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Digital Payments: race to the bottom

Updated: Aug 6, 2019

In the past, innovation flowed from the West to the East. China, seen for years as an imitator rather than an innovator, is streets ahead of the West in fintech usage. Legacy systems and entrenched interests will make it hard for the West to imitate the East. The blocking of Ant Financial’s attempted purchase of MoneyGram exemplifies an approach that will be detrimental to financial inclusion.

Innovative smartphone-based mobile payment systems in China have flourished, with adoption by huge swathes of the population. AliPay’s 520m Chinese users have access to a financial ecosystem encompassing mobile banking, savings, wealth management, lending and credit scoring that no DM country can match.

Despite the obvious convenience of digital payments, take up has been slow elsewhere.

How did China crush barriers to digital payment adoption?

Humans are creatures of habit, and need to overcome behavioural barriers such as security (“will my money be safe?”); and cost, usually manifesting as merchants discouraging use to avoid fees.

In China, the reputation of giants such as Alibaba and Tencent helped to overcome security concerns and with merchant payments costs disruptively lower than the 2-3% in DMs, encouraging merchants onboard.

But broader success came from using behavioural data generated by payments transactions, cultivating ecosystems that encompass mobile banking, savings, wealth management, lending and credit scoring.

In DMs, existing banks are incentivised to defend their payments and consumer businesses, maintaining the status quo and blocking innovation (see our recent white paper “Future Shocked: DM legacy systems are no match for China’s innovative Fintech.”). Would-be innovators akin to Alibaba and Tencent have been blocked. In contrast, most consumer transactions in China were cash-based, so banks had little to defend.

But the silver bullet is consumer credit. From a consumer perspective, the more digital transactions you generate, the more information you provide to the platform, improving your credit score.

Fintech is at the heart of financial inclusion

Smartphones can replace branches, staff, and outdated IT to provide low-cost, reliable and sophisticated banking services. Low-cost banking drives financial inclusion by bringing people into the formal financial system, away from high-priced informal lending sources and loan sharks that they can ill afford. This drives a virtuous cycle of more innovation and access to credit in new and varied fields.

Chinese fintech can drive financial inclusion in DMs

Financial inclusion means belonging to the mainstream financial system irrespective of income. It is easy to assume from an office in NY or London that everybody in DMs is financially included. Unfortunately 1.5m adults in the UK and 9m households in the US are financially excluded.

In the UK, where 4 banks share 85% of the market for personal current accounts, the competition authority recently found it necessary to force the banks to release customers’ own transaction data to them, aiming to kick-start the sort of ecosystem that has already developed in China. The recent blocking of Ant Financial’s purchase of MoneyGram, a global money transfer service, by CFIUS, will frustrate fintech progress in the US.

We believe that that fintech innovation will ultimately flow from East to West. DM consumers will be unhappy bearing the costs of inefficient and anachronistic banking and payments services. And every day that fintech development is delayed, financial inclusion is delayed, preventing people on low-incomes from accessing opportunities, and extending inequality in both EMs and DMs.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.


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