5. The emergence of FinTechs in China

During the last years, China has become the world’s FinTech Market leader. Peer to peer lending, digital payment and wealth management are the main sub-areas in which Chinese FinTech companies are investing in the most so far.
5. The emergence of FinTechs in China
Contributors (1)
Dec 18, 2018

5. The emergence of FinTechs in China

During the last years, China has become the world’s FinTech Market leader.1 Peer to peer lending, digital payment and wealth management are the main sub-areas in which Chinese FinTech companies are investing in the most so far. In a society in which digital economy is already embedded in people’s daily life, the FinTech companies are flourishing and changing the way people deal with money and investments.

In China, the services provided by FinTechs are majorly related to big data, consumer finance, wealth management and online payment.2 Moreover, there are 7 key sectors in which these companies are investing in and providing services for:

1. Online payments and e-wallets;

2. Supply chain and consumer finance;

3. Peer-to-peer (P2P) lending platforms;

4. Online funds;

5. Online insurance;

6. Personal finance management; and

7. Online brokerage.

Geographically, these companies are located in specific cities – or regional clusters – such as Beijing, Shanghai, Shenzhen, Hangzhou, Chengdu and Chongqing. This spatial distribution is not random. In fact, it is directly related to local governments’ incentives and policies such as technological parks and other special areas created for attracting IT companies, and cultivating talents and technologies.3

However, why has this sector’s expansion been so expressive during the last five years? Among the many factors, wit is possible to list the exponential growth in digital connectivity and infrastructure in China, the deep penetration of smartphones, the impressive development of e-commerce, and the Chinese population and SMEs’4 unmet financial needs.

Undoubtedly, China is becoming a digital marketplace. The digital infrastructure is developing really fast and it is spreading all around the country, especially, in the urban areas. Private companies along with both the central and the local governments have put efforts to increase and improve this digital connectivity all over the territory.

In fact, China has become the largest and most developed retail e-commerce market in the world – check figures 5.1 and 5.2. In 2016, the country was responsible for 47% of the global digital retail sales and, by 2020, it is estimated that China will be responsible for almost 60% of retail e-commerce’s sales in the world.5 As consequence of this rapid e-commerce’s expansion, the demand for new technologies and financial services that allow consumers to purchase goods and services online, for example, is also growing exponentially.6

Figure 5.1 Share of global retail e-commerce sales, China vs. U.S., 2015 – 2020. Source: author based on EY and Asian Insights Office DBS Group Research (2016)7

Figure 5.2 China’s e-commerce projection, 2011-2017. Source: author based on Li and Yi (2016) 8

In addition to the demands created by the e-commerce sector, the penetration of smartphones and the big number of netizens have also contributed to the creation of a welcoming environment for FinTech companies flourish. By December 2017, China had around 772 million Internet users – more than the Europe’s entire population9. Additionally, the Internet penetration rate was 55.8%, higher than the World’s and Asia’s average of 50.1% and 45.6% respectively. In the previous year, the number of mobile Internet users in the country is also impressive: 695 million people, approximately 95% of Chinese netizens10 using smartphones, tablets and other mobile devices to connect to the Internet.11

Figure 5.3 Number Chinese Internet Users. Source: author based on CNNIC (2017)12

Figure 5.4 Internet Penetration Rate in China between 2006 and 2017. Source: author based on CNNIC (2017).

Nevertheless, having a big number of people connected to the Internet and a growing e-commerce sector are just some of the requirements for the consolidation of a truly digital economy. Safe online payment platforms and other gateways are also required in order to a digital marketplace and economy to be consolidated.

In China, the numbers of Online Third-Party payment companies and online payment platforms’ companies, services and their users have increased exponentially during the past five years. In fact, the amount of online payment platforms’ users reached a peak 475 million people by the end of 201613. Moreover, it is expected that the total transactions made through them will surpass CNY19 trillion in 2017. 14 A brief evolution of the number of users, the amount of money transacted through these platforms and the Third-Party Online Payment Growth Rate in the country can be observed in the figures 5.5, 5.6 and 5.7 below.

Figure 5.5 Online payment users in China, 2014 and 2017. Source: author based on 中国互联 ⽹络信息中⼼ (CNNIC) (2018)15

Figure 5.6 Third-Party Online Payment in China, 2011-2019 (estimated numbers for 2018 and 2019). Source: author based on China Internet Watch (2017)16

Figure 5.7 Third-Party Online Payment in China – Growth rate YoY (%) between 2011 and 2019 (estimated). Source: author based on China Internet Watch (2017).

Indeed, the expansion of Third-Party Online Payment platforms in China is deeply is a result of the cooperation between these companies, the Chinese Government (in all levels), public service agencies and local communities

“(…) to launch services of public utility payment, building and promoting an all-round online payment system for public service (…), which greatly improves the efficiency of public service agencies and effectively minimizes the payment inconvenience of the public. In terms of offline payment, e-payment companies vigorously develop the market and greatly enrich payment scenarios, prompting consumers to initially develop the habit of using mobile payment tools to pay bills when shopping at physical stores (…). The payment habit is rapidly developed among consumers living in lowtier cities, with a “no wallet” era quietly initiated. Online payment brings shopping users convenience and minimizes the inconvenience of merchants in reducing operating costs and managing cash, greatly promoting the use of offline payment Apps.”17

The advantages associated with the usage of these platforms are, in fact, transforming the business models adopted by many companies and the service and goods merchants have been selling. Small and middle-sized enterprises, for instance, are benefiting from this safe, fast and low-cost payment methods. Consumers are buying18 using digital payment systems such as Alipay, WeChat Pay, UnionPay Quick, and QQ Wallet more and more. As figure 5.8 shows, Alipay has been used more often than cash for paying for goods in first-tier cities. In Second and Third-tier cities, it has been the second most used payment method just slightly behind the use of cash. Additionally, some researches indicate that both spend19, the number of credit and debit cards in circulation, and these cards penetration rate per capita20 are decreasing in China.21

Figure 5.8 Payment methods used most regularly between February and March 2016. Source: author based on EY, DBS Group Research (2016)22

Another big stimulus for investing in digital payment platforms and other financial services in China is related to unmet financial citizen’s needs23, especially, coming from the middle class sector. During the past decades, the Chinese economy grew expressively and China’s middle class has followed this path. Nowadays, the country’s middle class is the main engine of consumerism in the country. In 2012, the mass middle class' urban private consumption was 54% of the Chinese total consumption. By 2022, the projection of the upper middle class' consumption is 56% of the total consumption.24

Nevertheless, the banking traditional system has accompanied neither the middle class growth nor its purchasing power. One fifth of China’s adult population remains unbanked. Furthermore, the credit system fits neither the demand nor the needs of million of Chinese citizens, especially, those in the middle and lower classes, because of the “lack of qualified collateral and credit repayment track records. In fact, many Chinese do not have existing banking relationships as evidenced by the fact that national credit bureau only has information on less than 20% of the population.”25

Actually, the traditional banking system in China is seen by many people as a provider of “homogeneous, uncompetitive, unimaginative financial products that are pushed out to customers, rather than responding to customers’ needs.” as the figure 5.9 shows.26

Figure 5.9 Reasons for using a non-bank rather than traditional banking system in China. Source: Author based on EY, DBS Group Research (2016)27

Additionally, it is also known that large Chinese banks generally prefer to focus on State Owned enterprises (SOEs) and large clients rather than on private individuals and Small and Medium Enterprises. In fact,

“the existing financial sector has long been dominated by the formal banking sector, where large state-owned banks (SOCBs) typically serve SOEs, leaving the SMEs underserved, although they account for a large share of GDP, employment and innovations. Moreover, banks also prefer to serve highnet worth customers, imposing stringent investment thresholds for wealth management- related financial services that preclude low- and middle-income savers/investors.”28

Unfortunately, this misallocation of credit in the Chinese Economy has led to a big credit gap in the country. Consequently, a non-official banking system has emerged in the shadows and has dealt with these needs not properly addressed by the traditional system. Although the majority of companies operating in the shadow banking system are usually not properly registered as financial institutions, the whole shadow banking system does not necessarily challenge the traditionally banking system status quo. Actually, it is possible to argue that shadow banks’ activities compliment the traditional banks’ ones, because they offer financial services to the unserved segments of the society – individuals and SMEs that are responsible for 80% of the economic output and 65% of the GDP, but receive only 20% of the credit generated by official banks and other financial institutions.

“In the context of China, non-bank finance and shadow banking thus capture both the essential elements that we now see in the P2P sector, namely the need for alternative forms of financing to support non-State growth, particularly among SMEs whilst at the same time addressing potential risks to consumers and the financial system.” 29

Attracted by the potential efficiency and market share gains offered by online P2P (lending and payment) platforms, typical shadow banking institutions, Internet companies and private investors have invested substantially in the FinTech sector. Because of the big amount of credit being delivered in a non-conventional and regulated way to these online-related financial sectors, the Chinese Central Government issued the Internet Finance Guidelines in July 2015. The document aimed to decrease the risks and uncertainties involved in “shadow”, non-official financial and, payment and investment transactions by providing a core of “good practice” regulation and accountability. Despite these efforts, the rules guiding peer-to-peer lending, digital wallets and payments made via online third-party platforms in China are yet under developed.

Nevertheless, the uncertainty that embeds the loans made through these online lending platforms seems to scare neither borrowers nor investors. In fact, there is still a huge demand from the SMEs and population in general for low-cost, and accessible financial services such as wealth management, online payment systems, loans, etc. In this scenario of high demand for financial and banking services and low offer from the traditional banking system, it is not surprising that online P2P lending companies are flourishing in China.

Some would argue, however, that precaution is necessary while dealing with both new payment and p2p lending platforms. From too-small-to-care to too-big-tofail, these FinTech alternatives are challenging, complimenting and changing the Chinese financial system as a whole.

In fact, a movement from a cash society towards a digital economy based on online payments, online p2p loans, and other financial technologies can be observed in China. On one hand, all levels of government are encouraging Chinese citizens to use those new tools and are also providing incentives for FinTech companies develop innovative solutions for the financial sector in the country. On the other hand, the impressive growth and penetration of these technologies question the financial system’s capacity of adaption to new demands and disruptive technologies.

Go to next: 6. Ant Financial and it’s Alipay

Back to previous: 4. The development of new technologies applied to the financial sector

  1. 1.

    “Followed by integrated financial services, big data ranked first and second when analyzing the firms included in our rankings on the basis of their business model. Since data is at the heart of recent developments in the financial services sector, companies that seek to harness the power of big data enjoy a significant competitive advantage over their peers.” EY and Asian Insights Office DBS Group Research. (2016) "The rise of FinTech in China: Redefining financial services". Accessed on October 27th, 2017. http://www.ey.com/Publication/vwLUAssets/ey-the-rise-of-fintech-in-china/$FILE/ey-the-rise-of-fintech-inchina. pdf

  2. 2.

    KPMG China (2016) “2016 China Leading Fintech 50”. Accessed on October 27th, 2017.


  3. 3.

    Ibid, pp. 7.

  4. 4.

    SMEs is an ancronym for Small and Medium Enterprises.

  5. 5.

    In 2012, the sales revenue for online retailers surpassed that of department stores for the first time. Last year,

    18.4% of the Chinese total retail sales value was related with e-commerce. For more data, check China Internet Network Information Center (CNNIC). (2017) Statistical Report on Internet Development in China. Accessed on March 29th, 2018. http://www.cac.gov.cn/2018-01/31/c_1122347026.htm

  6. 6.

    China Internet Network Information Center (CNNIC). (2017) Statistical Report on Internet Development in China. Accessed on March 29th, 2018. http://www.cac.gov.cn/2018-01/31/c_1122347026.htm

  7. 7.

    EY and Asian Insights Office DBS Group Research (2016), op. cit., pp. 16.

  8. 8.

    Li, S., Yi, C. (2016) “Impact of Technology on China’s Financial System” in Shadow Banking in China: An Opportunity for Financial Reform, ed. Sheng, A. & Soon, N. G. Hoboken: John Wiley & Sons, pp. 174.

  9. 9.

    2016, the European population was approximately 741 million.

  10. 10.

    Netizen ia an active particiapnt in the online community of the Internet.

  11. 11.

    China Internet Network Information Center (CNNIC) (2017) Statistical Report on Internet Development in China. Accessed on March 29th, 2018. http://www.cac.gov.cn/2018-01/31/c_1122347026.htm

  12. 12.

    Ibid, pp. 39.

  13. 13.

    The number of people using online payment systems in mobile devices such as smartphones, tablets, and

    smartwatches was around 470 million according with the Statistical Report on Internet Development in China.

    China Internet Network Information Center (CNNIC). (2017), op. cit., pp. 71.

  14. 14.

    Li, S., Yi, C. (2016) “Impact of Technology on China’s Financial System” in Shadow Banking in China: An Opportunity for Financial Reform, ed. Sheng, A. & Soon, N. G. Hoboken: John Wiley & Sons, pp. 176.

  15. 15.

    中国互联⽹络信息中⼼(CNNIC). (2018) “中国互联⽹网络发展状况统计报告” Accessed on March 29th, 2018.


  16. 16.

    China Internet Watch (2017) “China third-party online payment overview 2011-2019” Accessed on October 31st, 2017. https://www.chinainternetwatch.com/20154/online-payment-2011-2019/#ixzz4wyycS09Q

  17. 17.

    Li, S. & Yi Tin, C. (2016), op. cit., pp. 171-172.

  18. 18.

    Here, both online, online-to-offline and offline purchases are taken into consideration.

  19. 19.

    Spends made through the use of credit cards as payment method.

  20. 20.

    There were 0.29 credit cards per capita in circulation by the end of 2015. In the previous year, the average was 0.34 cards per capita according with People’s Bank of China (PBOC). For more information, check EY and Asian Insights Office DBS Group Research (2016), op. cit.

  21. 21.

    EY and Asian Insights Office DBS Group Research (2016), op. cit., pp. 16.

  22. 22.

    EY and Asian Insights Office DBS Group Research (2016), op. cit., pp. 17.

  23. 23.

    As the traditional banking system tends to lend mostly to Stately Owned Enterprises (SOEs), many Small and Medium Size Enterprises are left behind – around 80% of the total of loans is directed towards SOEs while SMEs receive only around 20% of it. Indeed, not only SMEs, but also individuals have to overcome many obstacles in order to take a loan in the traditional banking system. Even when individuals can borrow money from the traditional and big banks, the interest rate they have to pay for it can be forbiddingly high – because of those high interest rates, many individuals and SMEs prefer to look for loans’ alternatives in the shadow banking system, for example. Many experts say that the unmet citizens financial needs are a decisive variable for the emergence and establishment of both the shadow banking system and FinTech companies that provide new ways of obtaining credit in the Chinese Economy. Besides the access to credit, other financial limitations/unmet needs are related with those citizens being able to take part into the formal economy and banking system itself. Million of people, indeed, do not even have bank accounts or credit/debit cards.

  24. 24.

    EY and Asian Insights Office DBS Group Research (2016), op. cit., pp. 17.

  25. 25.

    EY and Asian Insights Office DBS Group Research (2016), op. cit., pp. 13-14.

  26. 26.


  27. 27.
  28. 28.

    Li, S. & Yi Tin, C. (2016), op. cit., pp. 171

  29. 29.

    Barberis, Jànos & Arner, Douglas. (2016) “FinTech in China: From Shadow Banking to P2P Lending” in Tasca, Paolo et al (eds.), Banking Beyond Banks and Money. Cham: Springer International Publishing AG, pp. 69.



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