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November 14, 2016updated 15 Nov 2016 10:08am

How UK fintechs can ease the pain of Brexit by seeking trade in China

China represents a golden opportunity for UK fintechs.

By James Nunns

Last week Chancellor Philip Hammond hosted China’s Vice-Premier Ma Kai for trade talks in London with mention of a “golden era” of relations between the two countries.

The UK’s relationship with China is viewed as being more important than ever as the country looks to expand its trading horizons in the wake of the Brexit referendum vote.

In the meeting between Hammond and Ma Kai it was announced that the Chinese contractor CITIC Construction would be invested £200m in the first phase of the £1.7bn London Royal Albert Docks project, which is being headed by the Chinese developer ABP.

hammond-china

Chancellor Philip Hammond hosted China’s Vice-Premier Ma Kai.

In return the UK is to invest up to £40m in the Asian Infrastructure Investment Bank in a fund that is designed to help developing countries to create infrastructure programmes.

Trade relationships are in place with China and Brexit promises an opportunity for much deeper relations with what is a huge Chinese market.

For UK fintechs that are looking to expand there is a clear but challenging opportunity to break into the Chinese market, one that strong relationships with the country would surely help.

China presents an opportunity that is even greater than the US market. According to the Credit Suisse 2015, Annual Wealth Report, China already has 109 million middle-class adults while the USA has 92 million. It also has 568 billionaires, compared to 535 in the US.

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By 2022 a McKinsey report predicts that 54% of China’s population will be considered in the upper middle class, earning between $16,000 – $34,000. This highlights the rapid market growth opportunity in a class group that would fit the kind of demographic that UK fintechs are aiming at.

China represents a good opportunity now because Brexit has left many with questions that remain unanswered. The result left fintechs questioning as to how the UK will trade with Europe following the country’s departure from the union and the financial services sector is rightly concerned that it will lose its place as a financial hub.

For fintechs the concerns match the incumbents in the market but perhaps pose a bigger threat due to the smaller new market entrants because Europe is the likely first step for those that are expanding their horizons beyond the UK.

It is widely accepted that the UK’s fintech sector is one, if not the, best in the world, highlighted by the sector generating over £6.6bn in revenue and employing over 61,000 people in 2015. The diverse sector offers things like alternative finance, payments services, online-only banks and blockchain.

On the 11th of November a group of some of the leading business men and women from the UK and China met at Level 39 to talk about, ‘UK – China Collaboration in FinTech’.

Co-organised by the Department for International Trade (DIT) and the National Internet Finance Association of China (NIFA), the event welcomed senior executives from the likes of Accenture, Deloitte, EY, the FCA, Barclays, HSBC, Lloyds Banking Group, and many more. Numerous figures from Her Majesty’s Treasury were present as were the likes of Shengqiang CHEN, CEO, JD Finance, and Dr Long CHEN, Chief Strategy Officer, Ant Financial.

The lengthy list of names from senior positions across the UK and China highlights the level of importance that is being placed on the potential fintech collaboration between the countries.

At the event, which was attended by CBR, came the launch of EY’s report, ‘China and UK FinTech – Unlocking opportunity,’ which is a dubbed a guidebook to building a leading partnership between the China and UK fintech sectors.

Commissioned by HM Government, the report aims to shine a light on the what a UK and China fintech relationship could bring to both countries, how both can benefit.

For starters, it is clear that at least some of China’s biggest companies are looking to expand into Europe and the US.

Dr Long CHEN, chief strategy officer, Ant Financial, said: “Globalisation a major priority,” but EY’s global head of fintech, Imran Gulamhuseinwala, said: “Exporting Chinese business models in same way they were created will be frustrating.”

The two countries bring their own strengths, and weaknesses, when it comes to fintech. The EY report says that the UK’s fintech sector is underpinned by its world leading policy environment, and development of technologies such as blockchain.

These are core components that can be leveraged in seeking new markets to expand to, such as China.

China’s competitive advantage comes in the area of strong investment, in 2016 it’s estimated that investment in the area has hit £6.5bn and the sector has been personified by a handful of tech giants, such as Ant Financial, Tencent, Baidu, and JD, all of which provide fintech solutions across a variety of subsectors.

Read on to find out how China is so unique. 

The opportunity in China is huge and growth has been boosted by a distinct lack of legacy infrastructure that has meant that participants can develop and deploy solutions to market much more quickly than in markets such as the UK and US.

“Maybe it’s actually because China lacks much of the physical banking networks of the US and Europe that its digital financial infrastructure is far more mature. With high levels of internet and mobile penetration China is already the world’s largest and most developed retail ecommerce market account for 47% of global retail sales,” said Gulamhuseinwala.

China is reaching the kind of scale that will leave other countries looking on in awe. In 2015 over 358 million consumers used mobile payments and online lending totalled £98.7bn.

Sherry Madera, Minister-Counsellor, Deputy Director General, DIT China, said: “Here in the UK we are excellent at moving money around across border, and this is something that we’ve seen much efficiency being driven into the system through financial technology. We are indeed leaders in this space but as are china at working in the consumer end of fintech being able to see what 1.378bn people are needing to be able to make an efficient market work even more efficiently.”

The drive in China by tech giants such as Baidu, Alibaba, and Tencent has seen a much greater consumer and tech driven approach, Gulamhuseinwala said: “We think this is a really important distinction of the Chinese market that we don’t see anywhere else in the world and we think there is real opportunity to import much of this thinking and business models into the UK and western markets.”

Global fintech growth shows rapid acceleration in APAC.

Global fintech growth shows rapid acceleration in APAC.

According to EY, these respective capabilities could lead to significant cross-border opportunities for UK fintechs that are looking to enter the Chinese market and vice-versa.

EY’s report, China and UK Fintech- Unlocking opportunity, says: “Three areas where the UK has strong existing and emerging capabilities include blockchain, RegTech(regulatory technology) and foreign exchange trading(FX). On the basis of the relative nascency but growing interest in these subsectors in China, there could be an opportunity for UK fintechs to export this capability cross-border.”

This is not expected to be a one-way pipeline as Chinese fintechs could find opportunities in the UK market relating to payments solutions to serve the vast number of Chinese tourists and student coming to the UK each year, these groups account for over £3bn in spend annually, the report says.

As the report identifies, “the size and scale of China’s fintech sector provides too big an opportunity to ignore, with the world’s largest and increasingly digitally-savvy consumer base to target.” The UK’s areas of strength in blockchain, RegTech and FX could provide the best opportunity to break into this market.

 

Blockchain

“In China, blockchain initiatives have largely been associated with academia and research institutes, with a focus on cryptocurrency. Local blockchain start-ups are still in the early-stages of development, where major banks have only just started to commission proof of concepts and pilot projects on blockchain applications.”

“In the UK, incoming regulations (such as MiFID II) have motivated corporations to invest in exploratory technologies such as blockchain to transform their operating models. This has resulted in the emergence of well-funded blockchain outfits, the mobilisation of talent from industry to blockchain-related start-ups and the maturing of technology solutions (e.g., underlying blockchain architecture platforms). We believe that UK fintechs can leverage these innovations, capabilities and expertise to develop the Chinese blockchain market further.”

 

RegTech

“China’s regulatory entities, such as the PBOC and CBRC, have in recent years become increasingly focused on fintech; evidenced by the release of the Guiding Opinions on Promotion of Healthy Development of Finance in 2015 (Guiding Opinion)– the first regulation issued by the Chinese Government in the fintech space.

“Guiding Opinions was subsequently followed by regulation focused on P2P lending, and non-banking online payment service providers.

“As China continues to be more hands-on from a regulatory standpoint, FS players will likely benefit from the availability of RegTech solutions to lower the complexity and costs of maintaining regulatory compliance.

The UK is home to a number of RegTech firms that have developed solutions related to compliance, advanced data analytics and risk evaluation. These techniques and knowledge could all be leveraged in the Chinese marketplace to great effect as its fintech sector and regulatory frameworks mature further.”

 

Foreign Exchange

“China is the third largest money transfer/remittance market globally (£36bn) thus creating an inherent need for payments platforms that can enable trade across multiple currencies and the settlement of transactions internationally.

“In this regard, the UK is home to a number of FX-focused payments platforms, which serve as the payments engines for notable money transfer fintechs and traditional financial institutions alike; a service which could also serve remittance providers in the Chinese market.”

Read on to discover the regulatory challenges. 

While the opportunity to expand into China should be exciting for UK fintechs, there are many challenges. Aside from the cultural, language and logistic barriers there are significant regulatory barriers.

Fintechs would be required to go through several issuing authorities such as; China Banking Regulatory Commission (CBRC), Ministry of Commerce, People’s Republic of China (MOFCOM), and People’s Bank of China (PBOC). However, EY says that a move to an update version of regulation for setting up foreign-invested enterprises could see many of the traditional barriers being diminished.

Companies would be required to obtain project approval from the National Development and Reform Commission for heavily regulated industries in addition to needing preliminary consent from relevant regulatory authorities.

The Financial Conduct Authority (FCA) signed the Co-operation Agreement with the People's Bank of China on 10th November.

The Financial Conduct Authority (FCA) signed the Co-operation Agreement with the People’s Bank of China on 10th November.

Those wishing to setup in China would also need to obtain ‘foreign-invested enterprise establishment’ approval, which is handled by MOFCOM. This application process can take between 1-3 months and approval is also required from FS regulators.

In order for foreign enterprises to be registered they need to gain relevant approval letters, certificates and other related documents. These are then dealt with by local branches of the Administration for Industry and Commerce.

Finally, additional registration procedures are in place with various government departments such as the tax bureau, FX authority, labour bureau, and finance bureau.

While there may be numerous barriers to overcome, the opportunity is one that should override any concerns about how difficult the journey should be.

China is quickly becoming a powerhouse when it comes to fintech and the UK’s impressive array of talent should be looking to the country as a viable route to expansion.

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