An analysis of how the pandemic is affecting the country’s nascent fintech environment.
► The epidemic is imposing a significant negative impact on Small and Medium-sized Enterprises (SMEs), while fintech, as the key to developing inclusive finance, is expected to further attract the attention of regulators and incumbents in the sector.
► The demand for Information Technology (IT) in finance from the side of incumbent players has increased, which is projected to: 1. put forward the market recognition in AI customer services, especially Natural language processing (NLP); 2. accelerate the process for incumbents in moving to the cloud.
► In consumer finance, the demand for personal loans tends to decrease in the short run; meanwhile, lenders are likely to face higher credit risks.
► Transaction volume for third-party payments witnessed a moderate level of decrease in the short run.
The fintech industry has outperformed the market during the almost three month period (as of March 20) that started at the beginning of this year. Xiangmihu Financial Technology index (399699:SZ) – China’s first fintech index, developed by Shenzhen government agencies – increased by 3.40%. Meanwhile, CSI300, the mainland’s major market index, lost 12.02% in the same period.
Besides, the performance of the Xiangmihu Fintech Index has beat most of the other industry indexes under SWS second-level industry classification since the beginning of 2020.
The epidemic has unleashed severe effects on the real economy. These are especially severe for the SMEs. Fintech, as crucial leverage in developing inclusive finance, is experiencing a favorable climate as the regulators draft policies that target supporting SMEs in smoothing their operations.
On March 10, the State Council sought to accelerate policies regarding targeted Reserve Requirement Ratio (RRR) cuts, which are aimed at facilitating support from the side of the commercial banks towards SME lending.
Responding to this issue, the People’s Bank of China (PBoC) launched specific policies on March 13 which cut the RRR by 50 to 100 basis points for eligible commercial banks. It has been effective since March 16, releasing CNY 550 billion in liquidity, of which CNY 400 billion is expected to be lent out for inclusive finance that benefits smaller firms, while the remainder is for long-term loans.
The reluctance of incumbent banks in serving SMEs has been a long-lasting dilemma in the financial sector. The fundamental reason lies in the fact that the considerable limited profit margin these SMEs can bring – much lower Average Revenue Per User (ARPU) and higher credit risk – under their traditional approach in operations.
On the other hand, with several years of development, fintech now shows a much more efficient path in conducting much of the business processes involved.
Under this background, the advocates of deepening inclusive finance from the regulatory side are expected to increase the recognition and adoption of fintech, which should be appealing to those IT providers that serve the incumbents.
IT in finance
The epidemic let the incumbent players re-estimate the drawback of the traditional offline-focused model, in particular, the limitations in customer service points and locally deployed projects. This is projected to increase the market recognition of AI-based products and accelerate the process for incumbents in moving to the cloud.
The epidemic locked out the offline service points of banks, securities firms and trust companies from normal operations, which considerably affected their promotion activities and also subscriptions from the prospective clients.
The double-system recording technology and the AI-based intelligence (largely based on NLP, to be precise) customer service and intelligent customer classification and product promotion technology have alleviated their anxiety to a certain extent.
However, it is also worth noting that as these fresh systems are lacking in clients – and thus, lacking in real-world scenario testing – prior to the outbreak, there are still outstanding pain points when applied to real business. These include the considerably high error rate in recognition (about 20%), the difficulty in recognizing the precise meaning of questions raised by app users and their wealth management flavor on risk, return and duration.
Therefore, as these AI-based fintech product providers meet increasing market demand, they, unfortunately, miss a considerable part of the opportunity due to the immaturity of their business. In this sense, the epidemic also brings them an opportunity to hear more about the true requests from their potential clients, which then sheds light on the direction for them to improve their products.
Financial service cloud
The huge expenditures on IT operations and maintenance have always been a pain point for the incumbents in the financial sector. According to Ma Zhitao – the CIO of Webank – during an interview with China Business Network, the incumbent players spend CNY 20–CNY 100 on this kind of expenditures annually for a single institutional account. This is not that huge – considering the fact that their average ARPU is at a thousand CNY level, according to their most recent annual report.
However, with the continuous drives and support from the regulatory side 'luring' the incumbents into stepping into the field of SME lending, better control on IT operations and maintenance expenditures is becoming extremely crucial (anyway, cost control is always important, even if they only serve the key accounts).
As a comparison, in 2019, the IT operations and maintenance expenditure attributed to a single account was CNY 3.6 for Webank – a typical fintech company in the field of SME lending.
Apart from the above concerns around costs and efficiency, the recent outbreak has also helped to accelerate the process for the incumbents in moving from heavily localized IT systems to cloud platforms, in the sense that all the locally deployed projects are hard to operate given the current situation, which straightforwardly shows more incumbents the limitations of traditional IT systems in terms of flexibility.
The above factors provide space for fintech firms that concentrate on cloud services. Though the projected market size was USD 927.5 million in 2019 (according to IDC), which more or less due to the lack of large-scale adoptions, the world-renowned research institute assigned it a 40% year-on-year increase for the next three years end at 2023. This somewhat suggests the future of financial cloud services in China in terms that are worth looking into.
Moreover, this is also a quite fragmented market – just as we find in most of the emerging areas. Though the arms of domestic tech giants like Ant Financial and Tencent are expected to share a considerable slice in the future – given their strong R&D capabilities and synergy with existing businesses – there is also plenty of opportunities for other players.
The epidemic has dealt a negative blow to consumer finance, which is reflected in decreasing demand and increasing associated risks.
The shrink in demand specifically lies in the installment loans associated with offline scenarios, for example, tourism and education.
Meanwhile, as a large part of users of internet consumer finance platforms come from lower-tier cities – and are more sensitive to the fluctuations on income – this is likely to result in a rise in the overdue rate for the corresponding products.
The transaction volume of third party payment is expected to witness a slight fall in the short run.
On the one hand, the offline acquiring business plummeted. This is expected to regain previous levels after the economy recovers from the covid-19. On the other hand, the online transaction volume is expected to smooth out.
Although there was an increase in the online purchase of ingredients, daily necessities and take-away foods, the entire GMV of online platforms is expected to drop – due to falling demand and delayed logistics. Besides, it is also worth mentioning that transaction volumes subject to digital consumption – like TV network subscriptions and gaming – are expected to increase.