Why these giant Chinese companies could destroy Australia's fintech ambitions

Photo: Feng Li/ Getty.

Fintech companies are some of the hottest startups around right now. Incredibly, more than 20 are now valued over $US1 billion. Australian credit reference fintech, Veda, might get bought for $2.2 billion.

The possibilities offered by fintech are enormous. Mobile payments, payment terminals, smart contracts, smart bonds, P2P lending and crowdsourcing are all examples of new technologies that pose a risk to core services provided by the financial establishment. This is why they want in.

According to some, Australia has the potential to be a leader in the sector. Australian super funds are investing heavily, with First State Super launching its own venture capital platform just weeks after putting $110 million into a different fund. Both Westpac and NAB have launched their own fintech investment funds, each with a $50 million war chest.

The banks are also taking a DIY approach, including the Commonwealth and its “innovation lab”, where they experiment with technology from robots to apis. NAB has its own innovation division NAB Labs, where they are also experimenting with technology like apps and the blockchain.

Governments are also involved, with the NSW Government backing Stone and Chalk, a new fintech hub that also has backing from Macquarie Bank and ANZ. NSW Premier Mike Baird justified such investments in an interview with Business Insider, pointing out how important technology will be, especially for an economy built on financial services.

And Stone and Chalk isn’t Sydney’s only fintech hub – Tyro also has 125 seats for companies to take on the banks.

But a paper published by SWIFT, the global network that controls international financial transactions, argues that China will play the dominant role in shaping the future of the sector.

Specifically, SWIFT argues fintech will be driven by the three Chinese tech giants – Baidu, Alibaba and Tencent.

We will suggest that the West will not determine the future of fintech: China will. Three companies, 1.4 billion people and China’s regulators will change the pattern of global trade, the mechanics of exchange and the face of banking as we know it.

There are more Chinese internet users than the combined populations of the United States and Europe. In this space Alibaba controls 80% of ecommerce, Baidu claims 90% of the search market and Tencent has 500 million users among its suite of services, which includes Wechat.

Rather than expand internationally, the companies diversified into new industries. Tencent created products for booking taxis and ordering food, and integrated a payment platform – WeChat Pay. Alibaba created Alipay, which controls nearly 80% of Chinese ecommerce payments. Baidu launched a mobile payment “wallet” and recently created a product that incorporates search into an index fund. The Baidu Baifa 100 index fund was up more than 50% on the rest of the market at one point in 2014.

The report notes that these services overwhelmingly target small businesses and thanks to the internet, these smaller companies are increasingly expanding overseas. And with the rise of emerging countries in Africa and Asia, these businesses are more important than ever. The companies are now also directly buying into fintech in other countries. For example Alibaba recently became the biggest shareholder in Indian Payments platform Paytm.

A chart from the report projects how small businesses increasingly get revenue from global sources:

If the report is to be believed, Australian fintech companies will need to go head-to-head with the big three Chinese players.

Where Australian fintech might have an advantage is in crowdfunding and peer-to-peer (P2P) lending because of early entrances into these markets. Early adoption was driven by a unique banking environment – many of the “problems” solved by fintech offshore don’t exist in Australia. Contactless payments, for example, are already widespread.

First mover advantage may not be enough, however. The SWIFT report claims Chinese companies are more innovative than their Australian counterparts, having created systems from scratch rather than building atop traditional banking structures.

China, rather than Japan or Australia, is the most dynamic market for P2P lending and, in fact, crowdfunding rather than P2P is likely to be a disruptor in any one of these markets. We have seen, in the case of Lending Club, for example, that P2P can simply become a new distribution channel for bank lending.

But the same network effects that advantage Chinese fintech may also aid Australia in P2P lending and crowdfunding. Morgan Stanley estimates that Society One has already received loan demands of $100 million. And there are more to come. MoneyPlace will launch at the end of the year, and US company OnDeck is also entering the market.

P2P lending is similarly well established in Australia. Australian inventors have raised millions through foreign crowdfunding websites like Kickstarter and local ones like Pozible, and Australian investors can back businesses through crowdfunding sites like VentureCrowd.

Business Insider spoke to Jeremy Colless, founder of equity crowdfunding service VentureCrowd, about the Australian market. Equity crowdfunding invests in companies and/or property in a similar fashion to normal crowdfunding, in return for a share of the company rather than product.

Colless says there are between 200,000 and 300,000 Australians who meet the current requirements to invest in equity through a crowdfunding website. And this could dramatically expand if the government succeeds in removing the requirements that potential investors be “sophisticated investors”, meaning they either earn $250,000 a year or have at least $2.5 million in net assets. According to Colless only a couple of thousand of these potential investors currently invest through P2P or crowdfunding platforms. So there is quite a lot of room here for expansion or disruption by foreign companies.

The VentureCrowd boss doesn’t fear foreign companies moving into his space.

“If you are operating as an online business you are operating effectively with all of your global competitors. So I certainly don’t sit in Australia and think our key competitors are other Australian crowdfunding businesses,” he said.

“Our competitors will be the global crowdfunding competitors. Now there are always barriers to entry once you get into financial services… but I think you would be naive to think, if you are setting up an equity crowdfunding platform in Australia, that you won’t be competing with global players.”

So there are regulatory hurdles to new players entering the Australian market. But on top of the regulatory barriers, Colless says his business is protected by the the network effects of its partners – myriad Australian accelerators and tech hubs, and the amount of deals Venturecrowd is able to draw.

“Deal flow will be the key thing that will see successful crowdfunding platforms emerge. It will be ones that have the best deal flow which will attract the most investors. So success will breed success,” Colless says.

In the end, it may all come down to network effects. The big three Chinese companies have achieved this in many areas alread. But where it comes to P2P lending and crowdsourcing, two areas Australia jumped into early, the network effect may already be on our side.

* Business Insider contacted P2P lender Society One for comment, but received no response.

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