China's historic economic shift to a more consumption- and service-driven model is under way, positioning the economic superpower for sustained growth over the next decade and beyond. The transformation has involved turning the country's focus toward building its financial services markets – creating an opportunity for U.S. firms to compete. Based on research and analysis recently published in The Demand Institute's report, "A Wealth of Opportunity: Chinese Consumers and Their Shifting Demand for Financial Services," increased access to financial services will generate between $650 billion and $950 billion in consumer spending by 2025.
U.S. companies that wish to reap the opportunity need to understand five things.
- They should not try to compete head-to-head with domestic companies but rather focus on identifying clear gaps in China's financial services sector that they can fill. They cannot expect to bring in their whole portfolio of services and expect to succeed across the board.
One large American global money transfer company recognized that the intra-China transfer business is well covered by local companies. So it concentrated on moving money home from the Chinese diaspora. Another company is focusing its wealth-management services in China on high net-worth individuals, and leaving the mass market to local players. It is thriving, because China lacks HNW money management firms with the international reputations these consumers look for, so competition is relatively thin.
- Even those elements of a company's portfolio that can fill a gap must be adjusted to the market. For instance, in wealth management, unlike in Western countries, savings and investments are often co-owned by parents and their adult children or other extended family members. When considering how to design savings and investment products, companies must think not about individuals or couples, but about whole families.
- Because of the low-infrastructure environment, companies need models that allow consumers to buy products and services online and to transact easily on mobile devices. China is a clear example of "leapfrogging," in which whole phases in the development of Western commerce, such as bank branch networks and the near-universal spread of computers, is largely being skipped. A significant share of insurance policies, for example, is sold and serviced via WeChat and other online services.
- Certain businesses that might be expected to grow in a certain way will not in fact do so. For instance, while there will be growth in consumer credit, there will continue to be lower penetration of credit cards. This is because credit cards will be used for transactions, but borrowing will largely be covered by credit offered by other means, such as online retailers like Alibaba, based on a history of past online purchases through its platforms.
- Companies can grow through providing consumers with education on financial services that are new to them. There is a particularly large opportunity in insurance, because only recently have large numbers of consumers needed to protect automobiles and more expensive houses. Many can now afford health and life insurance products for the first time.
But insurance is a new service for consumers, and its benefits are not obvious. Local companies have little expertise here, because the market is so new. As a result, once again, insurance providers find that they have greater freedom to build their business based on existing expertise, and they are providing a service hard for local players to replicate.
The window for successful entry will remain open for a good while – but not as open as it is now. Chinese companies are famously nimble and know the culture. They are creating new business models and adapting technology to serve Chinese consumers. The growth of Alibaba's virtual credit business and WeChat's drive into enabling consumers' financial management are testimony to that fact.
Fortunately, international financial services companies possess expertise in consumer engagement and education superior to those of local companies today. They should press their advantage now, in the context of a full understanding of what will and will not work in this exciting and still largely-new market. China is and will continue to be the world's second-largest consumer market, and consumer spending will grow faster in China than in most other countries. The race is to the swift – as long as they understand that the course is not without obstacles.