Big banks on notice that they’re losing ground to China’s fintech giants

Josh Ye
Key Points
  • Banking world stands up and notices Chinese firms strength in mobile payments
  • Non-bank firms like Alipay show greater capacity in transaction volumes
  • Impact on retail banking operations a key factor for fintech development
Mobile payment platforms Apple Pay and Alipay are displayed for a photograph in Hong Kong, China, on November 1, 2016.
Anthony Kwan | Bloomberg | Getty Images

The giants of the banking world are starting to publicly acknowledge the dominance of mobile payment methods devised by Chinese technology firms – and, more broadly, a failure to keep up with fintech rivals in certain areas.

Speaking before a crowd of hundreds at the Rise Conference in Hong Kong last month, Jing Ulrich, vice chairman Asia Pacific at JPMorgan Chase, heaped praise on the two Chinese online payment juggernauts, Alibaba Group's Alipay and Tencent's Tenpay.

"JPMorgan every year, as we speak, processes through our QuickPay 94 million payments," she said, "But Tencent, the Chinese company, over Chinese New Year, in five days processed 46 billion payments. Basically that means 800 million payments per hour.

"Visa has a maximum capacity of processing 25,000 payments per second. But Alipay can process 50,000 payments, twice as much, per second."

The fintech duopoly in China
The fintech duopoly in China

The rise of online payments through non-bank services, exemplified by Alipay and WeChat Pay – which falls under the Tenpay umbrella – in China, has caused another banking giant, Goldman Sachs, to stand up and take notice too.

The firm recently published a report, led by Mancy Sun, which reveals the value of third-party payments in China grew more than 74 times from 2010 to 2016, from US$155 billion to a staggering US$11.4 trillion.

Of that total, 56 per cent took the form of peer-to-peer transfers while about 16 per cent was consumption-related. Furthermore, payments made via third-party payment companies comprised 40 per cent of all retail sales, a figure that is still growing.

The user base in China of these applications is also mind-boggling. Goldman Sachs' report showed that there were 3.4 billion third-party payment accounts in China last year.

As of December, Tenpay managed around 600 million payment accounts. By March this year, Alipay had reached 520 million payment accounts. Both numbers dwarf the 197 million users Paypal has globally.

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The emergence of new electronic payment methods is undoubtedly reshaping consumer behaviour.

Li Yong, 23, a resident of Guangzhou, Guangdong, rarely carries cash with her nowadays. When it comes to commuting, she said major metro stations all feature machines which allow riders to top up their metrocards or purchase tickets with either Alipay or Tenpay. Or she can make use of dockless shared bikes if she does not want to take the metro.

"I only carry my wallet when I have to board a plane or a train because I need to show my IDs on those occasions," she said.

Li believes mobile online payment now accounts for the majority of urbanites' daily expenses, more than spending with credit cards and cash combined.

"There are QR codes for Alipay or Tenpay for expenses as small as one-yuan soymilk or a five-yuan chow-fun in a street-side breakfast place," she said. "You can find QR codes at snack stands, street vendors or places like H&M."

The growth rate of the online payment sector is showing no signs of abating. According to Chinese central bank data, online payments through non-bank services expanded 60 per cent in the first quarter to 47 billion transactions valued at 26.47 trillion yuan (US$3.9 trillion), 43 per cent more than last year.

And it's not just online payments where the traditional banks are being left behind. They're also losing ground to mobile trading platforms.

The second quarter of this year was a tough one for the trading desks of big Wall Street banks.

Is China's fintech boom sustainable?
Is China's fintech boom sustainable?

Goldman Sachs' trading revenue fell 17 per cent, while at Citigroup, it was down 7 per cent. JPMorgan's revenue fell somewhere in between, declining 14 per cent to US$4.8 billion.

"The retail banking market has gone through big changes in the way people interact with machines and computers, but the wholesale market has not," said David Hudson, JPMorgan's global head of markets execution.

He said traditional banks had failed to ride the first wave when mobile banking started to gain traction.

"Wholesale banking has probably missed the ways consumer banking has gone through the year," he said, "My two-year-old can use an iPhone. But it's quite difficult to use complex products from banks."

Ulrich said it is imperative for traditional banks to start evolving.

"In the next three to five years, the line between traditional banks and fintech companies will become blurred. Traditional banks have to, in some ways, become fintech companies themselves.

"Otherwise we will be left with no business."