[vc_row full_height="yes" equal_height="yes" content_placement="middle" text_align="center" type="image" bg_position_horizontal="center" enable_parallax="false" parallax_speed="0.4" padding_top="110" padding_bottom="0" bg_image="11949"][vc_column][kleo_gap size="100px"][vc_row_inner][vc_column_inner][vc_custom_heading text="A TRYST WITH THE CHINESE DIGITAL FINANCE ECOSYSTEM" font_container="tag:h2|font_size:48px|text_align:center|color:%23ffffff|line_height:54px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" letter_spacing=""][vc_column_text text_color="#ffffff" font_size="18px" letter_spacing="" el_class="lh24"]
<p class="lh30" style="text-align: center;">By Badal Malick, Catalyst, New Delhi</p>
[/vc_column_text][/vc_column_inner][/vc_row_inner][kleo_gap size="130px"][/vc_column][/vc_row][vc_row equal_height="yes" content_placement="middle" type="color" bg_color="#ffffff" padding_top="10" padding_bottom="0"][vc_column width="1/2"][/vc_column][vc_column width="1/2"][vc_row_inner equal_height="yes" content_placement="middle"][vc_column_inner width="5/12" css=".vc_custom_1504265033147{padding-right: 0px !important;}"][/vc_column_inner][vc_column_inner width="1/3" css=".vc_custom_1504265063058{padding-left: 0px !important;}"][vc_column_text letter_spacing=""][addtoany][/vc_column_text][/vc_column_inner][vc_column_inner width="1/4" css=".vc_custom_1504265782417{padding-right: 0px !important;padding-left: 0px !important;}"][kleo_button title="Print this page" href="http://cashlesscatalyst.org/wp-content/uploads/2018/02/Chinese-digital-finance-ecosystem-doc.pdf" target="_blank" style="custom" position="left" size="lg" special="no" border="no" icon="print" font_size="16px" letter_spacing="" el_class="grey-icon" custom_text="#d11e3c"][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type="image" padding_bottom="10" bg_image="7841"][vc_column][vc_row_inner equal_height="yes"][vc_column_inner width="1/2"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]In December, I had the privilege of spending 5 days in Shenzhen and Beijing to immerse myself in the stupendous Chinese digital financial inclusion story, and draw some insightful parallels with the Indian experience.

The context of the trip was an invitation to present our work at a financial inclusion workshop organized by the World Savings and Banking Institute (WSBI) and China Postal Savings Bank in Beijing.

The event saw participation from banks, MFIs and grassroots organizations across several Asian and African countries. I happened to be the only representative from India.

During my trip, I also had the opportunity to visit TenCent’s operations in Shenzhen as well as the Chinese Academy for Financial Inclusion (CAFI) at Renmin University and China Postal Savings Bank in Beijing.

I was deeply struck by the divergent financial inclusion trajectories (and resultant outcomes) of our two neighboring countries, which really got me thinking about the underlying factors responsible for this chasm, and particularly how we in India can potentially learn from the Chinese experience.[/vc_column_text][vc_custom_heading text="VISIT TO CHINA POSTAL SAVINGS BANK R&amp;D CENTER" font_container="tag:h2|font_size:20px|text_align:left|color:%2337373a|line_height:26px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][vc_single_image image="11950" img_size="full" alignment="center" animation="animate-when-almost-visible" css_animation="el-fade"][/vc_column_inner][vc_column_inner width="1/2"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]A few upfront, context-setting statistics are notable:

<strong>Bank account penetration:</strong> While both countries have seen widespread account creation amongst the poor, China is much better positioned in terms of actual usage of these accounts. According to the latest available FINDEX survey, 43% of new accounts lie dormant in India versus 8% in China. In fact, 52% of accounts in China are deemed “high use” - defined by at least 3 withdrawals per month or by a direct payment or savings deposit over the previous 12 months. Bank account creation in China has also significantly benefited the poor, the rural and women - which represent most of their 180 million strong “newly banked” segment.

<strong>Mobile ownership:</strong> According to a 2016 Pew Research Center survey, 71% of Chinese reported having used the Internet or owning a smartphone, compared to one-fifth of Indians. Reported smartphone ownership itself is 68% compared to 18%. Overall mobile ownership is almost universal in China compared to 72% in India. More interestingly, these trends hold even among favorable demographic segments.  Comparative China vs. India smartphone penetration rates were 94% vs. 29% for ages 18-34, 89% vs. 38% for those having at least secondary education, and 87% vs. 24% for above median income levels. Almost 1 in 5 Chinese adults make payments from their bank accounts using mobile phones.

The above infrastructural disparities along with regulatory, as well as behavioral or cultural co-factors appear to be responsible for significantly different digital payment usage rates across countries. In 2015, China ranked third globally with 38.1 billion digital payment transactions. India clocked 4.5 billion. According to a recent CapGemini World Payments Report, 2016-2020 CAGR in digital payments growth is expected to be 36% for China and 25% for India.1 To the extent that broader access to digital finance rests upon a foundation of digital payments, the consequences are evident.

In this context, I see four broad lessons we can learn from China that should serve us well in building an inclusive digital finance ecosystem.
[/vc_column_text][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22" css=".vc_custom_1518599324056{margin-top: 70px !important;}"]<em style="font-weight: 300; font-size: 14px; line-height: 20px; text-align: right;"><sup>*</sup> 1. <a href="https://www.capgemini.com/service/world-payments-report-2017-from-capgemini-and-bnp-paribas/" target="_blank" rel="noopener noreferrer">https://www.capgemini.com/service/world-payments-report-2017-from-capgemini-and-bnp-paribas/</a></em>[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner content_placement="middle" css=".vc_custom_1518592917858{padding-top: 30px !important;padding-bottom: 30px !important;background-color: rgba(0,0,0,0.01) !important;*background-color: rgb(0,0,0) !important;}"][vc_column_inner][vc_separator color="custom" accent_color="#626262"][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type="image" padding_top="0" padding_bottom="10" bg_image="7841"][vc_column][vc_row_inner][vc_column_inner][vc_custom_heading text="#1 A MORE PRAGMATIC AND INNOVATION FRIENDLY REGULATORY APPROACH" font_container="tag:h2|font_size:26px|text_align:center|color:%23d11e3c|line_height:32px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][kleo_gap][/vc_column_inner][/vc_row_inner][vc_row_inner equal_height="yes"][vc_column_inner width="1/2"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]The Chinese financial inclusion policy framework is broad, all-encompassing and flexible. It targets universal goals of extending coverage, availability, user satisfaction, and perceived gain for underserved groups including small and micro enterprises, farmers, urban poor, disabled, elderly and other special groups. It promotes affordable, convenient and safe use of financial products amongst the poor.

It also articulates the role for a variety of organizations – traditional financial institutions like banks, fin-techs, insurance companies, as well as decentralized and specialized institutions like rural cooperatives, financial leasing companies, wholesale financiers and credit guarantors.

Similarly, it defines the scope of what constitutes financial inclusion quite extensively, including micro-lending, online lending and borrowing, capital markets financing, insurance, e-payments, e-commerce, and crowd financing. It also provisions for the need for digital and existing brick &amp; mortar distribution channels to complement one another.

On the legal and regulatory side, it underscores the need to define norms, rights and obligations in service provision, systematic monitoring and evaluation, differential incentives, tax/ fiscal, as well as monetary credit policies, and digital financial literacy.[/vc_column_text][/vc_column_inner][vc_column_inner width="1/2"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]Importantly, this flexible and non-interventionist framework allows for innovation to flourish across the financial services spectrum. This has greatly encouraged fin-tech innovation and enabled the private sector to develop sustainable business models without needing to worry too much about regulatory risk. Instead, the regulator has leveraged central and local monitoring agencies to track outcomes, manage risk, and only after achieving certain innovation thresholds have they retrofitted regulations where needed, as seen most notably perhaps in the micro-credit and payday lending sectors. Following predatory lending practices with APRs skyrocketing as high as 500%, the regulator capped interest rates charged by service providers (to 36%) for them to be able to avail regulatory safeguards. It’s of course another matter that this created widespread moral hazard that led a vast majority of providers to shut shop.

India, which has adopted a far more prescriptive regulatory framework till date, could possibly benefit from a regulatory approach that tones and times its interventions in a way not to foreclose technology and business model innovation. India is poised to see future growth in areas like digital payments and digital micro-credit, where it could greatly benefit from the Chinese experience in regulating and legislating these domains. China’s central-to-local regulatory infrastructure is also something India can borrow given the similar need to balance innovation and customer protection under scale and complexity.[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner content_placement="middle" css=".vc_custom_1518592917858{padding-top: 30px !important;padding-bottom: 30px !important;background-color: rgba(0,0,0,0.01) !important;*background-color: rgb(0,0,0) !important;}"][vc_column_inner][vc_separator color="custom" accent_color="#626262"][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type="image" padding_top="0" padding_bottom="10" bg_image="7841"][vc_column][vc_row_inner][vc_column_inner][vc_custom_heading text="#2 RAPID INNOVATION CYCLES ACROSS PROVIDERS OF FINANCE" font_container="tag:h2|font_size:26px|text_align:center|color:%23d11e3c|line_height:32px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][kleo_gap][/vc_column_inner][/vc_row_inner][vc_row_inner equal_height="yes"][vc_column_inner width="1/2"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]The dizzying pace of innovation in China’s financial sector is clear to any lay person by a cursory look at their local newspapers. At the apex of digital finance innovation are two multi-licensed fin-tech giants – Ant Financial and TenCent – who have built massive digital payment ecosystems at break-neck speed on top of their respective e-commerce and social networking platforms, and are now rapidly increasing their footprint across lending, banking, wealth management, and micro-insurance. At over $210B in assets under management and across 370 million investors, Ant Financial’s Yu’e Bao has converted its customer account balances into the largest money market fund in the world, prompting its customers to transfer even more money to its platform. Ant, TenCent and Ping An have teamed up to establish ZhongAn, a company that uses artificial intelligence and big data to reimagine how to design, price, and distribute online-only insurance products (e.g., shipment returns, flight delay, cracked screen policies), and has already in three years sold 5.8 billion policies to 460 million customers.

It may be because and not despite the emergence of these two fintech giants and the lure of exits they can provide that the smaller scale fin-tech ecosystem has boomed although it’s far from clear if their dominance is good for local innovation. In 2016, investment in mainland Chinese and Hong Kong fintech ventures totaled $10.2 billion, exceeding North America. A web of JVs, aggressive acquisitions and strategic partnerships have also emerged to create innovative hybrid propositions at scale. Within three years of operations, WeBank, a TenCent JV with two other financial concerns, is serving about 50 million customers with an internet only product suite including micro-loans, wealth management and depository services by leveraging the 900 million strong WeChat online distribution platform.

It further uses its distribution channel and technology capabilities to partner with other banks with larger balance sheets and gain a business model advantage. The platform now offers sub-$10, 3-minute loans disbursed at APRs as low as 7% (compared to 22% offered by most credit card companies) and with flexible pre-payment terms.[/vc_column_text][/vc_column_inner][vc_column_inner width="1/2"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]Fast-paced and tangible innovation however also extends to a broader list of more traditional financial institutions, which have embraced and aggressively invested in new technologies like cloud computing, big data, AI and blockchain, while continuing to leverage their traditional assets such as strategic partnerships, brick &amp; mortar presence, product breadth, and access to large/ deep customer insights. Many major banks and insurance companies have pledged at least 1% of annual pretax profit into development of fin-tech and online initiatives.

China Postal Bank, a first tier bank with retail operations spanning over 500 million customers, 1 billion accounts, and 40,000 branches, has an impressive record of integrated technology into their back-end and front-end systems. PSBC spends $300 million annually on its IT backbone transformation, and has deployed 130+ IT systems across all businesses in the last ten years to support its current scale of 100-150 million transactions per day.

It has invested in open, distributed architecture, which enables lower cost, continuous improvements, and has already migrated 60% of transactions to the cloud. PSBC has successfully used blockchain technologies to eliminate repeat verifications and cut sourcing time, and reduce transaction time through smart contracts, shared ledgers, and faster consensus with other partner institutions.

The use of AI has helped PSBC automate its customer support, introduce robo-advisory in its wealth management businesses, speeden its audit and authorizations, and enable smart, self-service interfaces using facial, voice and biometric recognition technologies. Branch operations also increasingly cater to young millennial segments by offering a more fun, engaging banking experience through the use of interactive digital technologies along with broader value propositions such as online grocery shopping &amp; pickup service to drive more user affinity, trust, and comfort with digital technology.[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type="image" padding_top="10" padding_bottom="10" bg_image="7841"][vc_column][vc_row_inner equal_height="yes"][vc_column_inner width="1/2"][vc_custom_heading text="A CHINA POSTAL SAVINGS BANK BRANCH" font_container="tag:h2|font_size:20px|text_align:left|color:%2337373a|line_height:26px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][vc_single_image image="11956" img_size="full" alignment="center" animation="animate-when-almost-visible" css_animation="el-fade"][/vc_column_inner][vc_column_inner width="1/2"][vc_custom_heading text="CHINESE BANKING CUSTOMERS USING FINTECH SERVICES" font_container="tag:h2|font_size:20px|text_align:left|color:%2337373a|line_height:26px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][vc_single_image image="11957" img_size="full" alignment="center" animation="animate-when-almost-visible" css_animation="el-fade"][/vc_column_inner][/vc_row_inner][vc_row_inner][vc_column_inner][kleo_gap size="20px"][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]It’s important to note that the nature of fintech innovation in China has been local and context-specific, which has paid rich dividends in the form of massive user uptake – the rapid transformation of small ticket cash transactions to QR code in urban China being a prime example. The scale of digital transactions has only buttressed sustainable business models and a diversification of digital financial offerings. China has become a global leader in peer-to-peer lending accounting for 3% of retail lending versus just 0.7% in the US. According to a recent DBS study, 35% of Chinese customers use insure-tech versus just 2% in India.

A recent E&amp;Y consumer study cited “more attractive rates and fees, better online experience and functionality, better quality of service and more innovative products” as top reasons why consumers were flocking to non-traditional banking &amp; finance services.[/vc_column_text][/vc_column_inner][/vc_row_inner][vc_row_inner content_placement="middle" css=".vc_custom_1518592917858{padding-top: 30px !important;padding-bottom: 30px !important;background-color: rgba(0,0,0,0.01) !important;*background-color: rgb(0,0,0) !important;}"][vc_column_inner][vc_separator color="custom" accent_color="#626262"][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type="image" padding_top="0" padding_bottom="10" bg_image="7841"][vc_column][vc_row_inner equal_height="yes"][vc_column_inner width="1/2"][vc_custom_heading text="#3 FOCUS ON THE RIGHT ``HOOKS AND LADDERS``" font_container="tag:h3|font_size:24px|text_align:left|color:%23d11e3c|line_height:30px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]The economies of scale and scope attained by e-commerce and social networking platforms have provided thrust to the burgeoning digital finance ecosystem in China. Its $675 billion ecommerce sector touching close to a third of the population is impetus for widespread growth of digital payments as a natural concomitant, and has turned players like JD Finance and AliPay into financial supermarkets.

Tencent, on the other hand, has created consumer-oriented conversational commerce on top of a mobile-led social media platform, starting with mobile wallet payments and subsequently QR-code. Here it is critical to understand that WeChat and AliBaba users find enormous value in not having to leave these ecosystems to address their diverse financial needs. Being able to access a ‘one-stop-shop’ financial hub that provides a lower cost, engaging experience is what probably successfully changed end user behavior, especially from cash to digital payments, in a very short time.

These broader initial value propositions are often context specific. India has not restricted foreign Internet companies or fostered such domestic behemoths. It has perhaps prudently pursued a far more laissez-faire policy and also built public infrastructure that creates a far more even playing field for innovation. But its ‘digital payments first’ strategy needs to be rethought.

Finding hooks that serve as more immediate sources of value be it access to affordable credit or streamlining new tax compliance requirements is required, as is creatively linking these to digital payments to drive more traction on the ground. Strategies need to be developed to enable Indian fin-techs to access these larger ecosystems through open developer platforms or strategic partnerships so that Indian users are best served through context appropriate products. This ‘demand side thinking’ needs to be instilled in supply side programs to digitize the nation.[/vc_column_text][/vc_column_inner][vc_column_inner width="1/2"][vc_custom_heading text="#4 MARKET CREATION AND EXPANSION IN SOURCES OF FUNDING" font_container="tag:h3|font_size:24px|text_align:left|color:%23d11e3c|line_height:30px" google_fonts="font_family:Roboto%20Condensed%3A300%2C300italic%2Cregular%2Citalic%2C700%2C700italic|font_style:700%20bold%20regular%3A700%3Anormal" css_animation="fadeIn" letter_spacing=""][vc_column_text text_color="#383b3b" font_size="16px" letter_spacing="" el_class="ptext-justify lh22"]Finally, the Indian fin-tech ecosystem needs the right signals and incentives for entrepreneurs to build the right products and – perhaps more importantly – for them to see light of day. In the absence of acquisition-hungry frontrunners, more established financial institutions – including ban ks, insurers, asset managers – should be encouraged to energize the innovation ecosystem at scale, although this is probably unlikely in today’s conservative environment, especially given stressed bank assets.

The Indian Government has done a good job in creating a base level of public good infrastructure – especially for authentication (Aadhaar), data governance (DigiLocker, Consent-based architecture), and payments (UPI, AEPS) – which is now collectively known as “India Stack”. India Stack probably ensures a more sustainable market development path by removing a ‘winner takes all’ scenario, but it does not necessarily address the need for rapid scaling to build deep value and change large system behavior. To do this, there may be room for more strategic government intervention in the form of supporting highly targeted, specialized incubation efforts and ‘middle-of-road’ venture funding (i.e., series A-C), which is currently broken in India today.[/vc_column_text][/vc_column_inner][/vc_row_inner][kleo_gap size="40px"][/vc_column][/vc_row][vc_row equal_height="yes" content_placement="middle" type="color" bg_color="#ffffff" padding_top="10px" padding_bottom="10px"][vc_column width="1/2"][/vc_column][vc_column width="1/2"][vc_row_inner equal_height="yes" content_placement="middle"][vc_column_inner width="5/12"][/vc_column_inner][vc_column_inner width="1/3" css=".vc_custom_1504265268713{padding-left: 0px !important;}"][vc_column_text letter_spacing=""][addtoany][/vc_column_text][/vc_column_inner][vc_column_inner width="1/4" css=".vc_custom_1504265795099{padding-right: 0px !important;padding-left: 0px !important;}"][kleo_button title="Print this page" href="http://cashlesscatalyst.org/wp-content/uploads/2018/02/Chinese-digital-finance-ecosystem-doc.pdf" target="_blank" style="custom" position="left" size="lg" special="no" border="no" icon="print" font_size="16px" letter_spacing="" el_class="grey-icon" custom_text="#d11e3c"][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row content_placement="middle" type="color" bg_color="#ffffff" padding_top="5" padding_bottom="5"][vc_column][vc_row_inner][vc_column_inner][vc_column_text letter_spacing=""][starbox id=9][/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row el_id="footer_area" disable_element="yes" front_status="draft" text_align="center" type="image" bg_position_horizontal="center" enable_parallax="false" column_gap="no" padding_top="70px" padding_bottom="50px" margin_top="0px" bg_image="9937"][vc_column width="1/4"][/vc_column][vc_column width="1/2" offset="vc_col-lg-offset-0 vc_col-md-offset-0 vc_col-sm-offset-0"][vc_single_image image="7888" img_size="full" alignment="center"][vc_column_text text_color="#ffffff" font_size="14px" letter_spacing="" css=".vc_custom_1484826151396{margin-top: 35px !important;margin-bottom: 5px !important;padding-right: 20px !important;}"]
<p style="text-align: center;">CATALYST is an initiative seeded by an alliance between the Government of India &amp; USAID, to expand digital payments and financial inclusion in India, especially for small merchants and low-income consumers.</p>
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