WHITE PAPER: Developed world legacy systems are no match for China's innovative Fintech
Updated: Aug 6, 2019
In the opening scenes of the 1972 documentary “Future Shock”, based on the bestseller by Alvin Toffler, Orson Welles walks on a travellator through Heathrow airport smoking a cigar and talking to the camera:
“In the course of my work, which takes me to just about every corner of the globe, I see many aspects of a phenomenon which I am just beginning to understand. Our modern technologies have changed the degree of sophistication, beyond our wildest dreams, but these technologies exacted a pretty heavy price. We live in an age of anxiety and time of stress. And with all our sophistication, we are in fact the victims of our own technological strengths –- we are the victims of shock… a future shock.”
In developed economies, existing banks are too entrenched to enable financial innovation to take hold we never expected to be future shocked in an EM… until it happened in November 2014 in Shanghai.
Over the years we’ve wondered which “corners of the globe”future shocked Orson Welles in 1972. Japan couldn’t have future shocked him for at least another decade. Does he mean the United States?
Throughout 20 ethnographic journeys in 15 different EMs over the past 7 years, none of our team members never expected to be future shocked. The commonly held belief was that EMs do not set technological trends; they only copy them…. until Tassos was future shocked in November 2014 in Shanghai.
Tassos met Lilly, who was 28, single and worked for a multinational. She described how she was using her smartphone to shop at Uniqlo. She didn’t buy the clothes she chose in the store. Instead, with a couple of clicks, she bought them through Tmall, arranged next-day delivery, and paid for them through AliPay.
But AliPay didn’t stop there. Its Yu’e Bao money market fund allowed Lilly to earn interest not monthly, but intraday (which she checked multiple times a day). Its peer-to-peer payment system, which looked like WhatsApp but for payments, allowed her to quickly transfer small amounts to her colleagues who brought her lunch. All this in a single platform was more than I had in the UK.
Following from that research FT beyondbrics published a blog by Tassos where he concluded:
“China may soon be setting trends that the West will be compelled to follow. It may be time for investors searching for the next big thing to start looking east[i]“
Three years later, Indian Fintech is also racing ahead, but in DMs we are still waiting for wide adoption of what China had in 2014. This isn’t because DM innovation in payments and “new wave” digital-only banking has been stifled owing to lack of capital. Around $9.1bn went into venture capital funding deals in Europe and the Americas, according to a report by KPMG[ii].
The reason is not lack of innovation, but lack of incentives by retail financial institutions to implement technology that would reduce their oligopolistic profits. And this is what is creating an opportunity for players from the East to disrupt the West.
Figure 1: Existing DM banking structure demonstrating bunding and the current account as a gateway to related products
In China, in contrast, the ability of Alibaba and Tencent, to move into “future banking” from adjacent markets, with the tacit approval of the state, has meant that critical mass came early. Chinese consumers are benefitting far more, and earlier, from financial technology or “fintech” innovation than their developed economy counterparts.
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[i]Tassos Stassopoulos “China emerges as a global innovator”, April 30, 2015 https://www.ft.com/content/828d6f6d-a9c0-304e-8883-638a6818fdf9
[ii]The Pulse of Fintech – Q4 2016, February 2017; KPMG – https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/02/pulse-of-fintech-q4-2016.pdf
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.