In 2017, mobile technologies and services generated 7.1% of GDP across Sub-Saharan Africa, and Mckinsey found a sharp rise in the number of mobile financial services such as peer-2-peer borrowing, group savings and micro-loans among others.
While the rise of fintech and alternative financial tools is exciting, so is the way many African banks have also embraced new digital-first strategies in order to reach a wider population across the continent. At the same time, China’s memory of the unbanked masses is as recent as the early 2000’s, when Fintech recently found an incredibly hospitable environment. With the over $40 billion USD Chinese Fintechs have raised in the past 5 years, they have developed numerous localized, scalable, and low-risk financial solutions leveraging cutting-edge technology enabling them to reach millions of customers. While payments tends to dominate the African fintechs, it constitutes just one of the seven key markets in China’s booming Fintech industry. The other areas are online insurance, online lending, personal financial management, online money-market funds, consumer finance and online brokerage. Given a number similarities in between the market development of the two regions, there are numerous ways that African banks that looking to innovate and serve their customers better can learn from already successful Chinese fintechs.
What is Driving China’s Fintech Growth?
According to the Financial Times, Chinese consumers spent around $22.8 Trillion using mobile payment platforms, much more than American consumers spending $112 Billion. 90% of that figure was from two of China’s biggest tech platforms Alibaba’s Alipay (54%) and Tencent’s TenPay (37%). This is obviously attributed to the 1.3 billion population and the burgeoning middle class of China. While Africa has a comparable 1.2 billion population, it is substantially less concentrated and much more ethnically diverse, which will prove troublesome in scaling country or region specific products. However, these difficulties might be tempered by the early-adoption mentality of Africans, as well mobile access.
China’s economic and financial policies have traditionally been very tight because China has a very strictly restricted currency, which impacts their massive export-import economy. However, because most Chinese fintechs are serving the domestic market, China’s Securities Regulatory Commission (CSRC), one of the regulatory body, felt more comfortable being light-touch and the regulation of players in the Fintech industry. As a result, the regulatory bodies created a vibrant, conducive environment which allowed Fintech companies to innovate and grow.
The hands off approach by the Chinese government, while predominantly positive, may have contributed to the rapid rise of the industry but it also led to a number of fraud cases. For example, Independent data estimates by Oliver Wyman show that as of May 2017, over 60% of the 5,890 online Peer-to-Peer platforms had ceased operations. Subsequently, now China has a more nuanced and sophisticated regulatory environment.
In order to draw the appropriate parallels between the market size of China and Africa, it is also important to the note the lack of harmonized Fintech regulation between countries or even regions, which can be very prohibitive for Fintech looking to scale like the ones in China. However, because many banks already operate across borders, they are perfectly positioned to scale these innovations.
Lack of Existing Physical Payment Infrastructure
While QR codes never really took off in the US, in early days China also had some trouble, but soon they were ubiquitous. From nail salons to banks to restaurants across China, consumers scan them to access everything from menus to payments. The QR code revolution was due, in a large part, to WeChat’s aggressive promotion, ease of use, low adoption costs, and the lack of existing hardware equipment such as POS terminals. In Africa, POS terminals are usually provided for free by the banks, so this may be a harder behavior to change. However, they often have connectivity issues, or other problems, that might actually make a case for QR codes. This is not applicable with feature phones, but now cheaper smartphones imported from China, may actual make this a more viable options. For example, Mastercard is now trying this strategy with Masterpass in East Africa.
Widespread Usage of E-Commerce, Social Media and the Internet
The internet boom of 2000 saw the emergence of online marketplaces in China such as TaoBao, YiHaoDian, and JD.com. These online marketplaces enabled Chinese consumers to leapfrog into the digital online space and served as a precursor to the rise of the innovative Fintech firms that we see today. The popularity of e-commerce created a necessary use case for online payments that helped the technology proliferate. Because most Western social media is blocked, the Chinese have created their very own social media platforms, such as Weibo, WeChat, and Renren. This also created captive audience who were forced to use the Chinese-specific solutions. While it doesn’t look like Facebook and Twitter are doing fintech, the internet boom and USSD has certainly driven financial inclusion in Africa.
The Key Players in the Chinese Fintech Industry
During Ant Financial’s last round of funding, they raised $10 billion at a $150 billion valuation, which demonstrates the maturity of the Fintech industry and investor confidence in the country towards Fintechs. Ant Financial first created AliPay, which supported Alibaba’s massive e-commerce platforms. It was initially an escrow service used by Alibaba merchants and consumers but later grew to encompass many other services such as taxi hailing, movie bookings, or air tickets among other services.
Demonstrating the huge demand for financial services in China, Yu’E Bao, the money market fund of Alibaba Group accessed through their app AliPay, overtook JP Morgan’s US government money market fund in 2017. It only took four years after its inception to become the world’s biggest money market fund. In addition to Yu’e Bao, Ant Financial also operates an innovative credit rating system called Sesame Credit, and a retail management system which uses artificial intelligence (AI) to run their operations.
Tencent Holdings is one of the biggest providers of internet, mobile and telecom services in China. It owns Tenpay, a payment platform which consists of WebChat Pay and QQ Wallet.
JD Finance was previously finance unit of e-commerce company JD.com before it branched out on its own in 2013. It provides retail products and services to 400 million individuals and technology service and solutions to over 700 financial institutions. JD Finance utilizes artificial intelligence to drive its highly successful risk insurance models, something that African banks can learn from.
Lufax, a division of Ping’An, is China’s largest Peer-to-Peer lending and wealth management platform in China with over $24 billion worth of loans. Since Ping’An is among China’s largest insurance companies, it serves as a guarantor to all loans disbursed on the Lufax platform. It’s Peer-to-Peer lending services uses a very innovative facial recognition in its account opening process.
Lessons African Banks can learn from Chinese Fintechs
#Lesson 1: Don’t Stick to Your Industry
Banks are seen as traditional behemoths, but as Chinese fintechs show, you don’t have to be a tech company to do fintech. While Ping’An started as an state-owned enterprise and stodgy insurance company, they are now innovating one some of the most cutting-edge facial recognition technology. As long the digital departments of banks are set up correctly, they can also innovate on technology that has multiplier effects.
#Lesson 2: The Power of Artificial Intelligence
China has been an innovator not only in the core technology of the the AI space, but also in implementation. For example, Sesame Credit utilizes AI and big data in order to score the credit trustworthiness and likelihood of fraud of their millions of accounts, all under seconds. Another example, is how the deployment of Yiri, a robo-adviser of the company Yirendai’s resulted in a 50% increase in the company’s Asset Management portfolio.
While it may AI and big data may seem like overly sophisticated solutions for banks, which may not have intense digital departments, there are actually number of out of the box solutions that banks can buy. Furthermore, given the amount of fraud and corruption within African financial institutions, it may be more necessary than ever that they use objective third party evaluations to discover fraud. Like Lufax’s facial recognition account opening, biometrics may actually be a more secure option with consumers that do not have identity documents.
Lesson 3: Gamification increases audience engagement
When WeChat Pay was first launched by Tencent, they leveraged launched a very innovative gamification feature known as digital red envelopes’. Because physical red packets were already so popular as a way of gifting, digital ‘red packets’ made immediate sense. These ‘red packets’ can be filled with either cash or games and can be sent by a user to another user or group. The group users then compete amongst each other to be the first to snatch a red packet. By digitizing an existing cultural behavior, WeChat Pay grew exponentially quickly. The African continent has an abundance of traditions and cultures that the banking industry can take advantage of and gamify them in to increase engagement with their customer base.
Lesson 4: Social Impact Banking
Ant Forest is an initiative launched by Ant Financial in 2016 to reward those customers who pay their bills using their AliPay system or engage in activities with a lower carbon footprint, such as using public transportation. Social impact banking as a rising trend is a response to the growing number of their millennial customers who are increasingly expecting their companies to give back to their community or environment. Given the increasing purchasing power of younger people on the continent, it would make sense for banks to create product features and challenges that would be specific to this demographic.
Lesson 5: Partnerships are Key
While there is quite a bit consolidation within the African financial sector, African banks do not necessarily think outside the box with the types of partnerships that will enable them to capture larger market shares. Partnerships do not necessarily have to be commercially based, but can about sharing technology or data.
For example, JD Finance and Tencent have a data-sharing partnership which involves the merging of JD finance customer shopping history data with data from Tencent’s WeChat messaging platform. JD then uses that data to make suggestions for customers’ purchases and assists vendors promote their products. It helps that Tencent is JD.com’s largest shareholder with a 20% stake in the company. This is also case where we advocate for data interoperability rather than integration.
JD.com has also partnered with Sina, one of the top portal websites in China. Using their consumer data, JD.com powers SINA’s content optimization with a view of better matching its readers with relevant content, a strategy is meant to increase their membership. In return, Sina returns the favour by assisting JD.com to gain deeper insights on consumer behaviour via its analytics platform. SINA is also able to develop better-targeted ads using that data which is meant to drive web traffic to JD’s online marketplace. While obviously there are certain data privacy restrictions to consider, especially when handling sensitive financial data, this an interesting case study for how banks can work with parallel industries, such as insurance and e-commerce.
Lesson 6: Social Media Is a Powerful Asset for Effective Customer Acquisition
In today’s age of social media into every aspect of a person’s lifestyle easily grants relevance to that social media platform or application.
Example: Tencent’s core business isn’t financial products or services but in social networking and entertainment which is channelled through its social messaging platform: WeChat.
WeChat offers its users a wide variety of services such as: ordering taxis or meals, checking movie times and even online shopping. This grants WeChat relevance in almost all aspects of a user’s daily life activities. This indigenous strategy of designing experiences around a user’s lifestyle and using social media as a powerful driving force in onboarding users to a financial platform is a strategy that African banks can embrace. It will definitely increase the uptake of financial services across the continent.
The African banking industry has made tremendous strides in expanding their financial services to the millions of unbanked Africans on the continent. However, Chinese Fintechs have also achieved massive growth amid a myriad of similar challenges. African banks can learn a lot from Chinese Fintechs on how they were able to overcome some of their challenges.