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September 25, 2019

Professor Bonnie Buchanan,

Head of Department of Finance and Accounting, University of Surrey

Quo Vadis? A Comparison of the Fintech Revolution in China and the West

“’Fintech’ heralds the dawn of narrow banking and portfolio

optimization. It will change the nature of money, shake the foundations

of central banking and deliver nothing less than a democratic revolution

for all who use financial services.”

Mark Carney, Governor of the Bank of England.

Mansion House Speech. June, 2016.

“If banks don’t change, we will change banks.”

Jack Ma. CEO of AliBaba

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“technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services.”

FSB (2017)

The Fintech definition I will be using:

» Blockchain (incl. cryptocurrencies, smart contracts)

» Analytics (AI, ML, DL, Big Data)

» Deposit and Lending (P2P lending, crowdfunding)

» Mobile Payments (eg. MPesa, Swish)

» Banking infrastructure (open bank API)

» Investment Management (Robo advisory)

» Insurtech

» Regtech

» Proptech

Fintech Categories

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» Stricter Basel III capital requirements – reduced lending to SMEs?

» 200 to 245 SMEs are unbanked or underbanked (IFC, 2013)

» In emerging markets, there is a USD 2 trillion ”funding gap” for SMEs.

» There are approx 1.7 billion adults who are currently ”unbanked”.

» Think about the impact of M-Pesa in Kenya.

Opportunities for Fintech

1) Consumer behavior and expectations in regard to financial services have changed.

2) Artificial intelligence (AI), cloud computing and big data have created an affordable infrastructure.

3) New currencies (esp. the promise of digital currencies) and credit systems have impacted investment and banking.

4) Due to mobile phone and other improved access methods, the barriers to entry in the financial services industry are being reduced.

Four key factors are driving Fintech innovation in the global financial services industry:

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1.11.6 1.7

2.83.6

6.9

14.3

26.527.3

34.4

33

0.

5.

10.

15.

20.

25.

30.

35.

40.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Total value of Fintech investments worldwide from 2008 to 2018 (in billion U.S. dollars)Source: Deloitte

131,110

167,633

216,087

1,265,788

1,562,408

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000

Germany

Japan

United Kingdom

United States

China

in millions USD

Countries with the highest FinTech transactional value worldwide in 2018

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0 10 20 30 40 50 60 70 80 90 100

China

U.S.

South Africa

U.K.

Mexico

Fintech adoption rates in financing by country 2019, by country

− No.

− The evolution of Fintech in China compared with three large Western Fintech markets

(US, UK and Sweden) has been very different.

− These markets represent very different legal (common versus civil law) and cultural

frameworks.

− In three Fintech areas:

− P2P, lending

− mobile payments and

− artificial intelligence (AI).

Has there been an even development globally?

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China and FinTech

• Chinese Fintech unicorns - B2C models.

• The European case - B2B models.

• 432 million Chinese citizens are currently “not banked”.

• Over half of the Chinese population is active on social media

• Presence of Baidu, Alibaba and Tencent (or the BAT).

• E.g., AliFinance has provided SME loans (where a huge funding gap exists) to over 409,000 borrowers

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» Historically, banks did not lend to the private sector.

» 2% of the total banking system is accounted for by: 800 small rural banks, 140 city banks and 40 foreign banks.

» 5 state owned banks accounts for half of the lending.

» What is in a name?

• Yu’E Bao - world’s largest MMF.

• A fast growing insurance industry.

• In China, trusts facilitate all kinds of loans.

• WeBank – 3-1-0 philosophy

Growth of China’s FinTech market

P2P Lending

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“Peer-to-peer lending is becoming an increasingly important source of finance for smaller

businesses.”

- Catherine Lewis LaTorre

• CEO of British Business Bank Investments (2016)

“I strongly suggest that the losses on peer-to-peer lending which will emerge in the next five to ten

years will make the worst bankers look like absolute lending geniuses.”

Lord Adair Turner, Feb 2016.

Loan Decisions»Thinks about the 5Cs…

»Capacity

»Capital

»Collateral

»Character

»Conditions

»P2P lending – Prosper uses 500 points of data on each borrower, but the credit score is just one data point.

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P2P Lending

• Traditional P2P Lending Model

• UK; USA, China (Dianrong)

• Notary Model

• Common in USA

• Guaranteed Return Model

• Used in China and Sweden

Different P2P Models

» In the US, dominated by Prosper and Lending Club

» In the UK, Funding Circle conducted its IPO last year.

» In China, the growth has been phenomenal.

» In China’s case lack of WMPs, geography, along with uncertain property and stock market drove growth.

» In the US and UK, institutional investors have started to dominate this market.

» Student loans are an increasingly bigger segment of US market.

» In 2014, first securitization of P2P loans in US.

» Last year there were USD 13 billion in P2P loan securitizations.

P2P Lending Market

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» In China, P2P platforms focus on four industry segments:

• consumer lending

• small business lending

• auto loans and

• real estate lending.

» On a cumulative basis there have been 5962 P2P lending platforms formed in China over the last decade.

P2P Lending market

1.37 8.42 22.8689.71

305.82

1,002.1

2,063.87

2,804.85

0.

500.

1,000.

1,500.

2,000.

2,500.

3,000.

2010 2011 2012 2013 2014 2015 2016 2017

Annual turnover of online peer-to-peer (P2P) lending platforms in China from 2010 to 2017 (in billion yuan)

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Number of online peer-to-peer (P2P) lending platforms in China from 2010 to 2017

15 50148

523

1,854

3,844

2,448

1,931

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013 2014 2015 2016 2017

But it has not been all smooth sailing in the P2P market ...

• China

• Ezubao

• Hongling Capital

• USA

• Lending Club

• Sweden

• TrustBuddy

• UK

• Collateral (UK)

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P2P/AI and Debt Collection

» Ziyitong has sought to recover RmB150bn.

» It launched an AI platform to help recover delinquent loans for some 600 debt collection agencies and >200 lenders, as well as Alibaba and Postal Savings Bank of China.

» Ziyitong uses a dialogue robot which determines the phrasing with the highest likelihood of pressuring the person to pay back the loan.

» Recovery rate is 41% for loans delinquent up to a week.

» Yigou also provides geo-locational data on some borrowers to help track borrowers down.

» Central government concern over “social unrest”

Mobile Payments

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-20

-15

-10

-5

0

5

10

15

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gro

wth

ra

te o

f C

urre

ncy

in

Cir

cu

lati

on

China (%) Sweden (%)

Growth Rate of Currency in Circulation 2007-2016

Market Share of Third-party Mobile Payment vs. Online Payment in China 2011-2019

3.5 418.5

42.650.7

74.6 78.5 83 85.2

96.5 9681.5

57.449.3

25.4 21.5 17 14.8

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e

%

Third Party Mobile Payment Online Payment

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» 2017 survey: 26 percent of respondents carry less than 100 yuan ($15); 14 percent no longer carry cash and 74 percent admit than can survive for over a month with only 100 yuan in their pockets.

» In 2016, China’s mobile payment sector was worth CNY38trillion ($5.7trillion), which is 50 times larger than the US market ($112billion).

Artificial Intelligence

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Uses of AI in financial services

»Email spam

»Cybersecurity

»Trading

»Capital optimization

»Customer support

»Claim management

»Loan decisions

»Fraud detection

»Insurance underwriting

Current Uses

Hype

» China’s online population is almost twice the size of the US.

» Vast amounts of data (WeChat has > 1 billion users).

» Two prominent technologies fueling the drive, namely facial recognition and AI chips.

» Both the US and China compete heavily in AI chip technology.

» In China, Baidu, Didi and Tencent dominate the AI market.

• In fact, Baidu recently changed its mission statement to “AI first”.

AI in China vs. the USA

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0

5

10

15

20

25

30

35

2013 2014 2015 2016 2017

No

. o

f D

ea

l

China backed equity deals to US startups US-backed equity deals to Chinese startups

Cross-border AI investments are on the rise

0 0.020.67

7.22

15.78

10.56

27.96

0.27

0

5

10

15

20

25

30

2012 2013 2014 2015 2016 2017 2018 Jan to May 2019

Value of AI investment deal in finance industry in China 2012-2019 (n billions of yuan)

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» P2P lending has not been tested in a high interest rate environment.

» Nor has it been tested through a full business cycle.

» How do you maintain financial inclusion in rural areas which are less technologically developed and lack infrastructure?

» Social Credit Score System (SCS) that is expected to be in place by 2020.

» Data security and individual privacy.

» Backlash to cashless society (Sweden set up a special parliamentary committee in Summer 2018).

» NPL and debt

Concerns and Risks