A new study has found that China is leading global investment in the innovative fintech industry, which creates internet-based products to facilitate consumer access to financial services.
Kristian Rouz — Financial technology (fintech) companies are gaining ever-increasing prominence in financial services worldwide. Over the past year, a large number of fintech firms raised record capital, as investors appear to be encouraged by the use of digital technology to streamline and automate a wide range of financial transactions.
According to a new study by data aggregator CB Insights, fintech firms backed by venture capital raised $39.6 billion over the past year, bringing the industry’s total capitalisation to an all-time high. This was also a 120-percent increase in fintech capitalisation compared to 2017.
The boom in fintech investment is being led by China, where Ant Financial — a partner payment system of internet marketplace Alibaba — raised a whopping $14 billion. The deal accounted for some 35 percent of total fintech investment last year.
A handful of Chinese fintech firms focus of consumer lending, facilitating the interaction between banks and their customers.
“Platforms like MYbank, Su’ning Finance, and other internet finance providers may push one step closer to close the finance gap for micro and small-sized enterprises in China”, Felix Yang of research firm Kapronasia said.
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Ant Financial runs China’s massive mobile pay system called Alipay, which allows banks to determine what kind of loans the consumer is qualified for — based off their history of financial transactions. Ant Financial’s total market capitalisation is estimated at $150 billion.
Another similar Chinese digital payment system is called WeBank, and is affiliated with Tencent — a giant entertainment, technology, and investment conglomerate. WeBank is similar to Alipay, and provides digital lending software to facilitate loan underwriting for banks.
“In order to provide enterprises with better loan support, WeBank thoroughly implemented the Party Central Committee’s arrangements to support the development of small and micro-sized enterprises, actively using data technology to optimize costs”, Li Nanqing, WeBank president, said.
The popularity of fintech services in China comes as the central government in Beijing is seeking to encourage domestic consumption of Chinese-made goods to reduce the nation’s reliance on exports. Fintech provides easy-to-use — and often smartphone-based — platforms for consumer lending, among other things, and China sees the innovation as particularly useful for its cause.
Additionally, China still doesn’t have a centralised and standardised credit system, which makes it harder for banks to evaluate possible underwriting risks. Fintech products help solve the issue by collecting data on borrowers, and providing profile reports to some lenders during a new loan application process.
“Fintech does provide a new mechanism”, David Yin of Moody’s said. “I think this provides a new trend, a new approach”.
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In light of this, China’s large financial enterprises, including those owned by the state, are willing to finance the further development of fintech innovations to facilitate the lending process, with the ultimate goal of boosting purchasing power and credit sustainability nationwide.
In its study, CB Insights also found last year’s fintech funding was attracted through a total of 1,707 deals, an increase from 1,480 deals in 2017. Many of 2018 transactions took place as part of 52 mega-rounds, or investments exceeding $100 million, with their combined worth reaching $24.88 billion — out of the total $39.6 billion.
Outside of China, investors have also boosted their presence in the fintech industry. They expect streamlined banking services to provide a competitive edge to financial institutions amid the rising interest rates, lower availability of credit, and the rising debt burden of households across the developed world.
In the US, fintech companies attracted $11.89 billion in 2018, also an all-time high, in 659 deals. This is still below the $14 billion that China’s Ant Financial raised in just one deal.
“We are seeing a significant increase in demand for our technology products and services from banks, asset management firms, insurance companies and securities brokers that are looking for ways to better service their customers at a lower cost”, Ant Financial said in a statement. “This includes banks that are trying to reduce the lending costs for small and medium-sized enterprises to help them survive and thrive”.
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The number of fintech investments declined in Europe — as many European banks have developed their own online banking apps and similar products, reducing the market for purely fintech firms. Total fintech financing in Europe rose to $3.53 billion last year.
However, Asia is leading the fintech charge, with total investments in the industry having risen by 38 percent, or $22.65 billion.