The Rise of Chinese Fintech: Lessons for the United States / Asset - - PowerPoint PPT Presentation

The Rise of Chinese Fintech: Lessons for the United States

Richman Center for Business, Law & Public Policy Columbia Business School & Columbia Law School February 25, 2019

/ Asset Management

John Mahoney Managing Director Co-Chairman, Financial Institutions Group Goldman, Sachs & Co.

1

China in Context

Source: Euromonitor Note: As of 2017

Cambodia China Hong Kong India Indonesia Japan Thailand Philippines South Korea Taiwan Vietnam Australia New Zealand Malaysia Singapore

Developed Emerging China Population (mm)

1,383 1,307 264 127 105 96 69 51 32 25 24 16 7 6 5 China India Indonesia Japan Philippines Vietnam Thailand South Korea Malaysia Australia Taiwan Cambodia Hong Kong Singapore New Zealand

APAC

Population 4.1 bn 1.4 bn 0.3 bn GDP per Capita $6.3K $8.7K $59.8K Number of Smartphones 2.2 bn 940 mm 248 mm

2

Cambodia China Hong Kong India Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam U.S. Australia New Zealand

1 2 3 4 5 6 7 8 9 10,000 20,000 30,000 40,000 50,000 60,000 70,000

GDP Growth (%) GDP per Capita (USD)

Disparate State of Development

Source: Euromonitor Note: As of 2017

Developed Emerging =US$2tn GDP China China GDP in 2035: US$40tn U.S. GDP in 2035: US$38tn

10 20 30 40 50 2017 2027

GDP (US$ tn)

China US 2017 2027 2035 … 110,000

3

China Hong Kong Japan South Korea Taiwan Singapore U.S. Australia Thailand Malaysia Philippines Indonesia Vietnam India (50)% 0% 50% 100% 150% 200% 250% 300% 0% 20% 40% 60% 80% 100% 120% 140% 160% Credit Card Penetration (%) Smartphone Penetration (%)

Opportunity for Technology Driven Financial Services

Source: Euromonitor, WCIS Note: As of 2017

= 100 mm population Developed Emerging China Mobile / Digital Models Attack Under-Served Markets

4

Major Demographic Shifts

Source: CIRC, Wind, Swiss Re

Rise of the Middle Class Urbanization From Manufacturing Towards Consumption

48.3% 57.3% 60.5% 2010 2017 2020 Urban Population (%) 6.1 12.1 15.4 2010 2017 2020 Disposable Income per Household (USD k) 44.1% 51.6% 2010 2017

Tertiary Industry as % of Total GDP (%)

5

China’s Strengths and Challenges

Source: Euromonitor, BIS, Bloomberg, Wind

Key Strengths Major Challenges  Large market ? Slowing growth ? Aging population  Growing well in excess of global average ? Severe environmental issues  Increasing personal wealth; emerging middle class ? Uneven wealth distribution  Transformation — From low-end manufacturing and export oriented industries... — ...To New Economy and consumption ? Significant increase in leverage; particularly in large corporate segment ? Capital flows and RMB depreciation a point of focus

GDP Debt / GDP RMB / USD Exchange Rate Foreign Exchange Reserves GDP Growth GDP per Capita Balancing reform and de-risking with growth and stability

(US$ tn) (US$ 000) (%) (US$ tn) (%)

U.S. Global Average China

10.6 6.9 2.3 3.7 10 17 17 17 4.6 8.9 59.5 10.7 10 17 17 17 6.1 12.2 19.4 10 17 17 181.6 256.8 250.9 244.4 10 17 17 17 6.9 6.8 6.8 6.5 6.36.26.16.2 6.6 6.8 6.6

08 09 10 11 12 13 14 15 16 17 18

2.8 4.0 3.0 3.1 Dec- 10 Aug- 14 Dec- 16 Dec- 18

6

China Prominent Among Global Financial Institutions

Source: Capital IQ Note: Market data as of Jan 18, 2019

Market Cap of the World’s 25 Largest Listed Financial Institutions

Canada US China Europe Australia India Brazil 503 348 283 278 229 213 183 169 164 149 148 107 107 101 100 93 90 89 84 85 81 81 80 77 74 Berkshire Hathaway JPM BOA ICBC Wells Fargo CCB ABC HSBC Ping An Citigroup BOC RBC AIA CMB TD Bank CBA Itaú Allianz China Life American Express HDFC Bank U.S. Bancorp Banco Santander GS MS

7 96 84 64 58 57 CITIC Haitong Guotai Junan Huatai GFS 8% 7% 5% 5% 5% 80 58 30 27 18 China Life Ping An Life Anbang Life CPIC Life Taikang 20% 14% 7% 7% 4%

196 94 92 88 81

99% 56% 78% 76% 49% Tianhong E-Fund CCB Principal ICBC-CS Bosera 10% 5% 5% 5% 4%

Traditional Financial Services Sectors are Concentrated with High Degree of State Influence

Banking – Top 5 by Assets Securities – Top 5 by Assets Insurance – Top 5 by GWP Investment Management – Top 5 by AUM

Source: Wind, CBIRC Note: CNY / USD = 6.85. Banking data as of Jun 30, 2018. Insurance GWP and market share based on life insurance, as of 2017. Securities data as of Jun 30, 2018. Investment management data as of Dec 31, 2018.

(US$ bn) JPM Total Assets: 2,590 MetLife GWP: 40 BlackRock AUM: 5,976 GS Total Assets: 969 SOE Non-SOE Market share Top company in U.S. Money market funds Personal consumer loan (excl. mortgages) (US$ bn) (US$ bn) (US$ bn) 3,986 3,329 3,200 2,963 1,361 ICBC CCB ABC BOC PSBC 14% 12% 11% 10% 5% $33 $28 $23 $57 $40

8

Regulatory Reforms Aimed at De-risking and Opening Up the Financial Services Industry

De-risking Opening Up

 Formation of Financial Stability Committee under control of the State Council and Merger of CBRC and CIRC to CBIRC  Various measures to reduce systemic risk — Reigning in shadow banking — Corporate deleveraging  Tightening capital requirements for financial institutions and encouraging broader range

• f capital instruments

 Allow for broader foreign participation across financial services — Securities, Insurance and Fund Management: foreign ownership limit increased to 51%, and removed entirely in 2021 — Banking: foreign ownership limit removed  Emphasized by China leadership

9

China’s Fintech Landscape

Fundamentals Focus Sectors Players

Payments Credit / Lending Wealth Management Insurance Digital Banking Vertical Search SaaS Health Tech

Major Demographic Shifts Large Unpenetrated Population Smartphone Penetration Start-Ups Incumbents Internet Giants

10 5% 7% China US 23% 8% China US

Large Unpenetrated Population

Credit, Payments, Insurance, Wealth Management

Source: Passport, Swiss Re Institute, Worldpay, WCIS

Premiums as a % of GDP in 2017 2012-2017 Cash deposits (savings) as % of GDP

Credit: Lending Penetration in China Insurance: Penetration as a % of GDP Wealth Management: Savings Rate U.S.

Prime Sub-prime Near- prime ~42% ~5-7% loss rate ~33% ~25% (Super) Prime Lower & Sub-prime Prime & Near-prime ~25% PBoC Data Base / Credit Card Holders ~1.5% loss rate Data / Credit Experience Available for “Super Prime” Population Only Significant “Prime” / “Near Prime” Market Opportunity ~500 mm population

Payments: China 3rd Party TPV

$204 $555 $2,161 $1,571 $1,882 $2,264 2013 2015 2017 China Independent 3rd Party TPV US Personal Credit Card TPV

US$ bn

11 0% 1% 2% 3% 4% 5%

70% 79% China US

Power of Technology

Significant Smartphone / E-commerce Penetration

Source: Passport

Smartphone Penetration E-Commerce Growth

As of 2017 E-Commerce as % of Nominal GDP

12 $161 $511 2017 2022E

Balance of Power Opportunity Internet Giants Incumbents Start-Ups Commentary Payments

Mobile / Online Offline Limited Highly concentrated between Ant and Tencent

Credit / Lending

Enablement / Distribution Super Prime Prime / Near-Prime Significant start-up activity

Wealth Management / Asset Management

Enablement / Distribution Manufacturing / Distribution Manufacturing / Distribution Market developing

Insurance

Distribution Manufacturing Varied Incumbents well- positioned

$2.2 $8.3 2017 2021E $0.5 $2.1 2017 2022E $37 $174 2015 2020E

Who Are Beneficiaries of the Fintech Opportunities?

Independent 3rd Party Payments, US$ tn Loan Balance of Online Consumer Finance, US$ bn AUM of Online Wealth Management, US$ tn Insuretech – GWP, US$ bn

Source: Oliver Wyman, GS Research, public filings

13

Internet Giants’ Fintech Presence is Broad and Deep

Value of Fintech Business (US$ bn)

 $41  $1502  $1153  $204  595

# of Users

 665 mm6  900 mm7  1,083 mm8  305 mm9  247 mm10

Payments Credit / Lending Wealth Management / Asset Management Insurance Digital Banking Vertical Search SaaS Health Tech

Baidu Finance Cloud Ant Financial Cloud Zhima Credit Ping An Cloud Qianhai Credit Service One Connect Good Doctor Health Connect Tencent Cloud JD Cloud Bai An Insurance JV with Allianz and Hillhouse (pending approval) 14% Zhong An stake 51% stake 10% Zhong An stake 10% stake 30% Allianz China Stake 20% Aviva HK stake Baidu Wealth Management Yu’e Bao Tianhong (China’s largest mutual fund) Lufax Licaitong JD Wealth Management Xiaojinku Baidu Wallet Alipay (#1 mobile payments platform) Ping An E-wallet WeChat Pay QQ Wallet (#2 mobile payments platform) JD Pay Jincai.JD Baidu Finance aiBank MYbank Lufax WeBank JD Finance Baitiao Xiaobai Credit

Note: Market data as of Jan 18, 2019; 1 Valuation of Du Xiao Man; 2 Valuation of Ant Financial; 3 Valuation of Tencent Financial Services; 4 Valuation of JD Finance; 5 Valuation of Lufax, One Connect, Ping An HealthKonnect and Ping An Good Doctor; 6 Mobile search MAU; 7 Annual active users; 8 MAU of Weixin and WeChat; 9 Annual active customer accounts; 10 Annual active Internet users

 –  –  –  –  –

Leading Life and P&C Insurance

14

Selected Start-Ups

Payments Credit / Lending Wealth Management / Asset Management Insurance Digital Banking Vertical Search SaaS Health Tech

Start-Ups Gaining Foothold

100 Credit Samoyed 51 Credit 360 Finance Auto Credit Card POS Offline Dianrong Dashu Xiaoying SME Cash Loans Yirendai Lufax Wacai Suishou Lufax Huifu / China PNR Uxin Cheche Tech Yusys Technologies Lianlian Pay Doubao

15 Build–out own consumer finance business / increase tolerance for (somewhat) lower credit quality  Separately licensed, fast growing consumer finance business  Affluent focused mobile offering  Largest bank with predominant consumer banking focus Increasing cooperation between banks and start-ups for more efficient access to mass consumer finance market  Enablement platform for rural and regional banks  White-label consumer loan app Strategic tie-ups between banks and Internet Giants  Launch of digital bank  ABC Financial Branch  Unsecured lending product  Credit card collection  Mobile payment  BOC / Tencent Fintech Lab  Comprehensive technology support

Incumbents’ Reactions Tentative So Far

Payments

 Historical focus on offline

Credit / Lending

 Slow response  But still an important role to play

Wealth Management / Asset Management

 Significant industry structural adjustment  Not a major focus (yet) on mass market  Potential long-term

• pportunity

Insurance

 Increasing focus on mobile /

• nline distribution

 Selected tie-ups between insurers and technology players  Product complexity favors incumbents

Focus on Online Distribution Major Investments in Technology Tie-Ups Insurers / Technology / / / / /

Ping An One Connect

16

Slow but Overall Sensible Approach to Fintech Regulation

 Regulators playing catch-up  Broad guidelines issued in Summer 2015: “Introductory Framework on Promoting Healthy Development of Internet Finance”  Implementation across segments taking time — Involves close discussion between regulators and participants — Seeks balance between support and risk mitigation — Requires alignment of interpretation across local regulators  May have underestimated magnitude and complexity of task  Willingness to create a healthy environment in which responsible Fintech players can play a meaningful role in financial services  Tightening of central oversight as opposed to mostly regional; direct involvement of PBOC, CBIRC and CSRC  Primary challenges are: — Sufficiency of resources — Forcing out marginal players while maintaining stability Direction To Date Outlook

17

Early Comparisons of Relative Position

Internet Giants Start-Ups Incumbents

1 Assuming flat growth from 2015 to 2018; 2 Number of annual active users during the twelve months ended November 30, 2018; 3 MAU of Weixin and WeChat as of 3Q2018; 4

Number of registered users as of 2017 year end; 5 Number of customers as of 2017 year end.

# of Customers (mm) Last 2 Years Growth in Customers 900 1,083 Ant Tencent

~50.0% ~21.8%

62 84 Qudian Jianpu 2.8x 7.8x 573 380 ICBC CCB 14.3% 10.1%

1 2 3 4 4 5 5

18

China Payments Increasingly Dominated by Non-Bank Platforms

By the Numbers: Western vs. China Payments Market

Source: iResearch, Nilson Report, Passport, GS Research; USD/RMB=6.85.

China 3rd Party TPV Catching up with US Credit Card TPV Mobile 3rd Party TPV Market Share (2017)

Other includes PingAn, JD Pay, China UnionPay, China PnR and others Average merchant fees as % of TPV

Payment Fees by Peer

2.5 – 3.0% 1.5 – 2.25% ~0.6% Square PayPal American Express V / MA Ant / TenPay 2.75 – 3.5% 2.5 – 3.0%

$204 $555 $2,161 $1,571 $1,882 $2,264 2013 2015 2017 China Independent 3rd Party TPV US Personal Credit Card TPV

US$ bn

Other 8% Alipay 54% Tenpay 38%

19

Payments is the Backbone to Ant Financial’s and Tencent’s Financial Service Business

Source: Company website, company presentation, iResearch and newsrun Note: Total payment volume from 2017 Analysys report. TPV includes network payment, prepaid card, bank card receipt and other payment services recognized by the People's Bank of China by non- financial institutions. Third-party payment platform does not involve the ownership of funds, but only money transfer. Ant’s number of SME borrowers, consumer finance users and Sesame Credit (credit bureau), wealth management and insurance users as of Mar 31, 2017. For payment business, 900 mm annual active global users were directly served by Ant during the 12 months ended Nov 30, 2018, and 120 mm global users were served by Ant’s strategic local partners during the 12 months ended Mar 31, 2017; Ant’s wealth management users represent cumulative users; Ant served 11 mm small businesses for unsecured lending; consumer finance and insurance users represent annual active users; and credit bureau users represent activated users. Tencent reported 1,083 mm+ mobile payment MAU as of Sep 30, 2018. Tencent’s consumer finance users (refers to cumulative users of WeBank) and wealth management users from newsrun.

/

Mobile Payment Volume Mobile Payment Volume

Local Partners Ant Financial

$6.6 tr $7.1 tr 1,083 mm+ 100 mm+ 98 mm+ 20K+ 12.6 mm+

Total Payment Volume Wehcat Pay MAU Wealth Management Users Consumer Finance Users SME Borrowers Insurance Users Credit Bureau Users

$9.2 tr 900 mm 120 mm $10.3 tr 1,020 mm 600 mm 100 mm 11 mm 392 mm 257 mm

Total Payment Volume Alipay Annual Active Users Wealth Management Users Consumer Finance Users SME Borrowers Insurance Users Credit Bureau Users

20

Significant Investment in Next Generation Technologies by Alibaba and Tencent

Source: Filings, News; USD / RMB = 6.85.

• 1. FY2018 for Alibaba, FY2017 for Tencent; 2. Spending on acquisitions, business combinations and private placements. Estimated numbers and information subject to public disclosure. Excluded

acquisitions as investor groups where individual investment amount was not disclosed. FY2018 for Alibaba, FY2017 for Tencent

Top Technology Priorities Annual Investment Spend2

US$2.5 bn US$3.6 bn

Annual R&D Spend1

US$6.3 bn+ US$10.6 bn+

Cloud Biometrics AI VR/AR Blockchain Cloud Big Data AI Blockchain Payments

21 305 209 150 115 107 53 38 35 30 25 21 20

Visa Master Card Ant Financial Tencent Financial Services PayPal Fiserv Lufax FIS Square Worldpay Wirecard JD Finance

US China

206 151 China US

China Fintech in the Global Context

Source: CB Insights (US unicorns), IT Orange (China Unicorns); market data as of Jan 18, 2019; USD/RMB = 6.85

• 1. Pro forma market cap of Fiserv post acquisition of First Data

Largest Fintech Companies Globally

(Market Cap / Indicated Value, US$ bn)

Number of Unicorns across Industries

1