Saturday night on a Shenzhen street corner, a young guitarist dressed in Johnny Cash black strums away, singing melodies. His open guitar case has a laminated QR reader, propped up, welcoming digital tips from passersby.
China’s expeditious adoption of fintech is generating profits not only for startups, but also the companies investing in them. Sitting in the headquarters of FinPlus, a fintech venture capital firm and accelerator, its CEO, Mosso Lau, said, “There are very many opportunities.”
In 2016, investment in mainland Chinese and Hong Kong fintech ventures totaled $10.2 billion, exceeding North America’s $9.2 billion. Many domestic financial services and e-commerce conglomerates are supporting Chinese fintech startups. Additionally, foreign investors include KKR & Co. L.P., Bain Capital, Accel Partners, Sequoia Capital, 500 Startups, IDG Capital Partners, Ping An Insurance, DBS Bank, and Standard Chartered Bank.
Lau said traditional financial institutions weren’t meeting customers' needs. Thus, FinPlus, a private company with a dozen employees and a USD $7.5 million balance sheet, was founded in 2015. It specializes in fintech incubation and series A funding. In exchange for an equity stake, FinPlus offers target companies funding, office space, back-office services, product design, marketing support, and industry analysis.
FinPlus reduces its risk by investing across fintech domains. It favors founders who are experienced industry professionals, “not greenhorns,” as Lau said. Most are in their mid-30s. “Our due diligence is relatively strict,” he said. When reviewing investment opportunities, FinPlus reviews what they call the six M's: Model, Market, Man, Money, Motivation, and Mobile.
As opposed to mainstream areas like P2P lending, FinPlus prefers less competitive channels including commercial invoicing, supply chain financing, customized insurance products, wealth management, risk management, anti-fraud, and B2B services based on SaaS.
They also like companies geared toward consumer finance areas such as college students, video game players, blue collar workers, and farmers. One niche market Lau said is not being served today is financing for young women interested in undergoing cosmetic surgeries. “We are relatively bullish on these types of investments,” he said.
Speaking about Chinese consumers, Lau said, “The demand is very big and is not being met.”
Fintech incubator JadeValue launched last year in Shanghai. It is the brainchild of Tang Yang, the founder of microlender CashBUS.
Although acknowledging China’s potential, JadeValue general manager John Uddman advises caution, citing intense competition and difficulty in acquiring customers. “When people haven’t lived in China for a long time, it makes it hard for them to build something here,” the Swede said. “It’s not often they have good knowledge of how things work.” For this reason, JadeValue prioritizes companies with Chinese roots.
Uddman said Chinese regulators allow sectors to mature before clamping down, which introduces uncertainty. “You have a lot of players innovate, but they don’t know exactly how things will be regulated in the future,” he said. Many P2Ps, for example, shuttered in recent years. More recently, initial coin offerings (ICOs) have been halted by China’s central bank, The People’s Bank of China.
Warts and all, China presents opportunities. Per deal, JadeValue invests between USD 150-750K, favoring blockchain, roboadvisory, credit diagnostics, real estate AI, and insurtech. In real estate, limited transparency causes distrust between tenants and landlords. And because most Chinese insurance companies are state-owned, ingenuity and customer service lag. Thus, these domains are ripe for change.
JadeValue is not alone. According to reports, the country’s largest insurer, China Life teamed up with Baidu to invest approximately $1 billion in AI and internet finance properties. The second-largest, Ping An Insurance, allocates roughly 1 percent of total revenues or $1 billion annually toward online initiatives.
Companies JadeValue supported include CRO, which tracks stolen electric bikes, InsuranceBox, which advertises a “magic box of customized insurance products,” and 2BOSS, an online housing transaction database.
Compared to their Western counterparts, Uddman said Chinese players value data more, which affords them greater expansion possibilities when offering new solutions. “If you want to be successful in China, you have to not only offer one product, but you should have a comprehensive product offering,” he said. China produces 2.5 times as many science and engineering graduates as the U.S.
Fintechs also benefit from Shanghai being a banking center. “The environment is really good,” Uddman said.
Across Greater China, incubators and capital providers are bolstering fintech communities. Taiwan’s Financial Supervisory Commission (FSC) opened a fintech office in 2015 and is planning an incubation center.
Heading south, Sui Yang Pang, managing partner of Nest, said Hong Kong is a vibrant place for fintechs. “It’s one of the most mature and solid in terms of [financial] infrastructure,” he said.
Nest invests in fintechs and operates accelerators in partnership with institutions such as DBS Bank. Corporations historically used accelerator programs for marketing hype, but now they genuinely desire new technologies. “Institutions are now going to market with a very specific list of needs,” Pang said.
Successfully integrating startups with corporations, however, is arduous owing to differing mindsets and vernaculars. Corporations approach problems from risk and compliance perspectives. They also treat startups as vendors, not partners. Pang advised corporations to use soft skills. “They fundamentally need to have an internal cultural ability to open up and to be able to interact with these startups,” he said.
Entrepreneurs bring agility, but need to better understand commercial aspects. “When you come and work with a corporate that understands these different markets, you get that expertise,” Pang said.
And many startups are being founded in Greater China, they aren’t stopping there. “Chinese startups have seen China as a massive and growing market, but what they will do is come increasingly overseas,” Pang said.
Chinese fintechs including Ant Financial, Dianrong, Lujiazui International Financial Asset Exchange (Lufax), Neo Capital, Ppdai.com, Qudian, and Zhong An Online Property and Casualty Insurance are reportedly looking to raise billions via overseas IPOs. And for investors who got in early, these could generate substantial windfalls.