The fintech revolution continues to gather momentum. According to an analysis by Accenture, global investment in fintech ventures more than doubled from $26.67 billion in 2017 to $55.33 billion in 2018. During the same period, the number of deals rose by 18.5% to 3,251. Compare that to 2010, when the number of deals came to 342 and funding topped $1.8 billion.

“Even with the current volatility in global markets and ongoing macroeconomic concerns, investment in the fintech sector remains strong,” said Richard Lumb, group chief executive of financial services at Accenture. He noted that the demand for fintech innovations by financial institutions continues to grow as they “face regulatory and capital pressure; competition spurred by Open Banking from new entrants, including big tech and neobanks; and new and evolving security threats.” (Open Banking is the practice of sharing user financial information even outside of financial institutions, such as with third party apps.)

Piyush Singh, senior managing director at Accenture and head of the financial services practice in Asia-Pacific, Africa, Middle East and Turkey, added that while it’s hard to tell “whether we’ll be able to keep up with this pace of torrid growth,” it’s clear that “many investors have woken up to the fact that financial technology can add a lot of benefits to businesses and consumers alike, both in developed and developing markets.”

Wharton School Dean Geoffrey Garrett, who also is a professor of management and private enterprise, believes that the fintech boom is “real” and “truly revolutionary.” He pointed to the “democratizing” aspect of fintech and how it lowers the barrier for small businesses and for people who traditionally have not had access to financial services.

“Financial systems were embedded and regulated quite a while ago and the amount of disruption that technology potentially provides is unlimited,” Garrett said. “With data as the new collateral, you can now use information (about people and businesses) to base decisions on investing and lending, instead of having to rely only on their financial assets.”

Bonnie Buchanan, head of the department of finance and accounting at the University of Surrey (U.K.), said fintech has grown for many reasons: Consumer behavior and expectations about financial services have changed; a more affordable infrastructure has been created by artificial intelligence (AI), cloud computing and big data; digital currencies have the potential to disrupt banking and credit; and mobile technologies have reduced the barriers to entry to the financial services industry. “Fintech continues to transform the global financial landscape,” she said.

The China Factor

China has been at the forefront of fintech growth and is the largest fintech market in the world. In terms of investments, according to the Accenture analysis, the value of fintech deals in China in 2018 was $25.5 billion. That’s a nine-fold increase over the previous year and accounts for 46% of all fintech investments globally in 2018.

Interestingly, more than half of China’s fintech investment last year came from a single deal. In May 2018, Hangzhou-based Ant Financial (spun off from the Alibaba Group), best known for its mobile payments service Alipay, raised $14 billion. This was also the largest fintech deal globally. The second-largest capital raise also came from China. Du Xiaoman Financial, a spinoff of Chinese search engine giant Baidu, raised $4.3 billion in two separate transactions. Another large transaction in China — $1.3 billion — was by wealth management platform Lufax.

China’s leadership in fintech is not surprising. Fintech lets it leapfrog over traditional banking systems emblematic of developed nations because Chinese financial services were not well-developed. This opened up an opportunity for tech companies such as Alibaba and Tencent to offer financial services. Now, most Chinese transact through mobile phones. Also, the regulatory environment in China is less constraining towards fintechs compared to the West, which also boosts fintech firms.

“China is known as a safe zone for startups to test new applications and ideas.” –Michael Moon

“China is known as a safe zone for start-ups to test new applications and ideas. Its financial technology is ahead of the rest of the world and the country possesses all the right attributes, including mostly laissez-faire government policies, a large (and underserved) online and digitally savvy population and an underdeveloped banking sector,” says Michael Moon, managing director, payments, trade and communications for Asia-Pacific at SWIFT, a global information network for financial transactions that serves more than 500 institutions in China.

China accounts for four of the world’s top 10 fintechs, according to an October 2018 report by H2 Ventures and KPMG. Also, it noted that 34 out of the top 100 fintech companies are payments companies. “This trend is reflected in China, where [it’s] led by Ant Financial and Tencent — many of the new fintechs exist to serve the fast-growing e-commerce industry that has taken the country by storm,” said Moon.

“Chinese fintechs are largely focused on the domestic payments space, mostly in retail. This is a space that many Chinese banks have ceded to the technology firms. In a very short span of time, these companies have built new ecosystem models around the smartphone and delivered this to consumers through super-apps that deliver a customer experience marked by usability, simplicity and convenience,” Moon continued.

Buchanan, co-author of the study ‘Quo Vadis? A Comparison of the Fintech Revolution in China and the West,’ said the roots of China’s fintech success is “not just from unprecedented innovation and a technological advantage, but also from integrating finance and real-life needs.” Added Vivek Belgavi, partner and fintech leader at PwC India: “The combination of the right market conditions and regulatory atmosphere has propelled Chinese fintechs to global leadership.”

China vs. the West

The Chinese modus operandi is something like this — companies look closely at innovations from the West. They mimic, they borrow, some may even say they misappropriate the technology — and then they scale it quickly and tremendously. Take mobile payments. While it is an American creation, the Chinese mobile payments market is 50 times larger than that of the U.S.

However, while Western players tend to focus on a market — for instance, PayPal and Stripe target payments, Robinhood on mobile investment, Kabbage on lending — Chinese firms prefer a broad, horizontal play. They have built comprehensive ecosystems and have super apps (like WeChat) catering to a variety of consumers’ needs across different financial services like payments, wealth management, lending as well as other services such as ride sharing, food ordering, travel bookings and so on.

“The combination of the right market conditions and regulatory atmosphere has propelled Chinese fintechs to global leadership.” –Vivek Belgavi

Garrett finds impressive the end-to-end services of Chinese tech firms and the ecosystems they have created. “We talk a lot about the Apple ecosystem but it’s nowhere as broad-based as the ecosystems of the large Chinese tech firms,” he said. “Even though Apple has Apple Pay, it looks to me to be at the periphery of Apple’s ecosystem. Alipay (from Alibaba) and WeChat (from Tencent) on the other hand, are right at the center of their respective ecosystems.”

Garrett pointed to another big move in China. With growing wealth among the Chinese, they are seeking a good return for their financial assets. Certainly, they want something better than what Chinese banks offer, which is nil for traditional savings accounts. As a result, services such as wealth management and asset management are booming. But it’s still unclear how wealth management will develop. “Who will take the lead in this — the traditional players or the fintech players? It is also unclear if it will be more Chinese players or Western players,” he said.

But Moon said the large Chinese fintech firms have expanded their offerings so extensively that some of them “are starting to act like financial institutions in their own right and competing head-on” with banks. Pointing out that China’s four largest state-owned banks have partnered with at least one large Chinese technology firm, he said it “attests to the wide-ranging financial capabilities of these firms unlike their European or American counterparts.”

Challenges Ahead

To be sure, there are challenges in fintech. Take, for instance, the peer-to-peer (P2P) lending platforms in China, which play an important role especially for small and medium enterprises that have limited credit access. The challenge here, is to “stop the sector from being too big to fail,” Buchanan said. She explained that the P2P industry in China has experienced a lot of turbulence since 2016, with over a third of these platforms running into difficulties either due to halted operations, disputes, frozen withdrawals or executives who have absconded with investor funds.

Despite a regulatory overhaul of the Chinese P2P industry in the last two years, failures have continued. “There is much speculation over the future viability of the Chinese P2P sector and its expected size,” said Buchanan. Moreover, there are also headwinds from the slowing Chinese economy and how exactly it will affect fintech, she added.

Initial coin offerings, cryptocurrency and P2P scandals such as those involving Ezubao (China), Lending Club (U.S.) and TrustBuddy (Sweden) have brought fintech to the top of policy and research agendas in China and the West. Policymakers are challenged to maintain market integrity and provide clear rules while encouraging financial innovation. There are also increasing concerns about AI’s societal impact and what it will mean in terms of financial inclusion.

“A business model based on easy-to-use and simple interfaces with free offers will no longer be enough to differentiate.” –Bonnie Buchanan

Buchanan pointed to Sweden as an example of challenges faced by the West. Sweden is one of the first Western countries to move towards a cashless economy, but it has not been without backlash. A downside of Sweden going cashless has been the speed of adoption. Opponents believe it has been too quick and is resulting in financial exclusion, especially for the elderly and low-income segments that may not be digitally savvy. “Financial inclusion is also important in considering a cashless society. Both sides can learn from the Swedish experience,” said Buchanan.

Another challenge for the West is fintechs must up their game. “A business model based on easy-to-use and simple interfaces with free offers will no longer be enough to differentiate. We are starting to see more partnering between fintechs and incumbent banks to establish a competitive edge,” said Buchanan. One aspect she finds encouraging is the U.K.’s regulatory “sandboxes” where fintech ideas are tested in a controlled and supervised environment. This concept is now being adopted globally.

According to Belgavi, the main lesson the West can learn from the Chinese is in building integrated solutions and ecosystems that can get embedded into the lives of their consumers, rather than focusing on only one particular product or service in isolation. Chinese players, he pointed out, work towards developing a deep understanding of their consumers and leverage that to build products and services that encompass their entire digital journey.

From the West, the key learning is around collaboration. Western markets have seen deeper collaboration among fintech firms as well as with traditional financial institutions. “Fintechs which are looking to scale up exponentially do not always have the luxury of time and funding to be able to build all on their own,” Belgavi said. “Partnering with other players can help save costs as well as shorten time to market.”

Garrett expects fintechs in the U.S. to get acquired by the big players like banks or credit card companies. “The question in the U.S. is [whether] the fintech disruptors remain independent or … they get acquired by the big players. The regulatory environment in the U.S. seems to be in the latter direction. I think disruptors in the U.S. will become part of the system rather than remain independent or grow like Alibaba-type of entities.”

The Way Forward

Challenges notwithstanding, experts agree that fintech has a bright future. “We are very optimistic about the future of global fintech. Fintech has already created new business models, revenue streams and investment opportunities, and that landscape will continue to grow,” said Buchanan. She noted that with an estimated average growth rate of 18.4% annually, global fintech transactional value is expected to reach $8.4 trillion by 2022. Investors will continue to look for innovation in insurance, banking, regtech and capital markets startups, she added.

“I think disruptors in the U.S. will become part of the system rather than remain independent or grow like Alibaba-type of entities.” –Geoffrey Garrett

“Fintech is going to continue soaring globally, albeit we will see different segments within grow differently,” said Belgavi. Segments like payments are approaching maturity in most markets, whereas alternate lending is the hottest segment, he added. Insurance and wealth management are yet to catch on apart from the biggest three to four global fintech hubs, Belgavi said.

Belgavi also expects smaller hubs to gain more prominence. “The fintech story so far has been dominated by the largest hubs like New York, London, Beijing, Shanghai, Singapore, Hong Kong and Mumbai. In the coming months and years, we hope to see expansion of larger players and growth of homegrown fintechs in smaller cities and geographies.”

According to Moon, ongoing disruption means that the financial industry – and the technological infrastructure underpinning it – will be significantly different in a year or two compared to how they look today. “Banks are investing in innovation to overcome legacy issues, and many are collaborating with fintechs to realize improvements in the cross-border payment experience,” he said. “Increasingly the lines are blurring and it is becoming apparent that payment industry players must collaborate to drive transformation and long-term growth.”

Garrett believes the field is wide open for any player to emerge as the winner. Unlike in 5G, for instance, where Huawei seems to have a global lead, he doesn’t see any powerful first mover advantages in fintech. “In fintech, we don’t need a backbone like 5G does with its telecom equipment sitting behind the network,” Garrett said. “In fintech, we are only taking advantage of the communications network. I think it will be a pretty fair fight between Chinese and Western players.”

This article is part of an editorial collaboration between Knowledge at Wharton and the SWIFT Institute.