BRI: rising to the fintech challenge

Written by The Economist Intelligence Group on behalf of HSBC

Financial technologies (fintech) being developed in China have the potential to increase financial inclusion in the developing countries along the Belt and Road. China’s top fintech firms have carved out a market in e- and m-financial services in an environment in which large state-owned banks dominate and small and medium-sized enterprises (SMEs) and individuals struggle to access affordable credit—conditions replicated in other developing Belt and Road Initiative (BRI) countries. Some are now expanding internationally, particularly along the Maritime Silk Road. Mobile payment systems and access to small-scale credit could boost consumption and SME trade. The government of China is supporting the roll out of data storage infrastructure that underpins these services.

There has been growing investor interest in fintech in recent years. Total global funding for the sector in 2017 was around US$31bn—more than ten-fold the $2.8bn five years earlier, according to KPMG1. While the US attracts most investment (nearly half of the global total in 20172), China is the largest consumer market for fintech services including digital payments and online lending,3 and is home to some of the world’s biggest fintech firms by value. The largest, Ant Financial, was valued at around $60bn for its IPO in 2016, and is aiming to raise further equity in 2018 based on a valuation of $80-$100bn.4 Several of China’s top fintech firms have emerged out of e-commerce and entertainment players, including Ant Financial and JD Financial, which spun off from e-commerce giants Alibaba Group and JD.com, respectively, and WeChat Pay, which belongs to gaming and social media firm Tencent. China’s domestic market is approaching saturation in certain fintech services such as mobile payments, prompting market leaders such as Alipay (part of Ant Financial) and WeChat Pay to take their competition abroad.

Fintech for financial inclusion

As Chinese fintech firms seek partners and markets in the developing Asian markets along the Belt and Road, consumers and small businesses stand to gain access to previously unavailable or unaffordable financial services. This could boost domestic and cross-border economic activity.

Financial inclusion in BRI regions graph


Compared with high-income countries, developing countries in the regions along the BRI routes have low levels of financial inclusion when it comes to the formal banking sector (see chart). Mobile-based transaction systems which bypass the incumbent banks have already had a large impact on financial inclusion in developing markets where many people lack bank accounts, fixed Internet access and computers. Kenya’s adoption of the home-grown m-payments system m-Pesa is an obvious example.

There are two areas in which Chinese firms are particularly strong and likely to influence fintech developments elsewhere. One is in combining separate functions in a single app, such as online shopping or gaming, micro-loans, online payments and in-person payments. The other is in making use of the large amounts of consumer data generated by these systems to provide smarter, more customised services.

China’s fintech firms embark on the Maritime Silk Road

The large and fast-growing consumer markets in the Association of South-East Asian Nations (ASEAN) have been among the first international targets for China’s fintech firms. Two main factors are driving them. One is the opportunity to provide m-payments services to Chinese tourists visiting the region. The other is securing access to local retail and e commerce markets. In the two years since Alibaba Group invested in South-east Asian e commerce firm Lazada, Ant Financial has announced joint ventures with, or investments in, digital payments platforms in Indonesia, the Philippines and Thailand. JD Financial and JD.com announced a fintech joint venture with Central Group, Thailand’s largest retail conglomerate, in 2017. WeChat Pay is looking in the same direction: Tencent was granted an e-payment licence for Malaysia in 2017 and plans to launch there in 2018. Partnering with successful local players makes sense, given that Chinese m-payment firms will face tougher competition in non-Chinese markets than at home, where they have enjoyed a degree of regulatory protection.

These early outward investments focus on m-payment systems, but as China’s international fintech investments expand to encompass areas such as consumer and SME credit, the economic impact is likely to be more significant.

Bringing credit to consumers and SMEs: data-driven fintech

Inequitable access to credit under a state-dominated banking system in China has provided fertile ground for non-bank lenders offering high interest rates and potentially dubious methods for ensuring repayment. Fintech firms have stepped in to offer alternatives such as online micro-loans and marketplace (peer-to-peer, P2P) lending. Their success has been helped by the paucity of good savings options, making retail investors relatively easy to come by. In some cases, loan services have emerged from e-commerce platforms. JD Financial and Ant Financial both offer credit to consumers and small e-commerce retailers alike. But there is also a lively lending marketplace, which has been embraced so enthusiastically in recent years that the authorities stepped in to cool it with more restrictive regulations in 2017.

China’s large fintech firms can provide affordable lending services due to their access to consumer data, and their focus on leveraging it with the help of artificial intelligence (AI) to produce risk assessments for individuals. Of JD Finance’s 4,000 staff, around half work on technology, data and risk control.5 Fintech firms affiliated with e-commerce, gaming and social media firms have their own large datasets to work with, but those without such affiliations are still taking a data-driven approach. Lufax, a leading marketplace lending platform backed by insurance firm Ping An, uses client data and psychological questionnaires in combination with AI to assess credit ratings. The extent to which Chinese fintech firms will be able to replicate this model will vary as they globalise, depending on the strength of consumer data protection laws in each jurisdiction.

Another area of fintech with the potential to boost trade along the Belt and Road is supply chain finance. Solutions using blockchain are being trialled in both China and India. In China, online marketplace lender Dianrong has teamed up with Taiwanese electronics manufacturing firm Foxconn to launch “Chained Finance”, aimed at providing supply chain finance for SMEs in China. US technology firm IBM and Indian conglomerate Mahindra have announced a similar enterprise targeting India’s SMEs.

Building out the data infrastructure

Data-driven fintech services require commensurate data storage facilities. In China, developing cloud storage technology has been identified as a priority for support under the government’s 13th Five-Year Plan. The government has long encouraged firms that can help achieve its security-driven aim of data localisation. Preferential contracting arrangements for state-owned banks and enterprises have helped partially-state-owned data storage firm Inspur (formerly Langchao) to grow and become globally competitive. In late-2017, Inspur announced an initiative to provide data centres in economies along the BRI routes. This will be carried out in partnership with four other IT multinationals—Cisco, IBM, Ericsson and Diebold Nixdorf—and will receive funding from several state-owned financial institutions in China. Inspur plans to build cloud centres in Frankfurt, Moscow and Ethiopia.

The Chinese government is also supporting efforts to channel venture capital into fintech investments into and out of China. UK-based Silk Ventures raised a US$500m fund in 2017, half of which will come from the State-owned Assets Supervision and Administration Commission (SASAC), an entity under the remit of the State Council. Chinese corporates listed as partners to the fund include firms engaged in fintech such as Alibaba Cloud and Tencent, as well as those concerned with providing the data infrastructure, such as Inspur and Huawei.

Fostering the next wave of fintech innovators

Fintech firms hoping to introduce financial services to Belt and Road countries will have to navigate complex regulatory environments, and the degree of resistance from incumbent banks will vary. But when it comes to finding a base for starting up or expanding fintech firms, Asia’s advanced cities are vying to be the hub of choice, ensuring that light-touch and supportive regulatory environments can be found. Hong Kong has launched a fintech hub and announced a regulatory “sandbox” in which ideas can be tested while enjoying regulatory exemptions. However, Singapore appears to be the location of choice for the time being, with firms such as Lufax and Alibaba Cloud selecting it as a base for international expansion.