Fintech in China and the United States: Innovation in funding, assets and technology

At the Haitong Securities Financial Technology Summit held in Beijing recently, Wei Bingfei, investment director of Sinovation Ventures, systematically analyzed the innovation cases in the three major areas of financial funds, assets and technology between China and the United States in the past decade, and elaborated on the innovation opportunities brought by the macroeconomic environment and scientific and technological development to the financial industry.

Part 1: Innovation on the funding side

Information platform, accounting tools, payment tools, securities brokerage, third-party wealth management, smart investment advisor

Part 2: Innovation on the Asset Side

Primary and secondary market equity, consumption, real estate, and small and medium-sized enterprise credit

Part III: Technological Innovation

Smart investment research, big data credit reporting, electronic currency, blockchain

Part 4: Summary and Reflection

Fintech is not a disruption, regulatory standards, and future development opportunities

Hello everyone, I just came back from the fourth Gobi Desert Entrepreneurship Trip. During the arduous 100-kilometer Gobi Desert hike, I kept thinking about the development and future direction of financial technology in China and the world. Entrepreneurship in the field of financial technology is like walking in the Gobi Desert. The person who walks to the end is not necessarily the one who runs the fastest at the beginning, nor is he or she the most physically fit. Instead, he or she maintains the original intention of entrepreneurship and walks step by step, relying on the mutual help of the team and personal persistence.

I studied computer science in Germany, and after graduation, I started to provide IT and management consulting services to financial institutions at Accenture and PwC in 2005. At that time, the term "fintech" had not yet appeared, and it was more about the informatization and ITization of financial institutions themselves. In Europe, I witnessed the rise and fall of commercial banks and investment banks, as well as the financial crisis from the US subprime mortgage crisis to the world in 2008-2009. At that time, I was in the strategic department of Deutsche Bank headquarters, and I saw that the greedy and unsustainable financial system brought the global economy to the brink of collapse. After returning to China, I worked in equity investment at Haitong Securities. I experienced 13 years as the first year of Internet finance, from the launch of Yu'ebao products, to the wild growth of P2P online loans in the past few years, to the introduction of supervision and a new round of reshuffle in the industry.

Nowadays, the term "Internet finance" is rarely mentioned, and "fintech" is more often mentioned. The industry has also returned to the essence of finance and used technological means to innovate. Finance is still the basic element of economic development, especially now that China's economy is facing transformation. How to stimulate consumption growth through financial innovation, help the development of small and medium-sized enterprises, encourage innovation and entrepreneurship, and thus promote economic development has become a question that everyone from financial regulators to entrepreneurs is thinking about.

In addition to investing in financial technology companies such as 91 Finance, JiMuBox (now PINGTEC Group), and Bubu Blockchain in China in the past few years, I also conduct research on American Fintech companies in Silicon Valley and New York every year. Next, I will systematically compare some typical cases of Fintech innovation in China and the United States in terms of both the capital and asset sides of finance, and then return to the technology itself, talking about the application of big data, machine learning, electronic currency, and blockchain technology in the financial field in recent years. Finally, I will share my summary and thoughts on the industry.

Part 1: Innovation on the funding side

In China, the era of large-scale asset management is gradually coming. Data shows that personal investable assets have increased by 16% annually, and the allocation has gradually diversified. In 2008, the proportion of cash and deposits of residents reached about 70%. Now, diversified asset allocation products have surpassed cash and deposits, reaching about 60%. The rise of China's middle class has brought huge opportunities to the wealth management industry.

At the same time, China's wealth management industry has entered the digital age. According to a survey by BCG (FINTECH Note: Boston Consulting Group), 80% of high-net-worth individuals accept Internet products, including electronic banking, third-party payment, Internet financial products, smart investment advisors, P2P, crowdfunding, etc. In China, the degree of digitalization of financial management people is higher than that in the United States.

Comparison of the development paths of wealth management in China and the United States:

Although the hundreds of years of development history of the US capital market is worth learning from, through the development of the Internet in the past 20 years, the middle class born in the 1980s and 1990s has gradually become the main force in the financial management market, which may bring the possibility of leapfrog development to China's wealth management model.

It can be seen that in the first stage, both China and the United States were individuals actively speculating in stocks, and the secondary market was basically dominated by retail investors. The market fluctuated greatly and was highly speculative. The second stage was the growth of China's institutional investment and the development of trust and fund sales models, such as the rise of institutions such as China Asset Management and Tiantian Fund Network. What China currently lacks is the model of institutional investment advisors in the United States and the product form of investment portfolios. The core reason is the lack of trust. As the US fund management strategy evolves from active to passive, smart investment advisors based on ETF products have developed rapidly in the past three years; in China, with the rise of the new generation of post-80s and post-90s, their trust in large Internet companies (such as Ant Financial of Alibaba) will even surpass traditional wealth management institutions. As a result, the online smart investment advisory model may also have the opportunity to develop in leaps and bounds in China, which is a very interesting phenomenon.

Another more interesting phenomenon is that the United States first had a wealth management industry with a history of several hundred years, and then the rise of P2P online lending platforms. In the market environment of long-term low yields of fixed-income products in the United States, funds are looking for alternative assets with relatively high yields, so some institutional funds have poured into the P2P credit market, which should be more accurately defined as P2FI (personal to financial institution). However, the development of Internet finance in China in the past was first P2P online lending, and it was truly person-to-person. Then, with the intensification of credit risks and the introduction of supervision, P2P online lending platforms gradually transformed, expanded their product lines, and became wealth management companies. So what I have recently observed is not only the change in caliber from "Internet finance" to "financial technology", but also the change in caliber from "P2P online lending" to "online financial management".

After comparing the different development paths and models of China and the United States on the capital side, let’s look at some specific cases:

Information platform: Everyone is familiar with it. Since the PC Internet was invented in China, platforms such as Eastmoney, Hexun, and Xueqiu have emerged. In the United States, there are also relatively mature platforms such as Yahoo Finance and Barron's. In the United States, there is a unicorn company called Credit Karma in recent years. Its model is relatively innovative. It acquires customers by checking personal credit for free, and then directs customer leads to financial institutions for a fee. In the current credit system in China, personal credit inquiries are not very common, so this model has not yet been seen in China.

Accounting tools: This is also a very mature model. The United States has Mint, which mainly manages banks and credit cards and makes profits through rebates for new card openings. Personal Capital provides integration tools on financial management accounts and then connects to asset management products. China's Wacai and Suishouji are also taking a similar path, but China's new credit card market is difficult to enter, so they directly enter the personal financial management market. The establishment of user trust and the conversion of financial product sales are the key.

Payment tools: The payment scene in the United States is mainly occupied by the three major credit card companies, which charge a handling fee of 2-4%, which is quite high. Therefore, a large number of startups in the United States have entered the payment field, including the ancestor of Fintech such as PayPal; in China, the payment field has been occupied by Alipay and WeChat Pay. With a fee rate of a few thousandths, coupled with extremely strong local promotion and product experience, China's mobile payment has surpassed the United States and has penetrated into the Indian and even European and American markets. However, the United States is stronger in the field of B2B payment. There is a unicorn company called Stripe. Because the Bs at both ends are relatively scattered, Stripe has become an aggregation tool that connects payment scenes and payment institutions; there are also several companies in China, representative of which is PING++, but because the current domestic payment institutions are Alipay and WeChat Pay, the market for B2B aggregation tools is relatively limited, but I believe that as Xiaomi, Huawei, Lenovo, Samsung and other companies that occupy the entrance to mobile terminals further enter the mobile payment field, the diversity of payment institutions will increase, and the integration demand on the B side will also be greater.

Securities brokerage and platform sales: brokerage fees are also quite high in the United States. In recent years, with the rise of several zero-fee platforms such as Robinhood, brokerage fees have also tended to be zero. In China, brokerage fees are already very low, and the liberalization of multiple accounts for one person has increased the competitive pressure on brokerage business. In the future, the brokerage business of both traditional and Internet brokerages will only be a means of attracting customers, and the source and focus of income and profits will gradually shift to margin trading, investment consulting, wealth management and asset management.

Robo-advisory: Two robo-advisory companies in the United States, Wealthfront and Betterment, have been developing for nearly a decade. Leading Internet finance companies in China, including JD Finance, CreditEase, Pintai, and Wacai, are all investing in the research and development of robo-advisory products. I expect this will become a standard product for large platforms to attract primary users, but it is becoming increasingly difficult for start-ups to develop new users through robo-advisory products. Compared with traditional investment advisors, the core competitiveness of American robo-advisory is low fees, only 20-40BP, while traditional investment advisors charge about 2% consulting fees or management fees. Americans have generally accepted passive financial management, so this field caters to the needs of many people for low fees and standard asset allocation. In terms of investment, the robo-advisory portfolio in the United States is basically based on ETF products. In the case of the immature liquidity and scale of ETFs in China, it is difficult to make robo-advisory based on ETF products. Now we see more configurations of fixed income + floating income products of public funds. In terms of technology, the configuration method based on ETFs or public funds is still in its early stages in terms of intelligence, and the entry threshold is not high. Currently in the United States, many securities and fund giants have also entered this field, causing a relatively large impact on start-ups. Some companies such as SigFig and Future Advisory have just been acquired by UBS and Black Rock.

Third-party wealth management: There is a listed financial company in the United States called LPL Financials, which is a platform for independent financial planners. In China, many companies have tried to innovate in this field, but they are not particularly successful so far. The reason is that the professionalism of China’s financial planners is relatively low. They only sell simple products and have not really established customer trust. Therefore, it is still a bit difficult to build an independent financial planner platform on this basis. However, the market for companies like Noah Wealth and CreditEase to serve mid- to high-end customers through a large number of offline financial planners is still very huge.

Part 2: Innovation on the Asset Side

At present, the development of the capital side of the Internet has reached a bottleneck period. Although the experience and high yield of mobile Internet have attracted a group of users, the negative impact of the Ezubao incident and thousands of P2P problem platforms, as well as the current strict supervision, have caused the shrinkage of the capital side of P2P platforms, and the funds have flowed back to relatively safe banks and platforms endorsed by large institutions, such as Ant Jubao, Lufax, and JD Finance. Many leading Internet financial companies are also transforming their businesses, from the original online funds + online asset platform model to the self-operated online and offline asset model (especially in the fields of consumer finance and supply chain finance), and the business has returned to the essence of finance, namely: risk control and risk pricing.

I divide innovations on the asset side into six categories: primary market equity, secondary market equity, consumer credit, real estate credit, small and medium-sized enterprise credit, and traditional asset management models.

Crowdfunding and trading of primary market equity

Equity crowdfunding in the primary market is a derivative model of venture capital (VC). In recent years, equity crowdfunding platforms such as Angel List have emerged in the United States. In China, platforms such as JD Crowdfunding and 36Kr Crowdfunding have also developed rapidly. However, I think that equity crowdfunding in the primary market is still a niche market. Only a small number of professional qualified investors and institutions are suitable for such high-risk investments. Just like becoming an LP of VC, it is a configuration of alternative assets and private equity products. Under the current regulatory environment, the amount of financing is limited. The core lies in its media and e-commerce attributes. For example, the help that 36Kr and JD bring to enterprises in market promotion, product sales, financing due diligence, and subsequent industrial and commercial registration, investor communication and other value-added services is the greatest value.

Another model that has been extended from the equity crowdfunding of start-ups is the equity trading of relatively large enterprises (i.e. "unicorns") in the primary market. In the past few years, both the United States and China have seen valuation inversions in the primary and secondary markets. Some unicorns in the primary market cannot support the valuation of the previous round when they go to the next round of financing or enter the secondary market, so the equity value of these unicorns in the primary market has been questioned, and the development of such trading platforms has also been restricted. The industry benchmark Second Market was acquired by the Nasdaq Exchange. The equity trading model in the primary market is an innovation on a small scale based on fairness and transparency, but if it is on a large scale, such as selling the equity of some unicorns to unqualified retail investors through some channels, there are still great risks.

Socialized trading of equity in the secondary market

If the regulation is open, the socialized trading model is relatively optimistic in China, because China's stock market is currently a market dominated by retail investors, and stockholders have a process of learning and being educated. As an institutionally dominated market, the market capacity of socialized information and trading platforms in the US stock market will be much smaller. Whether it is virtual trading or real trading, whether it is buying individual stocks or portfolio allocation, socialized stock trading is an emerging way to acquire customers, but the securities business still needs to return to its essence. To have long-term profitability, it still needs to extend to core businesses such as margin trading and asset management. Although overseas social platforms such as eToro and Motif have brokerage and investment advisory licenses, their customer retention and asset management scale growth have always been a difficulty.

Comparison of credit structure between China and the United States:

Comparing the credit structures of China and the United States, let me analyze some innovation opportunities in the credit field.

In the United States, a type of "student loan" accounts for 9% of the total credit scale. China currently also has several platforms doing student credit, but the model is completely different from that of the United States. Chinese students mainly rely on consumer loans, while American student credit is mainly student loans. The previous incidents of college students taking out "naked loan" and jumping off buildings after debt collection show that China's current student credit market is very immature.

Another obvious difference is in the field of auto loans, which account for 8% in the United States and 4% in China. The total number of cars in China's entire auto market has exceeded 150 million units, and the financial penetration rate of new car sales will rise further. The transaction volume of used cars in 2015 was close to 10 million units (4 million units after removing duplicate transactions), and the financial penetration rate was estimated to be around 10%. The market has just started. China's consumer credit penetration rate is constantly rising and is currently around 20%, which is lower than the levels of the United States and South Korea. There is still huge room for development in the future, especially for blue-collar workers who currently do not have credit cards.

Consumer credit

We can compare innovative companies in the consumer credit field in China and the United States: Affirm in the United States mainly conducts installment business in the home and luxury consumption fields, and Capital One cuts into financial services for blue-collar and sub-prime and near-prime groups. It controls risks through accurate user portraits and big data analysis, and has emerged as a new force in the US consumer finance market. In China, relying on e-commerce platforms, such as Ant Financial's Huabei and JD Finance's Baitiao, it has achieved rapid development. In the offline consumption scene, Home Credit has entered China for nearly ten years and has occupied an important position in the blue-collar consumer finance market through installment of 3C products. In the field of personal microcredit, there are great differences between the United States and China. The United States has a very complete personal credit scoring system FICO and the data model of the three major credit bureaus. Based on the perfect credit system, online loan platforms such as Lending Club have been able to develop. However, China's personal credit system has a low coverage rate, the data and scoring system is not yet sound, and the fraud rate of personal credit is quite high. It is necessary to first use consumption scenarios to obtain customer data, cultivate customer credit habits, and then further issue credit lines to convert them into long-term consumer credit customers.

Real estate loans

After the subprime mortgage crisis, the amount of housing loans in the United States dropped sharply, and the country experienced a painful deleveraging process (you may have seen the story of the movie "99 Homes"). However, after deleveraging, the US real estate market ushered in a healthy development period, which also brought new market opportunities for real estate credit, such as the bridge credit business of small and medium-sized developers that Lending Home has entered. For China's real estate credit market, the residential housing loan rate has exceeded 60%. Although Chinese residents have a high savings rate and there is a custom of several generations of families buying houses together, the risk will not erupt in the short term, but the mortgage assets are also in the process of increasing risks, and it is necessary to guard against the risks of real estate mortgage loans and down payment loans in second-tier and lower cities.

SME Loans

The difficulty of SMEs in obtaining loans is a worldwide problem. In 2015, the amount of loans to SMEs accounted for only 38%, but the number of SMEs accounted for 76%, and the GDP they created accounted for more than 60%. Data shows that the United States reduced the scale of credit to SMEs during the financial crisis, and currently the amount of credit to SMEs in China's banking industry is also declining as the credit quality declines, but this also brings opportunities to financial technology companies.

We can see that a large number of fintech companies have emerged in the United States and the United Kingdom, such as OnDeck and Funding Circle, which have effectively carried out credit business for small and medium-sized enterprises; in China, there are also fintech companies that have achieved rapid development of credit business in the catering, retail, hotel and other fields by controlling supply chain and transaction flow data.

In the field of e-commerce and supply chain finance, the scale of supply chain finance has been rapidly expanded through the realization of closed-loop transactions and the use of big data, such as Kabbage, Ant Microfinance, and JD.com-Jing Microfinance. In the United States, e-commerce platforms are more likely to cooperate with financial institutions. In China, e-commerce platforms or industrial supply chain platforms + self-operated finance have almost become the standard for e-commerce and industrial giants. In essence, the business models and interests of supply chain and finance are contradictory: supply chain pursues scale, and finance wants to control risks; this is also the reason why supply chain finance in the United States is more dominated by banks rather than financial companies in the industry.

In the field of trade finance, the trade contracts and accounts receivable in the United States are transparent and real, and the penetration rate of trade insurance is high. In recent years, accounts receivable exchanges such as Prime Revenue have also emerged. However, the situation in China is quite different from that in the United States, and trade finance is difficult to carry out on a large scale. Although China has a system of bank bills and commercial bills, bank bills have become a tool for discounting, giving rise to a huge market for bank bill discounting. It is difficult to verify the authenticity of bills, and it is difficult to control the phenomenon of falsifying trade contracts, related transactions, and brushing orders. By establishing a more complete enterprise-level credit reporting system and applying new technologies such as blockchain, the Internet of Things, electronic bills, and electronic taxation, we hope to gradually break the current dilemma of domestic trade finance in the future.

Part III: Technological Innovation

From the perspective of technology-driven development, the development of financial innovation in the past 10 years can be divided into three stages:

The first stage is the new channels and new models generated by the informatization of financial services, such as direct banks and financial supermarkets, represented by companies such as Bankrate and ING DiBa. Its technological driving force is the application of the core systems of financial institutions and the popularization of the Internet.

The second stage is the innovation of financial products. The popularization of online payment tools such as Alipay and PayPal and the application of financial big data have given rise to innovations in P2P online lending, big data risk control, and smart investment advisory/research models.

The intelligent investment research tool KENSHO hopes to serve securities analysts and traders by building a more intelligent information data platform. Currently, the product is only being tested within Goldman Sachs and has not been officially launched. How to commercialize it under the existing system and how to differentiate it from existing products (such as Bloomberg and Wind Information) are worth discussing.

China and the United States may take different paths in the field of big data credit reporting and anti-fraud. The three major credit reporting bureaus in the United States (Experian, Equifax, and TransUnion) have a history of development of more than a hundred years. In the early days of their establishment, the Internet had not yet been invented. They spent a lot of manpower and material resources to collect data from various industries and merged regional credit reporting bureaus scattered across the United States to achieve the current data volume and industry status of the three major players. However, the establishment of China's entire personal credit reporting system coincided with the rapid development of the Internet and mobile payments. China's personal credit reporting industry may be led by Internet companies in the future, because the coverage rate of Internet companies and the accuracy of portraits will greatly exceed those of traditional credit reporting companies.

The third stage is the innovation of currency and assets. With the rise of electronic currency and the application of blockchain as the underlying financial architecture, blockchain-based payments, clearing and settlement, and transactions can be realized, which will greatly improve the efficiency of the existing financial system and increase its integrity and security.

Bitcoin has gradually become a kind of electronic gold. From the birth to the development of Bitcoin, after a round of black market transactions, speculation, to regulatory suppression, it is now returning to a rational value range, and its volatility is gradually stabilizing. Due to the halving of the issuance volume in the first half of this year, all Bitcoins have a new wave of market. In this process, it gradually has the properties of gold, that is: Bitcoin itself has usage scenarios (such as online shopping), just like gold can be used as decoration, but its use is not very extensive. Similar to the limited reserves of gold, the issuance of Bitcoin is also limited, so people will gradually regard it as an asset class for value preservation and appreciation. Its system is gradually becoming mainstream and diversified. Some banks (such as Citi, UBS, etc.) have also issued their own electronic currencies, and China's central bank is also conducting research on the issuance of national electronic currencies. Therefore, electronic currency will be a long-term currency or asset class and will gradually be integrated into the mainstream financial system.

The technology behind electronic money is blockchain technology. Its technology (mainly composed of distributed algorithms, public and private keys, hash algorithms, and consensus algorithms) is not complicated. Its real significance lies in breaking the central monopoly of business and forming a multi-center, trustless business system. At present, the main applications of blockchain are in financial fields such as payment, remittance, credit, and transactions. In the future, it will be widely used in record keeping (such as property rights, electronic medical records, etc.) and smart contracts. I will divide the development and evolution of blockchain technology and business models into three stages:

The first stage is the technical service of private chain. Leading financial institutions such as Citi, UBS, VISA, Ant Financial, and Sunshine Insurance have established internal blockchain technology teams. More institutions will adopt outsourcing and entrust blockchain technology service companies to help build private chain applications within the institutions. In the United States, Ripple, Blockstream, Chain; in China, Bubi Blockchain and other companies have independently built private chain systems to serve their customers.

The second stage is the commercial service of the alliance chain. The global blockchain alliance R3 has accepted more than 40 financial institutions as members, including China Ping An and China Merchants Bank. Several blockchain alliances are gradually forming in the Chinese market, including the China Distributed Ledger Foundation Agreement Alliance (China Ledger) led by Wanxiang and the Golden Chain Alliance led by WeBank.

The third stage is the platform based on public blockchain, which refers to independent platform business based on public blockchains such as Bitcoin/Ethereum/HyperLedger, such as Circle in the payment field. The future competition between such emerging companies based on blockchain technology and existing platform companies is worth paying attention to. For example, in the future competition between Circle and PayPal, will business grafting technology have an advantage, or will technology-driven business have more stamina?

Part 4: Summary and reflections on the nature of financial technology

This speech analyzed various models of financial technology and finally put forward some thoughts on the nature of financial technology and its future development.

1. Is FinTech a subversion? An improvement and supplement? Or a scam?

From the history of finance, we can find that the main reason for the problems or even bankruptcies of banks is compliance and risk control problems, or a major financial crisis. No bank has ever gone bankrupt simply because of the lack of technology, so FinTech cannot be said to subvert traditional finance, but is more of an improvement and supplement. The innovation on the capital side we are talking about today mainly improves the user experience, from counters to ATMs, from PC Internet to mobile Internet. Many innovative models on the asset side, such as consumer finance and small and medium-sized enterprise credit, are actually what traditional financial institutions do not do well enough or cannot do in the existing system. The products of FinTech companies are an effective supplement to the existing financial system. While improving and supplementing innovation, we must strictly supervise and guard against pseudo-innovation and Ponzi schemes carried out under the banner of FinTech, such as Ezubao, and the quantitative investment scam described in the recent movie "Money Monster".

2. Financial technology regulatory standards

The P2P online lending supervision measures, "Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries", have finally been promulgated after nearly two years of formulation and revision. The government needs to grasp the double-edged sword of "inclusive finance" and "excessive finance". On the one hand, finance can stimulate consumption and economic development and increase leverage, but on the other hand, it can also cause economic bubbles and even financial crises. How to grasp this scale is an art. In the past few years, there have been some policy and regulatory vacuums in the development of Internet finance, which has led to the wild growth in the past. Now is the time to strengthen supervision and return to the essence of finance.

3. Where are the development opportunities for financial technology in the future?

Looking back at the innovation of financial technology, from the earliest invention of ATM machines and computers, to the application of the Internet and mobile Internet, to the current development of big data, blockchain, and artificial intelligence, new technology hotspots will emerge every 5-10 years. Due to its digital nature, the financial industry will also lead the future development and application of digital technology. For start-ups, the latest wave of opportunities is already halfway through. The subsequent innovations will start more from the technology itself, serve traditional financial institutions, or traditional financial institutions will spontaneously innovate themselves through technology. There are a lot of innovation opportunities here.

The Fintech innovation competition has entered the second half, and it is time to truly test the team's professionalism and system combat capabilities. The final winner is not necessarily the one who runs the fastest or has the best physical strength at the beginning, but the team that maintains the original intention of entrepreneurship and returns to the core of "technology drives finance, and finance promotes the economy." Let's encourage each other!