The future of EU companies in the Chinese fintech environment

As the fintech adoption rate has soared to 68 per cent in China, its development has brought worldwide attention in search of how to develop and adopt similar technology. EY Tax with Dr Zhong Lin, partner, EY Chen & Co Law Firm and Galaad Delval, researcher, EY Chen & Co Law Firm, a member firm of Ernst & Young Global Limited, present the current state of fintech in China and what opportunities are open to European Union companies.

Referred to as fintech, the various technologies applied to financial services have deeply impacted the Chinese economy in recent years. With a soaring 252 per cent increase in fintech investment between 2010 and June 2016, the sustained development of those technologies, combined with a soaring adoption rate of 68 per cent among consumers, has led fintech to gain even further traction in the consumer marketplace.[1] The widespread adoption of this technology can be seen in its rapidly growing ecosystem which has come to encompass what are considered ‘traditional companies’.

With fintech increasingly becoming an integral part of the Chinese economy, the question of its current status and what that implies for European Union (EU) companies has become critical. Recognised and accepted by both consumers and companies, fintech is resulting in a unique opportunity for EU companies, which are willing to enter the fintech market to increase their presence.

The widespread acceptance of fintech under the ‘practicability’ umbrella
The current status of fintech in China is marked by continued widespread adoption by consumers and with steady growth in the fintech ecosystem.

With an ever increasing ecosystem, fintech has now become a common component in various industries that are only tangentially linked to the world of finance. Customers are now able to use a one-stop application for a multitude of different services. It is now rare to have companies that have not integrated fintech into their operations for the purpose of receiving or managing payments. This cycle of dependency is rooted in the concept of ‘practicability’, where the way a service or payment functions is rooted in fintech. For the user, it is extremely simple to use mobile payment, either by scanning or having their QR code scanned. It is similarly useful for the company to be a part of a consumer’s mobile transaction by having their own mobile payment account, a process much simpler than the traditional opening of a bank account.

What to expect from the regulatory angle?
While the fintech market has mostly remained outside the scope of regulatory reform, a marked shift has taken place within this year. While the 2017 Cybersecurity Law of the People’s Republic of China (Cybersecurity Law), adopted on 7^th November 2016, is meant to be a law that broadly applies to areas of cybersecurity and data protection, and due to this its effects on fintech cannot be underestimated. With the Cybersecurity Law, as general law, strengthening data protection and cybersecurity requirements for all companies operating in China, this will naturally have an impact on the fintech market and all businesses that utilise this technology.

There are several other key developments that have taken place since then, one of which includes the Circular of the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission and the Standardisation Administration of China on Issuing the Development Plan for Building the Standardisation System for the Finance Sector [2016–2020] (adopted on 8^th June 2017). This circular in the fourth chapter, third section, calls for standardising and further regulating the fintech industry. Further regulations will take the form of national standards, laws and policy guidance.

These developments hint at regulations being tightened with regards to the fintech industry; this includes the government and various other governmental bodies, employing both direct and indirect means of regulation. These regulations could take the form of new national or industrial standards and even more direct policy proposals that govern the use of fintech in areas like bike-sharing, banking, or its use on mobile devices.

What does this mean for EU companies?
The adoption of fintech by customers, as well as the recent focus on enacting new regulations, shows not only a market that is already well developed, but also one that has room to grow.

As major internet companies are leading the fintech development in China, numerous start-ups have emerged with the purpose of disrupting the current marketplace or inventing an innovative new product. EU companies could integrate into the Chinese fintech market by leveraging unique and innovative domestic products to help with the adoption and development of fintech in China. Some of these products could help to fill in the as-yet-unknown gaps currently present in the Chinese fintech sector. At the same time, European Union businesses could help introduce a pro-privacy stance that is currently under-represented in Chinese fintech.

It is unlikely that EU small to medium-sized enterprises can break into the mobile fintech market, as competition remains fierce among domestic participants that are already far ahead in payment technologies like blockchain and the use of artificial intelligence.

Despite these limitations, there is a unique opportunity for EU companies to successfully tap into the current fintech market. Now is the key time with the coming implementation, in 2020, of the new National Social Credit System, a policy which further entrenches fintech into the lives of Chinese citizens.

[1] The Rise of FinTech in China, a collaborative report by DBS and EY, DBS and EY, 2016.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.