounds including $290 million to Dianrong, an online lending marketplace; $160 million to WeCash, another credit assessment and lending platform and $130 million to Meili Jinrong, a peer to peer lending player in the first half of 2018 alone. Soon, these companies are likely to start looking to markets abroad.
This is where Africa comes into the picture. About 1.7 billion people in the world are still unbanked. Of this, nearly 400 million are in Africa and the rest in South Asian countries (India accounting for a big share of the unbanked). The African continent, with over 50 countries, 1.2 billion people and a combined gross domestic product of $2 trillion, is a big market. It is also a region where people have already taken mobile money services offered by telecom companies. M-Pesa by Safaricom, Mobile Money by MTN, Orange Money, Tigo Cash or Tigo Pesa, Vodafone Cash, and Airtel Money are some of the popular services in the region. There are nearly 200 such companies in Sub Saharan Africa.
In Africa, the Chinese arrowhead is again Ant Financial. The payments major has partnered with the United Nations Economic Commission for Africa (ECA) and the International Financial Corporation to promote digital financial inclusion. According to the agreement announced in August at Addis Ababa, the Ethiopian capital, Ant will achieve this through investment and technical capacity building.
Alibaba’s Jack Ma, Ant Financial CEO Eric Jing, Melinda Gates and Nandan Nilekani are part of committees and panels for financial inclusion and identity projects at the United Nations and World Bank.
What this really means is that telecom-run mobile money providers are about to be challenged big time. Ant Financial is likely to pick up a stake in local companies as it did with Paytm in India, help banks build and launch applications on its tech stack or even launch its own payment wallet in the region.
In India, a major open market, the most visible marker of Chinese ambition in fintech is Paytm, the country’s largest digital payments company (also see disclosure). But there’s more.
Investors and entrepreneurs in China tell us that at least half a dozen Chinese companies are testing to launch in India. While some are trying to get approvals to set up their teams in India, others have already made their way into India through investments.
Chinese micro-lending company Fenqile and smartphone maker Xiaomi have invested in student lending platform KrazyBee. Xiaomi has also invested in ZestMoney, a digital lending platform. The phone and consumer goods maker, which became India’s largest smartphone seller in just three years, is also testing features such as Mi Credits (powered by KrazyBee) on its phones. WeCash, now valued at over $3 billion, has plans to enter India soon.
“Launching a fintech business in India is a little more challenging than other sectors like e-commerce and internet platforms for the Chinese,” says Jangir whose firm has invested in FlashCash, a micro-lending platform in India. But, “It’s only the beginning for fintech interest in India…you are likely to see more Chinese players in the market.”
An open alternative
The proliferation of Chinese mobile wallets, and a new wave of “challenger banks” is already giving “nightmares to American bankers”, as this story points out. Reacting to this threat, big banks have started setting up outposts in Silicon Valley. Perhaps Silicon Valley’s fintech companies can hold the Chinese at bay in markets like Europe and the US. But if the Chinese gambit that’s focussed on mobile banking and the hitherto unbanked users in other markets pays off, there will be little growth left for others.
Still, there is one hurdle before the barrelling Chinese fintech companies: the open architecture Unified Payments Interface rolled out in India. As we’d written earlier, UPI-supported payment platforms are fast emerging the gold standard in mobile payments in India since its launch in April 2016. UPI obviates the need for a mobile wallet, connecting directly to a user’s bank account. The interface has made it possible for companies such as Google, Amazon, WhatsApp and PhonePe quickly launch payments apps in a space that was earlier dominated by Ant Financial-backed Paytm.
Another approach similar to UPI is the Level One project, backed by the Bill and Melinda Gates Foundation. The Level One Project lays out a playbook to create a national digital financial services system built on top of shared, open standards-based components and governed by its participants.
“Many of these people are either geographically remote, live in rural areas that are not served by banks, or that are not covered by branches and ATMs. The traditional banking services are not adequate or too expensive for these people,” says Konstantin Peric, Deputy Director, Level One Digital Payment Systems, Financial Services for the Poor (FSP) at the Bill & Melinda Gates Foundation.
To that end, Peric and a few other partner companies have built MojaLoop, an open-source software that can be used to build national digital payments platforms. In Swahili, Moja means One. Projects that use Moja Loop are underway in Kenya, Uganda, Tanzania, and Nigeria in Africa, and in Indonesia, India, Bangladesh and Pakistan in Asia.
Peric is a bit of a legend in financial tech circles. The 57-year-old technologist was the chief architect of Swift, a global network that connects 10,000 financial institutions and corporates around the world. India’s UPI, Peric says, has a lot of similarities with Level One Project. That way, Indian fintech companies are likely to gain an edge in markets where the project has been implemented.
“Most of the focus today on our side is to foster interoperability. Because that grows the market,” says Peric. By launching a layer that makes mobile payment systems interoperable, he hopes to unlock competition without hurting users.
So, will Chinese companies be able to replicate their success at home in Africa? “No one can predict the future. But Africa is different,” says Peric. He points out that China is largely a homogenous market and Africa with 54 countries is very diverse. “There will be a need for more partnership and collaboration rather than one big push to cover all of these.
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Updated at 12:47 pm on December 12, 2018 to correct the lead visual of the story that had a small map of Pakistan including the areas of Pakistan Occupied Kashmir.
Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures, Vijay Shekhar Sharma, Jay Vijayan and Girish Mathrubootham among its investors. Accel Partners and Blume Ventures are venture capital firms with investments in several companies. Vijay Shekhar Sharma is the founder of Paytm. Jay Vijayan and Girish Mathrubootham are entrepreneurs and angel investors. None of FactorDaily’s investors has any influence on its reporting about India’s technology and startup ecosystem.