Crossing the Digital Bridge with China’s Fintech Giants

A January 2019 Forrester Research paper signaled the impending outreach of China’s big four fintech firms – namely Baidu, Alibaba, Tencent and JD.com (BATJ) – to the world, starting off in Asia.

Stricter regulation of China’s fintech space and the already saturated retail financial services sector there is forcing the BATJ firms to shift their strategy. They believe that they can earn more revenue at higher margins by selling technology to incumbent financial institutions in China and emerging markets.

The BATJ firms are targeting Belt and Road Countries (BRC) with financial inclusion strategies. Alibaba’s Ant Financial aims to serve 2 billion customers and plans to achieve this by bringing financial inclusion to developing BRC countries. Baidu, Tencent, and JD.com are playing catch-up, but they have the financial muscle to bridge gaps fast.

Singapore’s Prime Minister Lee Hsien Loong has said that BRCs can explore four major areas of cooperation: infrastructure connectivity, financial connectivity, joint collaborations, and the offering of services to resolve cross-border commercial disputes.

“Singapore is well placed to support the [Belt and Road Initiative],” he added, citing its position as a global financial center and one of the largest offshore yuan centers in the world.  Similarly, other countries in Asia may see the BATJ ventures as a “quick fix” to speed up digital transformation.

Can't Always Replicate

Forrester’s research showed that BATJ’s global expansion strategies would be very different from the strategies that made them successful in China as these subsidiaries become true fintech vendors.

These firms are expanding their reach from retail customers to enterprise customers, including financial institutions.  Although banks are increasingly partnering with BATJ firms, they should be wary of some underlying risks, including “questionable data security, lack of synergy, and cultural conflicts”.

Meanwhile, C-level strategists around Asia should be keen to explore how their own corporations can benefit from riding the BATJ bandwagon.

Emerging trade wars are driving Chinese government policies to keep capital within the country and complicating plans for global mergers and acquisitions. So, the BATJ firms are now expanding their reach to Belt and Road emerging markets with large unbanked and underserved populations.

In Southeast Asia, the payments gap is estimated at USD 180 billion and the credit gap at USD 80 billion. BATJ could play a significant part in closing these gaps and enable financial inclusion in these regions. Yet, other than their economic prowess, do BATJ collaborations offer any guarantee of success in Asia and beyond?

Fit and Finish: Proceed with Caution

To answer this critical question, Forrester’s analyst Meng Liu offered some insights and provisos that potential BATJ partners can consider: “The BATJs’ enviable position as fintech vendors make them potential partners for banks’ and insurers’ digital transformations. Financial institutions that are in emerging markets or want to expand into those markets should put the BATJ firms’ fintech arms on their shortlist but need to be cautious in their evaluation and selection decisions.”

Firstly, while the BATJs’ demonstrated expertise in driving local financial inclusion is irresistible, Liu noted that “in some emerging markets, the BATJs’ success models would be harder to replicate since there would be stricter regulations like general data protection regulations in data sharing. Many of the customer-centric practices, as well as the highly efficient credit rating and risk management models, are based on big data analytics that use real customer data. If there are high barriers for companies to acquire customer data, it would be difficult to create the same level of advanced risk management or credit rating models with affordable costs.”

Secondly, while BATJ firms may not be a perfect fit with non-China corporate cultures and demographics for business collaborations, their disruptive technology track record makes them valuable consultants in IT infrastructure upgrades.

BATJ firms have developed practical, cost-effective financial technologies for financial cloud, high volume payment processing, and consumer data analytics that tapped the vast China population in ways that are now textbook learning for the rest of the world.

Forrester’s Liu quoted Ant Fin as an example: “It has developed an advanced microloan risk management model called 310 that achieves high efficiency and low costs, and Ant Fin has exported this model to some emerging markets like Pakistan.”

Also, in the financial cloud space, Alibaba Cloud is among the top five cloud providers in the world, and none of its global peers own more than 1 billion customers' financial behavior data as Alibaba and Ant Fin do. Such class-leading financial cloud-based solutions can be tailored to the financial services industry outside of China.

Culture Club Pains

The final consideration is the need for due diligence by potential partners to identify potential collaboration challenges.

China’s Big Four banks created strategic partnerships with BATJ firms in 2017, but none have achieved meaningful outcomes. Cultural differences, data-sharing concerns, megabanks’ conservative nature, and the huge burden of the legacy banking systems inhibited collaboration. Megabanks also no longer feel the urge to partner with BATJ firms, as they have retained large corporations like state-owned enterprises and affluent individuals as clients, generating stable revenue and hefty profits in recent years.

To take their alliances with fintechs beyond hype, financial institutions need to have indepth knowledge of who they’re working with, evaluate the economic value more cautiously, and choose a structure that matches their goals and resources.

Forrester’s analysts offer the following considerations when considering BATJ partnerships:

  1. Does the culture fit? A BATJ firm’s culture is very aggressive, fast-paced and tech-savvy. Some incumbent players may not feel comfortable working in this intense and fast-paced environment with BATJ. 
  2. Are you comfortable sharing some customer data with BATJ? BATJ can provide some cost-effective and practical fintech solutions but there is no free lunch in the world. Firms should be open to sharing customers or customers' data with BATJ if the partnership can have any hope of successful outcomes. 
  3. Is management clear about what results you want to achieve? If you just want to make a headline and enhance your global presence, go ahead and partner with BATJ firms. But if you do want to solve your business/technology issues, please note that it won't be a short-term project. You need to do solid due diligence regarding the costs, benefits, regulatory risks, and synergies before you sign a strategic partnership with BATJ. 

Regardless of your approach, Liu reiterated “There is no fixed model or formula for companies to follow when partnering with BATJ firms. The assessment steps can change from time to time depending on your company structure, culture, geographic presence, overall strategy and so on. Keeping an eye on three culture-fit points (above) in advance would be beneficial for achieving a good finish and outcome.”