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How China got a head start in fintech, and why the West won’t catch up

Payment apps like Alipay and WeChat transformed daily life in China. The West won’t see a similar payments revolution—and that might even be a good thing.
December 19, 2018
Eoin Ryan

In 2013 I moved from Paris to Beijing to study China’s financial system. I stayed for two years and became fluent enough to translate economics books from Mandarin into English and give talks on monetary policy in Mandarin.

But I never really felt I fit in until I visited again and Alipay finally approved me (foreigners can have a hard time getting authorized to use China’s financial super-apps). Before then, I would frantically search for an ATM for cash while my friends used their phones’ Alipay or WeChat apps—similar to Venmo—to split restaurant bills. They invested their paychecks with the click of a button to start earning interest immediately, while I had to wait in line at a bank. But last year, armed with Alipay, I used a shared bike that got me to a meeting early, paid for dinner by scanning a QR code, and then called my first ride-share via Didi—all through the app.

Ant Financial’s Alipay and Tencent’s WeChat have changed the way many people live their financial lives. They are one-stop shops that enable half a billion Chinese to access a dizzying array of services, from payments, loans, investments, and credit scores to taxi rides, travel bookings, and social media.

Because so much is sold via these apps, Alibaba and Tencent know the health (or lack thereof) of many small businesses across China. As a result, they can lend to companies that banks might consider too risky. Likewise, people with no traditional credit score can get cheap loans because Ant Financial has their payment and purchase history.

In the United States, meanwhile, people overwhelmingly pay with plastic and write out billions of paper checks every year. Facebook makes users switch between two separate apps for messaging and scrolling through friends’ feeds. Google Wallet launched in 2011, two years before Alipay’s digital wallet, but it languishes mostly unused. Apple Pay came out a year later, but it can be difficult to find retailers that accept it even in major US cities.

So with all the advantages, is the West just a few years away from gleefully adopting the Chinese model? Probably not. Here’s why.

1. China was ripe for a payments revolution because alternatives didn’t exist
In 2004, when Alipay launched as a simple payment option, Chinese finance was extremely low-tech. Clunky state-owned banks had nearly gone bankrupt from bad loans, and they cared little for average consumers. People had to travel to bank branches and wait in long lines to pay their bills; savings were eroded because the government set the interest rate on deposits below inflation; and barely anyone could get a credit card. Only 7.3% of Chinese used the internet then, compared with 65% of Americans.

So when something new came along, there were barely any legacy systems to get in the way. Fintech firms had room to grow instead of being squashed or acquired by giant incumbents.

Compare that with the US, where traditional financial firms have long provided decent options for loans, payments, and investments. Any fintech startup in the US that wants to get into payments has to go up against Visa and Mastercard, which benefit from decades of experience and ingrained consumer habits.

2. The innovations that sparked Chinese fintech were nothing new outside China
Many of China’s highly touted fintech “innovations” were in fact adaptations, combinations, or more successful uses of technology or models pioneered by others. QR codes were used in Japanese supply chains starting in 1994, escrow services were long available on eBay, and money market funds that allowed users to invest via electronic payment accounts were available on PayPal all before Alipay used QR codes for payment and launched China’s fintech frenzy with its Yu’E Bao money market fund. For all the hype about mobile payments, most Alipay and Tencent Pay transactions today actually have digital versions of old-fashioned debit cards hiding behind the QR codes. And the codes themselves can hide malware that drains people’s bank accounts.

Ant Financial and Tencent control far more and see into more of their users’ lives than any individual companies in the US do. That information could be used against you.

3. The Chinese system is a hacker’s dream and a privacy nightmare
The convenience of sharing your account data only once, with one app, not only gives the payment platforms enormous power but also makes them gigantic honeypots for hackers. We’ve seen what happens when we put excessive trust in firms to secure multiple areas of our lives—like using Facebook to log in to other websites. A similar issue with Ant Financial or Tencent would be far worse. They control far more and see into more of their users’ lives than any individual companies in the US do. That information could be used against you—for example, they could get you to pay more if they think you’d be willing to.

4. Chinese fintech got a major helping hand from the government
The Chinese government gave its tech giants far more leeway to innovate than American regulators would allow. China left the online payments market virtually unregulated for years, and the central bank governor explicitly stated that he would allow unregulated tech firms to enter spaces that were previously off limits to anyone without a financial license, giving those companies freedom to grow before any rules would be imposed.

For better or worse, US regulators took the opposite approach. They forced young fintech startups to comply with the full rulebook, though its application to their new models was not always clear. For example, PayPal had to go state by state to apply for money transmitter licenses. The US has also long kept a separation between banking and nonfinancial businesses. If Google wanted to own a bank, American regulators would force it to get out of businesses like search and advertising. This may bar American tech from ever pursuing China’s super-app model.

5. Fintech shuts out the elderly and the less tech-savvy
As I found out the hard way, if you’re a foreigner—or if you’re a tourist, or you’re from rural China, or you’re older and used to dealing with cash—you can get shut out by an app-focused economy. People are finding their cash unwelcome all over China, and they might discover that they can’t get a taxi because it’s already been hailed by someone with an app.

So while there’s lots to like about the Chinese model, especially its convenience, we might not actually want to emulate it—even if we could.

Martin Chorzempa is a research fellow at the Peterson Institute for International Economics in Washington, DC and a former visiting scholar at Peking University’s China Center for Economic Research.

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