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How FinTech Won over the Emerging Affluent in China

Tracey Xiang 2019-01-03

Not only have Chinese internet platforms become major distributors and marketing channels for traditional retail investment products, the revolutionary internet-only investment products and services they’ve introduced are also highly popular. Their convenient online offerings are especially welcomed by the affluent young Chinese.

Riding on the latest wave of financial technologies, characterized by the rise of Internet platforms as the new financial intermediaries and financial data collectors and processors, Chinese Internet services and developers comprising of both established tech companies and startups, have quickly become major players in the retail investment market, increasingly replacing traditional financial institutions in the distribution of traditional retail investment products and facilitating new internet-mediated investing activities.

The rapid development of online investing platforms and the associated technologies have paralleled the equally fast growth of China’s commercial mobile internet. The emerging affluent, whose screen time is mainly allocated to mobile, are drawn to the easy-to-access investment options and top-notch mobile user experience provided by Chinese online and mobile investing services.

Out of over 70 million active users of mobile investing services in the first three quarters of 2017, about 45% were between the ages of 31 and 35 and over 20% between 24 and 30, according to Chinese internet market research firm, Analysys.

For young first-time investors, online and mobile services have become the primary choice. 79% of millennials, defined in China as those born from 1980 to 1999 (aged 19-38), said their first purchase of investment products was through online channels, according to a survey published in July 2018 by Chinese market research firm iResearch.

A major innovation that boosted the development of China’s online and mobile retail investment market is Yu’e Bao, a money market mutual fund developed by e-commerce giant Alibaba through partnering with a local mutual fund company.

In June 2013, Yu’e Bao launched on Alipay, the leading online payment service born out of the e-tail marketplace of Alibaba. While the traditional financial institutions still required customers to visit a physical shop to open an account and had high investment thresholds, Yu’e Bao reduced the procedures of buying and redemption to a few taps on the Alipay mobile app and has no minimum investment requirement. Tailored for the existing users of Alibaba and Alipay, Yu’e Bao allows them to redeem on demand, to pay for purchases on Alibaba’s retail sites or make payments with other online or offline businesses that accept Alipay. The ease of use was made possible by the well-established mobile payments and transaction infrastructure built by Alipay and user accounts data Alipay had collected.

Yu’e Bao gained some 149 million individual investors within fifteen months after launch, with 77% being millennials. It would become the world’s biggest money market fund in assets under management in 2017.

After rolling out a few more similar products, Alibaba’s finance arm launched in 2015, Ant Fortune, a mobile “fund supermarket” that helps asset management firms sell their investment products with the same ease as selling Yu’e Bao. In mid-2017, Ant Fortune enabled third parties to set up shops there, selling and marketing investment products just like running retail businesses on Alibaba’s e-tail marketplaces.

Ant Fortune announced in June 2018 to allow asset management firms on its platform to access their in-house developed AI capabilities and other intelligent tools in data tracking and analysis, personalized marketing, and customer service. The company claimed that these intelligent offerings had increased the operational efficiency by 70% and reduced operating costs by 50% for pilot participants in the previous year.

Yu’e Bao and Ant Fortune inspired other major Chinese Internet platforms, which, like Alibaba, have massive users who are already familiar with making payments or transfer money on mobile devices. Independent platforms and solutions also emerged, with varying levels of automation and intelligence in data analysis.

Tencent, the dominant messaging service provider that also operates a popular mobile payment service, added its own fund supermarket onto WeChat and QQ, the two ubiquitous messaging services in China, in 2014. Called Licaitong, the fund platform claimed to have gained more than 100 million customers as of the end of 2016. The recent rollout on the WeChat app, which allows users of the in-app mobile payment service to invest in a money market fund, saw 74% of the early adopters being millennials.

Xiaomi, a leading smart device maker, has pre-installed its financial services app in all smartphones the company has shipped. PINTEC, a finance technology developer, provides configurable modules for asset management companies to create mobile pages for customized mutual fund products with ease.

Almost all public mutual funds in China are now available on online “fund supermarkets” run by internet companies. Ant Fortune claimed that over 90% of the Chinese mutual fund firms had established presence on its platform as of June 2018.

Interpersonal lending, which has long been regarded in China as a formal financial system and hard to access for smaller businesses and individuals, is another sector that has been significantly transformed by the internet, thanks to the rise of online peer-to-peer lending, more recently known as marketplace lending. 65% of millennials that participated in the above mentioned iResearch survey said they had ever invested in peer-to-peer loans.

The total number of Chinese online peer-to-peer lending platforms exceeded 5000 at peak. Millions of individual investors were drawn to it, expecting higher returns but may not have been aware of the increased risks in impersonal, long-distance lending. Frauds and failures became rampant before regulators came in. After a series of regulatory crackdowns and market consolidations, the total number of peer-to-peer lending sites has recently declined to over one thousand and investors to over two million.

Further consolidation in peer-to-peer lending is expected in the near future, but it is believed that the market will be here to stay. A handful of Chinese marketplace lenders have stood out with automated or near-automated risk-based pricing and risk management systems to enhance performance. They turn out to be more profitable than many of their Western peers.

International investing has also been made much easier by a new generation of mobile investing apps such as mobile brokerage services and robo-advisors. A chunk of early adopters of these services are young employees in the tech industry, many of whom started investing overseas after being granted stock options or shares by their employers who are mostly listed outside of mainland China, in particular in the U.S. and Hong Kong. FUTU and Tiger Shares, two leading players in international stock trading, were both founded by veterans of major Chinese tech companies.

It is expected that China’s personal investing market will continue to be driven by the young, tech-savvy population. China’s emerging middle class is young compared with that of many developed markets. 78% of them belong to the millennial generation, according to the White Paper on the Emerging Middle Class Wealth 2018, co-published by Forbes and UP Financial in January 2018.

The fast growth of China’s online investing market has also benefited from a so far relatively supportive regulatory environment for the development of certain finance technologies, a well-established consumer internet infrastructure and, as China’s finance industry has a relatively short history, the absence of decades-old technology systems which many developed markets find hard to adapt and change.

Tracey Xiang is a tech writer, specializing in ChinaTech, Digital Economy, FinTech and AI.

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