Apps bloom in China as millions bank on their smartphones

BEIJING — You forgot your wallet and it is four flights up to your apartment in Shanghai. No worries. You’ve got your smartphone. Open Tencent Holdings’ WeChat, the Chinese Twitter on steroids, and tap China’s versions of PayPal, E*Trade, Uber, Amazon and TripAdvisor rolled into a single app. Order and pay for your taxi, then book a restaurant where you’ll split the bill electronically with a friend.

With a few minutes to spare, transfer money into the mutual fund run by e-commerce giant Alibaba Group. See a poster for a hot new movie? Snap a photo of it and let search engine Baidu find a theatre and buy you tickets for later that evening.

Financial innovation is bubbling up around the globe, but China is where digital banking, investing and lending have gone mainstream. Technology companies armed with financial apps are challenging banks and other intermediaries for a market with 1.3 billion people and US$7.8 trillion (S$11 trillion) of deposits. Tencent’s WeChat, Alibaba’s Alipay arm and Baidu are leading the way with digital wallets that let consumers manage their money via their phones.

“Financial innovation is being discussed everywhere, in New York, London, San Francisco, Hong Kong,” said Mr Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia. “But mainland China is where it has gone beyond talk and is really having an impact. What we’re seeing here is the future of global banking.”

Traditional banking in China is balky, backward, and inefficient — creating ample opportunities for nimble tech companies such as Alibaba and Baidu. The huge, state-owned banks do some lending to consumers and private businesses, but they typically prefer making loans to state-owned enterprises that provide implicit government guarantees.

For consumers, the government banks offer low interest rates on savings accounts, making new online funds and financial products with higher rates attractive.

Banking can be such a struggle in China that consumers tend to shun personal checks and instead tote wallets bulging with 100 yuan (S$22) bills, China’s biggest banknote. “The inefficiencies of Chinese state-owned banks explain the innovation coming from the private sector,” said Mr Duncan Clark, a former Morgan Stanley investment banker who founded and runs BDA China, a Beijing-based technology consulting firm.

Mr Kapron, who has lived in Shanghai for 11 years, has experienced the digital revolution first-hand. “In 2004, whenever I had to pay my rent, I would go to my bank, queue, withdraw my rent as cash, walk it across the street to my landlord’s bank, take a number and queue, and then eventually deposit the money into his account,” he said. “Today, I pay my rent using Alipay from Alibaba. I invest using WeChat from Tencent, and I bought a mutual fund from Baidu. The landscape has completely changed.”

Mr Kapron is among the 390 million people in China who have registered to use mobile banking.

That’s more than the population of the United States and 40 per cent of people worldwide who bank by phone, says consulting firm Accenture.

Chinese companies that process online payments have lured even more converts. Alipay has attracted 400 million people worldwide who actively use the payment system on their desktops and mobile devices, the company said in July. It processed US$778 billion of payments in the year that ended in June 2014.

Tencent’s QQ messaging service counts more than 815 million active users each month. Tencent said more than 100 million users have integrated their bank cards with its QQ wallet and Weixin Payment services. In contrast, PayPal, one of the first online payment systems, had 165 million users worldwide in the latest quarter. Internet-based peer-to-peer lenders, meantime, made at least US$32.5 billion in loans in China last year, almost quadruple such lending in the rest of the world, according to UK investment bank Liberum Capital.

The old-guard banks themselves say they cannot act quickly enough. Singapore’s DBS Group Holdings, South-east Asia’s largest lender by assets, is already active in China. It sees a new opportunity from the explosive growth of online banking and is building an incubator in Hong Kong to find and develop finance startups.

“An insidious consequence of the 2008-to-2009 global financial crisis is that our industry has been so preoccupied with issues of capital, liquidity, and ethical conduct that we’ve been unable to prepare adequately for the digital future,” said DBS chief executive Piyush Gupta. “This has allowed nonbank competitors to make some of the biggest inroads into financial services.”

But mobile and Internet banks have a major weakness: Clients need an account at a bricks-and-mortar lender because a human teller must verify their identity. Alibaba affiliate Zhejiang Ant Small & Micro Financial Services Group is teaming up with a startup called Megvii to work around that rule. Megvii offers facial-recognition software based on the 1.3 billion scans China’s public security bureau holds. These scans could potentially be used to identify online banking customers, Megvii says.

Regulators have indicated they are open to innovation. For one thing, digital banking leaves a trail that cash does not. And it might help the Chinese government get a clearer snapshot of economic activity. BLOOMBERG