Fintech’s Good Fortune: Eight Things Africa Can Learn from China’s Success
In May, the FiDA Partnership took 26 leaders from Africa’s digital finance industry to China to learn about their unprecedented Fintech boom. The week was immersive and intense, designed to allow participants to escape the boardroom and experience Chinese digital life firsthand on the streets of Beijing, in the mom-and-pop stores of Hangzhou, and the on factory floors of Guangdong. Here are our key lessons.
1) Government Played a Critical Role in Providing an Enabling Environment
The Chinese government established the ecosystem to support digital financial services. State-owned banks have provided 80 percent of adults with a bank account and an extensive branch and ATM network, eliminating the need for Fintechs to develop expensive cash-in-cash-out networks. Prioritization of rural development has extended broadband connectivity, universal IDs and road infrastructure, which lowers the cost of servicing remote areas.
Regulators’ “wait and see” approach sparked the FinTech boom in China and when regulation was eventually introduced it created space for fintechs to flourish.
2) Business Model Innovation is Happening in a Big Way
Laissez-faire regulation and growing tech expertise gave rise to innovative new players entering the financial services space with fresh business models. One such model is peer-to-peer (P2P) lending. We met China’s largest P2P lender, Yirendai, which offers prime borrowers access to unsecured credit by connecting them to investors through its online marketplace.
Digital finance business models in China are increasingly data-driven. Therefore, companies with large data pools and expertise in deriving insights from them have led the way. These tend to be tech giants such as JD.com, Alibaba and Tencent, so we are seeing profits in the financial services value chain shift from financial institutions to tech companies. The fact that these companies’ core business is not finance, but social networking or e-commerce, means they are not dependent on financial services revenues for their existence. This promotes experimentation and therefore product sophistication as companies can be patient for profit. It also means companies can subsidize entry-level products – usually payments – to encourage uptake.
3) The Power of AI
China’s fintechs have developed enviable know-how in artificial intelligence (AI), which has a visible presence in China. For example, we shopped at JD’s unmanned stores which use smart shelves and facial recognition. We also saw AI in action at Weijun Grocery, a mom-and-pop shop in Hangzhou which uses Alibaba’s retail management platform to digitize inventory management. Weijun receives advice from the platform on what to stock based on historical sales, a trove of data about neighbouring communities, and timely information such as weather forecasts – for example to ensure ice-creams are in stock during a heatwave. We saw how cameras track customer movements to create a heat map showing where they spend most time in-store to help the owner optimise layout and merchandising.
AI is also used extensively on the back end. JD, Yirendai and Bairong told us how they leverage AI to process large datasets for risk management. JD uses more than 30,000 variables and 100 models to credit score over 200M users.
4) Partnerships are Key
In China even the largest tech titans acknowledge that they can’t do it all. We heard about partnerships addressing a range of needs including risk management, scale, capital constraints, technology, expertise, and regulatory compliance. Two of the biggest players, JD Finance and Tencent, told us how they partner to share user data, enabling JD Finance to develop a deeper understanding of their customers for credit profiling. JD Finance explained how they partner with banks to access low-cost loanable funds in exchange for their large de-risked customer base. In China, partnerships abound.
5) Social Media and Entertainment are Powerful for Customer Acquisition
Tencent’s core business is social networking and entertainment, channeled largely through it’s messaging app, WeChat. WeChat offers a vast array of services – in Beijing we ordered taxis, hired Ofo bikes, ordered meals, checked movie times, and shopped online – all within the app. This grants WeChat relevance in almost all aspects of millions of users’ everyday lives, enabling Tencent to integrate financial services in meaningful ways with immediately applicable use cases. This is in contrast to what we see even in more mature digital finance markets in Africa where financial services are often offered in isolation from existing behaviors.
6) Trust is a Big Pull actor
Professor Long Chen, Alibaba’s chief strategy officer who joined us for a lakeside chat in Hangzhou, noted that tech platforms’ ability to create trust has been a significant growth factor. A Calligraphy Brush Seller in Panjiayuan Market, Beijing, noted: “I even use Taobao to sell to customers I already know because it creates trust. Payment only happens if the customer is happy and there is a process for returning goods if they are not.”
7) Rural E-Commerce is Creating New Opportunities for Job Creation
Cuntao has extended e-commerce into rural areas by setting up 30,000 service centers at village convenience stores, enabling villagers with poor internet access to access goods previously unavailable to them. Centers receive goods ordered through Alibaba’s ecommerce sites and handle last mile logistics to customers’ homes, in return for commission. They are also education centers, teaching villagers how to shop online and helping them place orders.
Cuntao also provides two-way distribution infrastructure, enabling rural producers to access new markets. We visited a factory started by a young man six years ago with $1,600 and a single room. He now employs 200 people and sells 1 million pairs of shoes annually on Taobao. It was impressive to see the role that e-commerce has played in creating jobs.
Olga Morawczynski from the Mastercard Foundation commented:
“Tracking the economy of jobs that have been created because of Alibaba has been fascinating. We hear the story that technology destroys jobs but I think here we’ve seen the ability for it to create jobs and increase the rate of creation of jobs.”
8) The Future is Offline
Alibaba believes that a foothold in traditional retail is the path to growth and has developed an online-to-offline (O2O) plan called “new retail”, which redefines commerce by enabling seamless engagement between online and offline worlds. Using data such as purchasing history and store visiting habits, Alibaba intends to personalize product offerings, purchasing experiences and marketing campaigns. Alibaba’s Hema supermarkets incubate these innovations; we experienced how shopping there is a smartphone powered experience. We scanned QR codes to get product information and payment is cashless and almost touchless, using facial recognition combined with Alipay embedded in the Hema app.
This is all part of an effort to tap into the huge offline commerce sector. Despite the success of e-commerce in China, 85 percent of purchases still happen at brick-and-mortar stores, amounting to a $3.9 trillion opportunity. Venturing offline enables Alibaba to access customers who are excluded from it’s online offerings owing to lack of digital literacy or phone ownership. Using offline experiences to bring people’s transactions online presents clear learnings for Africa.
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We’re launching a blog series focused on deep dives into learnings from our trip to China. Follow us on Twitter or LinkedIn to catch each blog and learn more about these insights. At FiDA, we catalyze knowledge and insights to promote meaningful financial inclusion in an increasingly digital world. If you are interested in joining a Live Learning trip, get in touch!
Jessica Osborn is a senior manager at Caribou Digital.
Images courtesy of Caribou Digital.