FinTech in China and US

Fintech in China and US
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Abstract
Fintech is one of the fastest-growing industries across the world. Fintech refers to the use of new technologies in the finance sector, such as mobile payment. More than 55 billion dollars have been invested in Fintech sector globally, and the figure is bound to increase as advancements in technology continue. Nevertheless, the Fintech industry differs per country, and this is particularly true for the two economic heavyweights, the United States and China. China is the leading country in the sector of Fintech and several factors such as high population, and low banking penetration have contributed to this growth. The current study examines different aspects of Fintech in the United States and China, such as emerging trends in Fintech, reasons why China is more successful in Fintech than the United States, merits of Fintech, effect of the US-China trade war on Fintech ventures and cybersecurity issues in Fintech.
Keywords: Fintech, Financial sector, China, United States, Technology,
Fintech in China and US
Fintech, which is stands for financial technology, refers to the use and development of financial technology systems to make financial transactions easier (Hernбndez, Цztьrk, Sittуn, & Rodrнguez, 2019). It is estimated that there have been more than 55 billion dollars invested in the Fintech industry globally, and the figure is poised to double given the increase in demographic trends in the world. China and the United States (US) have established some of the best financial technology systems in the world, as most developing countries look up to them for benchmarking. Various factors have driven the growth of Fintech in China and the US. Low levels of banking system penetration are one of the factors that have enhanced its adoption in both countries (Richman Centre News, 2019). The paper focuses on factors contributing to the growth of the Fintech industry in both China and the US, current issues in Fintech, and merits attributed to financial technology.
Demographic change is one of the main issues that has led to the explosive growth of Fintech in the world. For example, China has experienced a significant increase in its middle-class population, which demands more sophisticated and more uncomplicated financial services. The modern population demands easy and fast payment activities to wealth management (Richman Centre News, 2019). This has led to the development of mobile applications in conjunction with the banking systems to enable subscribers to make payments and withdrawals without necessarily going to the bank physically. In the United States, there has been more significant growth in Fintech companies.
Table 1: US Fintech top Firms (Kauflin, 2019)
Company NameCompany Value (billions)Stripe Company 225.5Coinbase Company8Robinhood Company 5.6
As shown in table 1, some of the biggest Fintech companies in the US include Stripe valued at 22.5 billion dollars, Coinbase at 8 billion dollars, and Robinhood Company valued at 5.6 billion according to Kauflin (2019). This is due to the demand that continues to expand by the day. It is also important to note that the increase in population has made it difficult for the incumbent financial institutions to serve the increasing number of customers in the market, especially in China. Nevertheless, in the US, the rise of Fintech is meant to give the population alternatives and convenience in financial institutions (Kauflin, 2019).
Emerging Trends in Fintech
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Figure 1: Current Issues in Fintech
Companies, as well as consumers, are looking for ways to reduce the use of energy and use of natural resources by going green, as shown in figure 1. The creation of technology that reduces energy usage in financial systems such as the use of energy management software like an intelligent energy management control system helps companies to devise ways of reducing energy consumption and reduction of costs (Hernбndez et al., 2019). Fixed costs due to economic conditions and regulations in the financial market ensure that people have to come up with relevant software that would be able to monitor firms to ensure that they comply with specific regulations. It is also important to note that there have been financial failures in the market due to increased technological hitches. For instance, during the Facebook IPO, when some of the clients purchased the shares at the wrong price. Knight Capital also suffered a technological breakdown that significantly affected its market value (Kauflin, 2019). Legal systems in most financial institutions are obsolete. Integrating these systems with newer systems tends to be time-consuming, complicated, and expensive.
Why is China is more Successful in Fintech than the United States?
As indicated previously, China is considered as the leading country in the world in the Fintech sector, dominated by some of the biggest companies such as Ant and Tencent. Several factors have contributed to this meteoric improvement in the Fintech industry, and the sector’s future appears great in this country (Columbia Business School, 2019). Some of the factors that have played a key role in strengthening Fintech in China include mobile centricity, demographic change, and a weak banking system. Unlike in the United States where a significant number of people are already financially stable, in China, for the past few decades, there has been an explosive growth in China’s middle-class population which has resulted in increased demand for financial services such as payment, credit, insurance and wealth management (Columbia Business School, 2019). Further, most of the traditional financial institutions, such as government-owned banks that have been offering financial services to people cannot service the high number of new customers. In addition, the banking system is not deep-rooted in China as it is in western countries such as the United States, which makes it easy for Fintech companies to absorb excess customers that cannot be served in the banks and other financial institutions (University of Pennsylvania, 2019). Thus, in China, Fintech firms in many ways have been established to serve the high demand in the new market, and the same cannot be said of the United States where the market for financial services was established long time ago when new technologies in finance had not yet arrived. As such, it is apparent that as opposed to the United States, Fintech in China is not a disruptive process, but is a process of creation of new online and mobile models to serve unmet customers’ needs. Apart from the demographic change and low penetration of the banking industry, high level of smartphone penetration has been a major contributing factor to the boom of Fintech in China, which has allowed tech firms to offer financial services even without physical infrastructure (Columbia Business School, 2019). Due to the large size of the population in China, the number of people owning a smartphone has dramatically increased and has surpassed that of the United States. Consequently, with nearly all people within the middle-income population having a smartphone, more Fintech firms have been established in China than the United States.
What has made China so successful in almost every sector is their ability to mimic the innovations from the West (University of Pennsylvania, 2019). China mimics, borrows or misappropriate various technologies from the West and then scale them up quickly for financial gains. For instance, while mobile payment is an American technology, China's mobile payment market is larger than that of the United States by 50 folds. In addition, although Western companies tend to concentrate more on market, Chinese firms tend to prefer a broad and horizontal play. For instance, in the United States Stripe and PayPal target payments, Kabbage targets lending, and Robinhood targets mobile investment (University of Pennsylvania, 2019). On the other hand, Chinese firms have built a robust Fintech ecosystem and have super mobile applications such as WeChat that cater to various needs of the customers across different financial services such as payments, product ordering, wealth management, travel booking, and lending among others.
Merits of Fintech
The reduction of operating costs for both financial institutions and consumers has led to more development in Fintech. The use of technologies such as PayPal as a form of payment internationally has reduced the costs that customers and banks incur significantly as well as increased the ease and speed of completing a transaction (Richman Centre news, 2019). This has forced banks to integrate these technological applications into their systems to stay relevant in the market. This has reduced the time and costs involved to sign and authenticate checks and cash transfers. It is also important to note that financial companies that acquire already established tech firms also boost their customer base, which increases their revenues in the long run. An example integration of the Zelle payment tool into mobile banking applications by both Chase Bank and Bank of America.
Advanced security for customer data in financial firms is enhanced as more firms invest heavily to provide this service to financial firms. The use of encryption and biometrics has ensured that money and vital customer information is not accessed by third parties that would result in loss of financial information of customers. The creation of personalized services that are consumer-oriented has been eased by the application of Fintech, which creates convenience for consumers (Hernбndez et al., 2019).
As established by Qian (2019), China remains the largest Fintech ecosystem globally in this age and time. This is attributed to the fact that China is currently dominated by some of the biggest giants in the market that include Ant and Tencent, besides other hosts of organizations that are making significant efforts directed towards filling the gaps that exist in the underserved markets. Recent reports by Qian (2019) revealed that the growth of Fintech in China is mainly attributed to the landscape of the nation, with the economy of China perceived as the driving factor for the growth in Fintech ventures. The global investments in Fintech ventures doubled significantly in 2018, an aspect that was initiated by the surges in funding from China as well as a stronger gain in other markets, given the fact that investors mainly placed their higher bets in mature startups. This tremendous growth is attributed to an increase in the value of the established deals in China that led to a collection of approximately $25.5 billion from Fintech investments in 2017. China, as alleged, is believed to have accounted for 46% of the Fintech investments, with more than half of these investments believed to have been financed in May, and which managed the largest money market globally (Qian, 2019).
China’s Low Credit Card Penetration
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Figure 2. Reasons why Fintech Ventures Thrive in China as opposed to the U.S.
On the other hand, it is significant to note that traditionally, the Chinese economy is often centrally planned, given the fact that it is driven and steered by investments that are mainly built within a state-owned and directed enterprise (SOE). Moreover, financial institutions and other lending systems mainly focus on the provision of services to the SOEs, an aspect that significantly underserves retail customers and SME's in China (Chen, 2016). China’s Fintech industry has massively grown due to the presence of a higher number of small and medium-sized enterprises (SMEs), which do not receive enough loans from banks. Most of SMEs in China receive inadequate loans from the banks despite these firms contributing a significant share to the country's GDP as well as employment (Qian, 2019). The discrepancy in bank lending witnessed in China is attributable to lack or insufficient collateral among SMEs. Subsequently Fintech firms have capitalized on the surplus of underserved SMEs and have stepped in to fill the void. While banks have become more reluctant to address the issue of the financial needs of SMEs, Fintech companies has played a crucial role in closing the gap between the banking product and the financial needs of private firms. Typically, the traditional banks in China focus more on serving governmental organizations and overlook the financial needs of SMEs as well as those of individuals (Qian, 2019). This is not the case in the United States where SMEs and various governmental organizations obtain their financial needs from bank loans. The Fintech industry is not as strong in the United States as China to provide financial assistance to startups. For instance, Ant Financial is a Fintech company in China that uses artificial intelligence (AI) technology in its lending business and applies blockchain technology to create a more transparent platform (Qian, 2019). The company offers small loans to support the highly fragmented credit demand created by a huge number of individual entrepreneurs and SMEs in China. Providing financial assistance to SMEs has contributed to the growth of the Fintech industry in China because companies within this sector reap huge profits from loan arrangements. Contrary to the U.S, the sluggishness of an incumbent, as well as the failure to address the changing needs of consumers, could result in disruptions that would make it challenging for entities to enter the market, detailing the reason why Fintech ventures in China are making significant strides. However, from a macro-economic view, there is a need for China to make significant transitions from its investment-directed economy to what Chen (2016) establishes as a con...