Are banks slowly regaining the edge over fintechs in China?

Written by Felix yang || 08 May 2018

China's banks have lost significant market share to fintech companies like Ant Finance and Tencent, especially in the mobile payment space, which the fintech companies have used as a basis to move into other market segments such as online lending. Banks have been distanced from consumers and there are concerns that people do not need banks any more. Are things really that bad?

The following chart shows that although it can seem from watching people flash WeChat or Alipay QR codes on the street that the fintechs have won the battle, in reality, the percentage of non-bank online payment value is only 6.5% of the total online payment market, meaning that the heavily retail focused 3rd party providers account for a very small part of the total digital payment market with much of the remainder coming from the corporate market segment. This is unlikely to change anytime soon as the Chinese government has emphasized many times that fintech companies should focus on small and frequent consumer payments, as well as support SME’s financial needs.

Online banking transaction

The PBOC has also issued detailed rules to make sure fintech companies stay within the intended segments. As an example, in 2017, the PBOC required payment companies to deposit a certain percentage of customer funds in specific non-interest bearing bank accounts and setup Wanglian to consolidate payment clearing.

There are more concerns for fintech companies’ future growth. One of these is trust. Consumers trust banks, especially in China, as the majority of banks are state owned or controlled - and 'too big to fail'. On the other side, fintech companies have a much shorter history and have come to the industry from many different backgrounds. With the scandals of recent years, the reputation of internet based fintech companies has made consumers even more cautious.

Another concern from consumers is the 'feeling of cash.' Money sitting in e-wallets cannot be cashed out directly unless it is first transferred back to a bank account. Since Alipay and Wechat Pay started to charge fees for such transactions, consumers have started to feel the difference between the money staying with fintech companies and the real money sitting in a bank. Of course consumers may not use cash in the future, but for now, it is an essential part of people's lives.  

It is difficult for fintech companies to overcome these challenges quickly and China's fintechs have somewhat slowed their breakneck growth and the threat to banks is maybe less obvious now. However, it does not help banks win back the lost battles either. Banks still need to learn from the harsh lesson fintech taught them in retail payments, and make improve in the future, especially around customer experience. But as the banks are starting to reach out for new partners and strategies, all might not be lost.

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