At the beginning of 2021, China's GDP was conservatively estimated to be $15.66trn. Experts also forecast that its economy will overtake the US in less than a decade due to its growth momentum, to become the world’s largest economy.
But over the past few months, Chinese regulators have taken significant steps to restrict the largely unfettered fintech activity that has boosted the economy.
China’s approach to regulating fintech has been three-fold. Firstly, financial businesses must be licensed to operate. Secondly, different businesses such as insurance and wealth management must set up firewalls to prevent cross-sector risks. Finally, the direct link between non-banks and banking information services must be cut.
The central bank has also required fintech businesses to set up holding companies and to include all subsidiaries engaged in financial activities.
A series of strict measures on fintech regulation have also been implemented. On November 1st, China’s new law on personal data protection came into effect. In September the Data Security Law was introduced, and in January, the central bank tightened its regulation of non-bank payment providers, effectively restricting their activities in the swiftly growing payments sector.
The previously free-wheeling fintech space seems to have been reined in with sudden effect and commentary in the space shows some companies have felt the pinch.
A culture of commercial growth for Chinese fintechs
However, for those more familiar with the culture of Chinese commerce, the restrictions came as no surprise. David Messenger, CEO of LianLian Global, one of China’s leading cross-border payments companies, says the moves are aimed at strengthening the industry by logical regulation and have not been unexpected for those within the industry.
Messenger is in a unique position in that he is a British national leading a China-born fintech company as it rolls out its expansion plan, first regionally, and now globally. Founded in Hangzhou, in 2004, LianLian Group is already considered an international entity. Its main purpose is to connect merchants globally, through two-way channels whereby companies both within and outside China can have a streamlined transaction network.
He says, “When you look at fintechs in China, really, there are two areas of regulation. One is the People’s Bank of China (PBoC) and the financial regulations. And then the other is the Cyber Administration Authority of China, which is the data security, data privacy regulations. In China, what often happens in new areas is the regulations are left flexible to let a market and solutions develop. Then, once the position is clear, the regulator brings in regulations that are broadly in line with the same objectives that regulators have all over the world.”
The process is, he says, a method that ultimately works best for the business climate and the customer because it closes areas of vulnerability, making the environment safer for business by providing greater stability in the financial system, data security and data privacy.
“I think most people would find it hard to disagree with the principles behind these changes,” says Messenger. “The difference is the way those principles get executed in China. I think if you're a foreign company, you need to be able to understand the Chinese process, see the direction things are moving and also be ready for the fact that in China, things move at China speed. That's true on the business side, and it's also true on the regulatory side. So, it's where China has grown so fast and innovated so well because things do move fast.”
Ultimately, he says, the goals are very reasonable and companies have to adapt to the fact that the way things get done in China is different.
Operational challenges for fintechs in China
While many smaller companies have swiftly adapted to the new fintech regulations, the larger entities have felt the strain. Messenger says monopoly players face the biggest challenges.
“If you are one of the monopoly players in China, there's pressure to take very significant steps, make significant changes and do so relatively quickly. If you are not in that category of data security and data privacy, the implementation is going to be phased. And so everyone is studying those changes and needs to really understand and engage with the regulator to figure out the best way to meet these new obligations.
“If you're in the broader space of the ecosystem, it's a time when you need to be engaging and figuring out how to engage with the regulator, and engage with the government to understand the best course of action. That's certainly what Chinese players are doing. Foreign players find that more challenging unless they have a very strong local partner who can help them navigate those channels.”
Cross-border payment space in China
While the financial environment in China is notoriously competitive – especially in the domestic payments space - the cross-border business presents great opportunities for innovative fintech companies. Over the past couple of years, there has been an international e-commerce boom. The industry in China was already growing rapidly, but the pandemic has driven it faster still, and given rise to new opportunities,
The new regulations have, says Messenger, opened up lots of new potential in China for those ready to adapt. “Essentially, the dominant players are forced to be more open and participate in a more open ecosystem, similar to what we have in the West. There's also increasing pressure on firms to have Chinese licenses and understand data security effectively.”
It is this ‘paperwork’ challenge that is often difficult for foreign fintech companies to navigate. But because LianLian Global is China-born it has the capability to navigate those changes. Furthermore, over the past couple of years, cross-border e-commerce has boomed. It was already growing rapidly, but the pandemic has driven it faster still, and given rise to new opportunities, he says.
“That long-term growth trend has been exciting and we see that continuing into the future. But it's also giving rise to a whole new set of e-commerce channels. TikTok is one of the big breakout stories in the last year, and there are other new e-commerce channels opening up. So it's becoming a more diversified ecosystem for cross-border e-commerce. And it's important for fintechs to really be able to navigate that and broaden their approach so that they can help their customers make the most of those opportunities.”
So are companies responding well to the situation? Messenger says the reaction has been mixed, but in general, positive. And that consumer demand through e-commerce channels has grown exponentially and shows no sign of slowing down.
“We see that volume and growth continuing at a very strong rate. And I think the key issue going forward will be, how to embrace those new e-commerce channels, as well as the ones you as a merchant are already familiar with. The other major focus we have is working with platforms, whether it is a marketplace or a large corporation doing business in China, or needing to disperse funds into China. And that is an area which has seen very rapid growth as well.”
The future of cross border trade
Ultimately, the industry shows no sign of slowing down and continues to demonstrate dynamism, regardless of regulations. Messenger believes we have only seen the tip of the iceberg in terms of potential.
“I'm excited,” he says. “I think this is a very exciting time in China. B2B cross-border trade is a huge area where fintechs can disrupt and innovate and provide new solutions. I think, particularly for us, we have very strong global banking partnerships with banks like Citi and Deutsche Bank. We're engaged with them in saying, how do we collaborate? Fintechs and banks, how do we create new solutions to issues that have been around for a long time?”
He adds, “I think the cross-border space, in general, is not China-centric. So it's supporting cross-border flows, whether they are from Vietnam or Thailand to Brazil or Europe to Singapore. The key is always that you've got to have local teams, local licenses to be able to not just have core innovations, but actually, be able to localise them effectively.”