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China and UK FinTechUnlocking opportunityA guidebook to building a leading partnership between the China and UK FinTech sectors

Commissioned by:

2 | China and UK FinTech — Unlocking opportunity

About this guidebookAs a recognised global capital or FinTech, the UK is home not only to a vibrant FinTech sector, but a well-rounded FinTech ecosystem To build upon this position, the UK is actively engaging with leading FinTech centres around the world, including China, to explore mutually bene cial FinTech opportunities To acilitate this activity, the UK Government commissioned to produce this guidebook

to oster greater collaboration, investment, and cross-border activity across the FinTech sectors in the UK and China

At , our ob ective is to help FinTechs scale-up, and we there ore understand the importance o international expansion to drive growth Given the depth o FinTech innovation and world-class capabilities in the China and UK FinTech sectors, there are several opportunities or cross-border expansion and/or investment across mature and emerging FinTech sub-sectors alike The purpose o this guidebook is to provide a landscaping o the China and UK FinTech sectors, and identi y some o the potential opportunities or trade and investment

e hope this report will be used by policymakers, investors and FinTechs in China and the UK to urther support their respective vibrant FinTech sectors e also hope that the insights o ered will be help ul to all broader stakeholders in the UK and Chinese FinTech ecosystems, and oster urther cross-border collaboration and investment between the UK and China

The analysis, views and recommendations expressed in this report were produced by and in ormed by interviews held with stakeholders across the FinTech ecosystem e are very thank ul to those who contributed their time and insights to this e ort

Imran Gulamhuseinwala Global FinTech ead


1. Executive summary

The UK is recognised as a global capital or FinTech, with its FinTech sector

generating c b in revenue in ith a well-served and well- unctioning

FinTech ecosystem, the UK has a particular competitive advantage rom its world leading FinTech policy environment

n recent years, China has also emerged as a leading FinTech centre From a near standing start, China’s FinTech sector has grown rapidly, with our o the top ve FinTech now located in China

Given the depth o FinTech innovation and strong capabilities in these two leading FinTech sectors, there are several opportunities or cross-border expansion and investment opportunities between China and the UK e provide a summary assessment o the China and UK FinTech sectors opposite, as well as potential opportunities or trade and investment Full details can be ound in chapters - o this guidebook


On the cutting edge, and Treasury, FinTech , Ventures,


2. The FinTech ecosystem


China

An emerging world-class FinTech ecosystem

China has emerged as one o the astest growing FinTech sectors, with the world’s largest consumer base providing the oundation or an increasingly active FinTech market otential or FinTech disruption is enhanced by access to vast capital, as well as strong talent and an encouraging policy environment

Talent Capital Policy DemandChina’s FinTech market is supported by a large pool of FS talent, complemented by technical and entrepreneurial talent.

The high availability of capital in the Chinese market, largely by domestic investors, provides investment for FinTechs of all maturities.

The Chinese Government has been very active in commissioning innovative initiatives; China’s banking regulators’ involvement has been moderate, though increasing.

China’s FinTech sector is enabled by the world’s largest consumer base, and complemented by a large number of underserved SMEs.

China’s m FS work orce provides a strong oundation or talent, with , nancial expertise elites

(i e , individuals with higher education, an overseas working background and FS related experience) and

, FinTech speci c elitesThe availability o tech talent stems rom the presence o international tech giants and top ranking ST (Science, Technology, ngineering and Mathematics) universities, and bene ts rom a rate in experienced overseas returnees’n regards to entrepreneurial

talent, remier i’s emphasis on the importance o mass entrepreneurship and innovation has enabled a rapidly growing pipeline o entrepreneurial talent

FinTech investment in China is now world leading and estimated to be c b, driven by a undraising round o c 3b by Ant Financial in

6

To support early-stage and growth investment, the Chinese Government operates more than government-guided unds, and in raised b to und start-ups 7

China also bene ts rom an active O market, completing more Os in the past years than the leading US and UK exchangesOn a regional level, Bei ing is particularly important in the

rst hal o , investment into Bei ing totaled c 6 o all Chinese FinTech investment

An overarching policy to limit oreign competition and investment has played a signi cant role in building China’s massive e-commerce market (accounting or c 47 o global digital sales) and digital economy — two key enablers or China’s FinTech sectorTax policies supporting FinTechs and start-ups include policies where ew

igh-Tech nterprises are taxed at compared to regular rates

otable Government and regulatory-led innovation initiatives include commissioning o the Social Credit System (a system to assign a credit score to every citizen and business), as well as the merging ndustry nnovation Fund ( 3 b) to

promote digitisation

Over o the population are FinTech users, with payments a primary driver: as o , 3 m Chinese customers used mobile paymentsChinese SM s have historically been underserved by the traditional banking system, and generate c 6 o the country’s GD

ith o top banks (by asset size) being based in China, this creates a signi cant base o nancial institutions to generate corporate demand or FinTech solutions

inkedin, 6 Chinese FinTech Talents hite aper6 CB nsights7 Bloomberg

Dealogic Sohu Finance

SF China Ministry o Finance orld Atlas,

3. Pro ling the China and UK FinTech sectors



China’s FinTech sector

China’s FinTech sector is personi ed by a hand ul o tech giants that provide FinTech solutions across a variety o subsectors These companies have leveraged their large customer bases and low ac uisition costs to develop solutions to most FS subsectors, as shown in gure

Figure : Sector focus of key tech companies in China

Group

Alibaba Tencent Baidu JD

Payments

Financing

Wealth Management

Insurance

Securities

Banking

Credit Scoring

Crowdfunding

Subsidiary running FinTech business

Ant Financial WeChat Baidu Financial JD Financial

Valuation $60b35 $83b36 < $3b37 $7b35

No. of registered users c.500m Alipay38 c.400m Tenpay39 c.65m Baidu Wallet39 c.100m 7 FS40

The large tech-giants have di erentiated themselves rom one another by ocusing on di erent core businesses or customer target groups:

• Alibaba: as the largest e-commerce plat orm in the world, Alibaba has cross-sold and built FS propositions on its consumer and SM customer bases, such as Ant Financial and Alipay integrating logistics with payments, and with merchants to consumer trade

• Tencent: Tencent has positioned its widely used social-messaging app eChat to o er peer-to-peer ( ) payments on its services with applications such as red envelope’ t is now also developing cross-border money trans er services

• Baidu: the internet search engine service has diversi ed into FS through investments, allowing users to purchase one o Baidu’s own unds, including a

MB 3b big-data based mutual und that sold out within three days o launch in 4

• JD: the second largest e-commerce plat orm in the country has built a consumer nance business subsidiary, JD Finance Originally ocused on credit lines or products sold through the e-commerce plat orm, the subsidiary provides consumer and SM nancing options, among other nancial products and services

China’s FinTech sector’s exponential growth and success has been heavily driven by these tech businesses entering the FS market, leveraging their huge customer bases to gain signi cant traction This has allowed them to uickly invest in building and ac uiring FS unctions to generate urther growth

and expansion3 Visual Capital, 636 Tech in Asia, 37 Stock 3 nterview with Ant Financial, 63 Sohu, 64 Finance ce, 6

China


China FinTech subsector deep dive

Payments

Wealth Management

Focus areas Enabling factors Example players

Social platform integrationUtilising social media applications to acilitate FS (e g , payments)

Daily ‘consumption activity’ integrationntegration o daily consumption

activities’ to resolve FS pain points e g , dining, utilities, medical services, online shopping, transportation, etc

• China is the world’s largest and most developed retail e-commerce market accounting or c 47 o global

digital sales46 thus providing an immediately large customer base to penetrate

• � nternet penetration rates have risen rom c in to c in

6, acting as a key catalyst or increasingly digitised payments,46 with the traditional conservative culture becoming increasingly com ortable with digital propositions

�• As o March , 7 third-party payments companies had been issued payment licenses 47

• Alipay (Alibaba)

• Tenpay (Tencent)

• Union ay

• JD pay (JD)

• Bestpay

• Bill

• CBC e-wallet


Digital nancial management platforms Global plat orms o ering mass-market, low-cost entry level consumer unds

Stock trading and social trading Digital plat orms that enable stock trading and social trading reducing the consumer barrier to entry to trading

Robo-advisors Online and automated nancialadvice/port olio management

• A large population o low-income (annual disposable income

, RMB) customers unable to meet the investment threshold or traditional wealth management

products o ered by banks 4

�• conomic progress has led to an exponential increase in size o the Chinese middle class, whereby c 7 o the population is expected to be mass or upper-middle class by

4

• u’ebao (Alibaba)

• Credit ase

• ue iu

• Baidu Financial Services

• JD Finance

• Shenzhen JFZ Capital Management Co

46 analysis47 Sohu Finance, 64 iResearch, 4 Forbes, 6

China

Regional FinTech hubs in China

S, 63 analysis4 City nnovation index o China, Guangdong Academy o Social Science, 6

Chinese nclusive Finance ndex eking University, 6

Regional FinTech hubs in China are concentrated in the main cities including Bei ing, angzhou, Shenzhen and Shanghai owever, recent government support has attracted FinTech activity in urther cities including Chengdu, Chong ing and Suzhou All provinces in China also have provincial industrial unds allocated to encourage technology investment, rom which the FinTech sector naturally bene ts

ShenzhenOverviewDubbed China’s ‘Silicon Valley’ due to the density o local high tech giants (Huawei, Tencentand ZT ) Shenzhen has also been designated as a Special conomic Zone, bene tting rom its proximity to Hong Kong’s nancial centre

EnablersShenzhen invested c 447m in 6 to attract global tech ‘elites’ 3 The city’s access to talent is enhanced by its proximity to Hong Kong University o Science and Technology Shenzhen is also the base o leading commercial banks ing-An Bank and China Merchants Bank

Incubators & AcceleratorsAccess to Finplus (China’s rst angel und or FinTech) and a high concentration o VCs and incubators in Shenzhen The science and technology park o the anshan district is also ranked rst or its attraction o high-tech innovation 4

FinTechsTencent, i iniu

China



UK FinTech subsector deep dive

6 analysis, 6

Alternative Finance

Payments


P2P lending oans to consumers and businesses

(SM s) whereby numerous lenders contribute to a single loan

Crowdfunding Sale o a stake to a number o investors in return or investment, acilitated by an online plat orm

Invoice trading The auctioning o invoices ( or immediate payment at a discount) through online trading plat orms

• business models, providing exible and low-cost rates

�• Alternative data sets being increasingly leveraged to assess borrower credit risk

�• Automated and real-time data to enhance underwriting

�• ider use o alternative unding models e g , combination o balance-sheet/o -balance sheet lending

�• Aggregator plat orms disrupting traditional broker models by consolidating unstructured and structured data sets into universal ormats

• Zopa• Funding Circle• Crowdcube• Seedrs• Syndicate Room• woca• Borro• Market nvoice• ezbob• ThinCats• lat orm Black• end nvest• Trade River• andbay• Funding xchange• Funding Options


Cross-border/FX ow-cost international money

trans ers and exchange with superior customer experience

B2B Payments ropositions acilitating the trans er

o B B payments through automated, e cient and real-time payment plat orms

• Advanced in rastructure enabling real-time payments (e g , Faster

ayments)

• � nnovative business models leveraging mobile and online access to increase utilisation and decrease costs e g , reducing variable payment charges rom c 3 to per transaction 6

�• ncreased pricing and ee transparency to increase higher consumer adoption

• Trans er ise• Azimo• Currency Cloud• orldRemit• bury• GoCardless• Access ay• Revolut• Curve• Kantox• Skrill• Ringpay

UK

6 uSwitch, 663 UK science park association, 664 nvest in Bristol, 66 O ce o ational Statistics, 666 Globalisation and world cities research network, 667 B Mellon, 66 GFC , 6

ManchesterOverview: Strong digital and creative capabilities ( 3 b invested to-date) 67

Enablers: , students makes it urope’s largest city The UK base o T centres or banks ( loyds and Barclays) 67

Incubators & Accelerators: Recent investment into large co-working spaces ( eo, The Vault) some accelerators ( nnovate Finance) and active regional investors ( orth est Fund, GM F, M DAS)

�FinTechs: Access ay, DueCourse

BristolOverview: amed by the ormer Chancellor George Osborne as one o the six nglish Science cities with a 3 m science park and urope’s largest robotics laboratories 63 FS sector employs , in the city 64

Enablers: The city’s balanced economy and high GD per capita (third highest in ngland)6 contribute to it being the ourth highest ranked nglish global city 66

Incubators & Accelerators: South est nnovation etwork, ervasive

Media Studio, R ACT Hub, Bristol Robotics ab, S Ts uared incubator and the South est Digital Tech Cluster

�FinTechs: Moneyhub, Fundsur er

UK

Regional FinTech hubs in the UK

FinTech activity in the UK is ocused in ondon, due to a concentration o global leading nancial institutions and capital, and strong access to nancial, technical and entrepreneurial talent

Regions outside ondon have historically bene tted rom government initiatives aiming to attract commerce to the area, lower costs o living, high availability o talent (particularly rom university partnerships) and subsector specialisations


4. Opportunities for trade and investment



Matchmaking Cross-border opportunities or UK FinTechs

hilst the size and scale o the Chinese FinTech sector is undisputed, the urry o activity in recent years has been dominated by domestic players ast examples o oreign entrants trying to access the market have had varying success, limited by government restrictions and erce competition

Blockchain• n China, blockchain initiatives

have largely been associated with academia and research institutes, with a ocus on cryptocurrency ocal blockchain start-ups are still in the early-stages o development, where ma or banks have only ust started to commission proo o concepts and pilot pro ects on blockchain applications

• n the UK, incoming regulations (such as MiF D ) have motivated corporations to invest in exploratory technologies such as blockchain to trans orm their operating models This has resulted in the emergence o well- unded blockchain out ts, the mobilisation o talent rom industry to blockchain- related start-ups and the maturing o technology solutions (e g , underlying blockchain architecture plat orms) e believe that UK FinTechs can leverage these innovations, capabilities and expertise to develop the Chinese blockchain market urther

RegTech• China’s regulatory entities, such as

the BOC and CBRC, have in recent years become increasingly ocused on FinTech evidenced by the release o the Guiding Opinions on romotion o Healthy Development o nternet Finance ( Guiding Opinion ) in

the rst regulation issued by the Chinese Government in the FinTech space Guiding Opinions was subse uently ollowed by regulation ocused on lending, and non-

banking online payment service providers

• As China continues to be more hands-on rom a regulatory standpoint, FS players will likely bene t rom the availability o RegTech solutions to lower the complexity and costs o maintaining regulatory compliance

• The UK is home to a number o RegTech rms that have developed solutions related to compliance, advanced data analytics and risk evaluation These techni ues and knowledge could all be leveraged in the Chinese marketplace to great e ect as its FinTech sector and regulatory rameworks mature urther

Foreign Exchange (FX)• China is the third largest money

trans er/remittance market globally (c 36b),6 thus creating an inherent need or payments plat orms that can enable trade across multiple currencies and the settlement o transactions internationally

• n this regard, the UK is home to a number o F - ocused payments plat orms, which serve as the payments engines or notable money trans er FinTechs and traditional

nancial institutions alike a service which could also serve remittance providers in the Chinese market

However, the size and scale o China’s FinTech sector provides too big an opportunity to ignore, with the world’s largest, and increasingly digitally-savvy consumer base to target

As covered in section 3 o this guidebook, the UK has strong capabilities in three areas, blockchain, RegTech and F These areas are still relatively nascent in China, providing a market opportunity or UK FinTechs

6 orld Bank, 6

UK


Investment FinTech investment in China and the UK

FinTech investment in China is world leading

n recent years, China has emerged as a leading FinTech hub not only based on level o activity within the sector, but also in terms o investment

As shown in gure 3, when compared to other leading FinTech centres, FinTech investment in China was second only to Cali ornia in , with over c b o investment, compared to c 4m in the UK n 6, however, FinTech investment in China has more than tripled to an estimated c 6 b, driven by Ant Financial’s c 3b undraising round

The signi cant growth and magnitude o FinTech investment into China is underpinned by robust access to capital, both through public and private sources o unding The Chinese Government operates more than 7 government-guided unds nationwide and in , and raised b to und start-ups, in addition to the 4 3b in government grants, tax breaks and subsidised technology parks pledged or start-ups by the Chinese

remier 74

rivate unding has also substantially supported early-stage and growth investments, with a large number o unds competing to invest in a limited pool o

nancially viable ideas For late-stage FinTechs, Chinese FinTechs also bene t rom an active O market, completing

more Os in the past years than the leading US and UK exchanges

74 C BC, 6

Figure 3: FinTech investment, by region (2015)

£3,828m

£2,055m

£1,487m

£554m

£2,055m

2015

£6,500m

2016

£499m£160m £102m

CA CN NY UK DE AU SG HK SAR

£44m

Source: CB InsightsNotes: Investment refers to the period from Q1 2015 to Q1 2016


Investment Opportunities or Chinese investors

On the basis o China’s strong access to capital, and current market dynamic whereby domestic sources are more than meeting the demand or FinTech capital, we see relatively modest opportunities or oreign investors to aggressively pursue the Chinese market

n the UK, however, we believe there is opportunity and appetite or Chinese oreign investment to bolster access to capital, particularly at growth

(i e , m- m) and pre- O stages (i e , m ) where current access to capital appears limited relative to early-stage investment

e see this as having a potentially strong bene t to the UK FinTech ecosystem, whereby urther growth capital could assist UK-based FinTechs to more success ully scale-up

nvestment into the UK market could take the orm o Chinese investors investing directly into UK FinTechs as part o VC

nancing rounds Alternatively, Chinese investors could seek to orm partnerships with local VC rms, or invest directly into their unds

n terms o speci c FinTech subsectors, we believe there are potentially interesting investment opportunities or Chinese investors in two main areas, namely: i) FinTech subsectors which are mature in China and ii) FinTech subsectors which are still emerging in China

FinTech subsectors which are mature in China: As documented in section 3 o this guidebook, subsectors in which China already excels include alternative nance, and payments FinTech areas which are also well-established in the UK As such, the appeal or Chinese investors could be two- old: investing in an established growth market in the UK, while still investing in an area which is well-trodden in the Chinese market

FinTech subsectors which are emerging in China: Chinese investors may also nd opportunities to invest to learn as being attractive otential subsectors o interest in this regard could include blockchain, RegTech, and digital challenger banking all o which are relatively nascent in

China relative to the UK As such, Chinese investors may be attracted to such opportunities which are small, but still relevant to existing domestic business interests

China


Accessing the China market

The process or oreign FinTechs wishing to pursue opportunities in China involves going through several issuing authorities including the CBRC, MOFCOM, BOC, as shown by gure 6 However, a move to an updated version o regulation or setting up oreign-invested enterprises suggests that the ma ority o traditional barriers could be diminished in the uture 77

A summary of authorisation steps

Step One Businesses must obtain project approval from the National Development and Reform Commission for heavily regulated areas of business, including FS. Preliminary consent is also needed from the relevant regulatory authority (e.g., CBRC and PBOC are the key regulators for setting up a bank).

Step Two FinTechs wishing to set up in China need to obtain ‘foreign-invested enterprise establishment’ approval. MOFCOM is responsible for handling the approval application process, with the FS subsector concerned and the amount of investment involved determining the length of the application process (between 1-3 months). Additional approval is required from FS regulators (PBOC, CRBC, CIRC).

Step Three The registration process for foreign enterprises involves gaining relevant approval letters, certi cates and other related documents, all of which are dealt with by local branches of the AIC (Administration for Industry and Commerce). AIC also issues business licences to enable a company to commence with selling goods and services.

Step Four Additional registration procedures exist with various government departments (including the applicable tax bureau, FX authority, labor bureau, nance bureau, etc.)

Figure 6: Overview of approval/registration procedures

77 MOFCOM7 orton Rose

Note:

• The process or setting up oreign-invested enterprises is under review or simpli cation, with a view to stimulating the set up o FinTech businesses in China 7

• n October 6, the Chinese government decided to streamline the administration approval or oreign investment Foreign investors are now only re uired to produce business plans to local regulators as long as their business is not on a negative list 77, i e , part o a speci c industry that is closed to oreign investors

China


UK

Accessing the UK market

n order to acilitate investment and cross-border FinTech initiatives, the UK provides a supportive policy environment to assist oreign FinTechs This assistance includes designated regulatory and government entities to simpli y the regulatory process and provide tailored assistance n addition, several trade bodies, as well as incubators and accelerators exist to enable integration into the wider FinTech ecosystem Several regulatory and industry entities that are involved in supporting oreign FinTechs are ound in gure

Entity Description

Regulators and government entities

FCA (Financial Conduct Authority)

The primary conduct regulator for FS in the UK, the FCA plays a key role in providing license and authorisation to domestic and foreign FS rms seeking to operate in the UK.

PRA (Prudential Regulation Authority)

The PRA is responsible for the regulation and supervision of banks, building societies, credit unions, insurers and major investment rms. FinTechs operating in these subsectors must gain PRA approval to operate in the UK.

BoE (Bank of England)

The Bank of England is the UK’s central bank. Through the PRA, it is responsible for issuing banking licences.

DIT (Department for International Trade)

Formerly UK Trade & Investment, the DIT promotes British trade globally. DIT helps overseas companies locate and grow in the UK, providing guidance on investment opportunities, tax, employment and visa advice. The DIT is particularly active in pursuing foreign FinTechs, with roadshows in a number of locations (including Singapore, Hong Kong and Australia).

Trade bodies and consortia

Innovate Finance An independent, not-for-pro t membership-based organisation and industry body serving the FinTech community and facilitating ecosystem growth. Innovate Finance connects start-ups with incumbent players, investors and entrepreneurs.

Tech City A non-pro t organisation which supports digital technology businesses and entrepreneurs across the UK through programmes and policy work.

R3 A blockchain-focused consortium of thought leaders, academics and over 50 FIs focused on the R&D of the nancial technology of distributed ledgers for the FS market

UK P2P Finance Association

An industry association of P2P lenders which aims to foster healthy growth and competition in the P2P sector through policy and regulation, ensuring members promote high standards of conduct and raise sector awareness

FinTech Circle A privately held rm, acting as a network for start-ups, investors and incumbent players

Figure : Regulatory, Government and Trade-related entities


UK

Accessing the UK market

n the UK, various government schemes exist to assist FinTechs with set up and regulatory authorisation, with incubators and accelerators providing access to capital and expertise or early-stage FinTechs These are included in gure

Resource Description

Government

Innovation Hub (FCA’s Project Innovate)

As part of the FCA’s Project Innovate, the Innovation Hub assists FinTechs in understanding the UK’s regulatory framework and facilitating the entry of innovative overseas rms to the UK. International co-operation agreements have also been set up with the Australian Securities and Investments Commission (ASIC) and Monetary Authority of Singapore (MAS).

Regulatory sandbox (FCA’s Project Innovate)

The FCA’s regulatory sandbox is a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring the usual regulatory consequences of pilot activities.

Tech Nation A report and online interactive tool for businesses wanting to learn more about the UK. Ecosystem, analysing the clusters and capabilities empowering the UK digital economy.

HQ-UK A programme operated by UK Government and Tech City UK to showcase why foreign digital companies should set up their headquarters in the UK.

Global Entrepreneur Programme, DIT

A programme that provides assistance to overseas entrepreneurs and early-stage tech businesses or start-ups that want to relocate their business to the UK.

Incubators & Accelerators

L39 Europe’s largest FinTech-focused incubator, providing of ce space, mentoring, networking and events to start-ups.

Seedcamp Launched in 2007, a UK-based venture-capital accelerator offering seed funding to innovative European start-ups.

Startupbootcamp An accelerator that partners with incumbent FS institutions to provide exposure, APIs and a network of professionals for early stage FinTech start-ups.

Barclays Accelerator A 15-week program designed to accelerate FinTech start-ups by giving them access to the bank’s network and mentorship.

Accenture Innovation FinTech Lab

A 12-week mentoring programme to enable start-ups to work with potential future customers and perfect propositions, gaining unique insights into the banking industry.

Figure : Programs and initiatives to support and attract foreign FinTechs

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