Opinion: Fintech Cooperation Beckons in China, EU
One of the biggest differences between the European and Chinese fintech markets is regulatory support.
China is dominated by an all-embracing, open-minded regulatory environment. This is a breeding ground for innovation, which has assisted the tech crowd in China to thrive in a market climate that is supportive of entrepreneurship. It also animates large corporations to work on innovation and explore the possibilities of fintech.
In the EU, the biggest challenge, besides the uncertain and changing regulations, is winning the consumers’ trust. A big difference between Europe and China is the acceptance of digital payment forms. That is especially true of Germany.
China’s population seems to be more and more open to using digital finance. Various services by fintechs are being used by Chinese and incorporated into different fields of their lives. This includes online and offline shopping, online banking, money transfers, digital payments, investments and crowdfunding.
McKinsey & Co. has calculated that since 2011, the internet economy in China has grown by more than 50 percent, and now comprises 7% of China’s gross domestic product. In comparison, it’s only 4% to 5% in Germany. Not surprisingly, in Germany about 72% of people consider cash to be a safer payment form than cards or digital payments.
One reason Germans tend to use cash so frequently is because they carry more of it than people from other countries. Almost 80% of payments are made in cash, according to German Central Bank.
Nevertheless, every European country’s people have their own unique spending habits. Therefore, customers’ preferences need to be considered in each country. Europeans nowadays are open to change as never before. This opens up a lot of opportunities for fintech companies with a convincing business model that offers benefits to the customer through transparent products and excellent service.
A big part of the huge success of fintech in China is due to Baidu, Alibaba and Tencent. The three tech giants control a massive share of China’s e-commerce landscape, as well as online messaging and internet search platforms. They also dominate about half of the Chinese third-party payments market. For example, Alipay from Ant Financial is the most popular in China and covers almost 80% of the country’s total mobile payments.
The reason the fintech market in Europe is smaller and more diversified with numerous fintech companies is partly based on the fact that European banks are undercapitalized, whereas Chinese — and Asian — banks are overcapitalized. The global financial crisis had a huge negative impact on Western and European banks. Now technology is needed to enhance systems, replace inefficient platforms, and create new revenue streams. This is a good starting point for innovation. Banks in China haven’t been hit by the crisis dramatically, so there isn’t necessarily an urgent need to strive for innovation as soon as possible.
A lot of interesting technology in Europe can be applied in China — and vice versa. For this to happen successfully, the right doors need to be open.
For European fintechs, the robo advice market could represent the open door to enter the Chinese market. Robo advice consists of automated technology that offers financial and investment services. Based on different factors, customers can choose portfolios that can be managed from their smartphones. The economy is developing, and the middle class has more financial means available. Chinese are starting to turn toward technology like automated wealth advice to find the services they are looking for. State-controlled banks are not prepared for this shift in how wealth management services are being used by customers. This represents a good opportunity for European fintechs to get involved and be a driving factor of China’s steadily growing wealth. To enter the Chinese market, foreign companies have to create a joint venture with local corporations. This opens up a great opportunity for Chinese enterprises to cooperate with experienced European fintechs in China and also expand their business to European countries.
In Europe, corporate venture capital (CVC) investors are particularly interested in fintechs. CVCs’ investment activity reached a five-year high in the first quarter of 2017. This result is mainly influenced by leading financial institutions that are launching their own venture divisions. At the same time, early-stage funding grew by 72% on a quarterly basis.
These numbers show that the fintech market in Europe is growing and offers numerous attractive opportunities for foreign investors. This also implies that the competition is growing steadily. Therefore it is necessary for investors to put their own competitive advantage on the table and also look at what the European customer needs.
Fintechs in Europe have to keep a special eye on regulations, customer behavior and preferences. The difference in the level of acceptance of digital payments in China and Germany is remarkable.
A recent example of two German drugstore chains shows how this gap could develop in the future. Both companies recognized the willingness of Chinese customers to use digital payment methods. Therefore, they are going to make it possible for Chinese tourists to buy products via Alipay. This simplifies purchases for Chinese tourists in Germany and also gives the chains an advantage over competing German drugstores. This could be a signal for other shops and chains in Germany and Europe to disrupt the longtime German tradition of cash payments. They could lead the digital payment sector and introduce the method of easier and faster payments to a broad proportion of the population.
If Germans and other Europeans get more accustomed to digital-payment methods and also fintech in general, there is a huge potential for Chinese companies to cooperate with European fintechs, both in Europe and China.
Yang Wang is a partner with Germany-based Earlybird Venture Capital.
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