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

Country / Region: Population (mm)

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 KoreaTaiwan

Thailand

Vietnam

U.S.

AustraliaNew Zealand

0

1

2

3

4

5

6

7

8

9

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

GD

P G

row

th (

%)

GDP per Capita (USD)

Disparate State of Development

Source: Euromonitor

Note: As of 2017

Developed Emerging

Cambodia

China

Hong Kong

India

Indonesia

Japan

Malaysia

Philippines

Singapore

South KoreaTaiwan

Thailand

Vietnam

USA

AustraliaNew Zealand

0

1

2

3

4

5

6

7

8

9

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

GD

P G

row

th (

%)

GDP per Capita (USD)

=US$2tn GDP

China

China GDP in

2035:

US$40tn

U.S. GDP in

2035:

US$38tn

0

10

20

30

40

50

2017 2027

GDP (US$ tn) China

US

2017 2027 2035

… 110,000

3

China

Hong Kong

Japan

South Korea

TaiwanSingapore

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%

Cre

dit

Card

Pen

etr

ati

on

(%

)

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

China GDP Per

Capita in 2035

~30k

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)

1

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

2.33.7

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

6.86.5

6.36.26.16.2

6.66.8

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

229213

183169 164

149 148

107 107 101 100 93 90 89 84 85 81 81 80 77 74

Be

rkshir

e H

ath

aw

ay

JP

M

BO

A

ICB

C

We

lls F

arg

o

CC

B

AB

C

HS

BC

Pin

g A

n

Citig

roup

BO

C

RB

C

AIA

CM

B

TD

Ba

nk

CB

A

Itaú

Alli

anz

Chin

a L

ife

Am

eri

ca

n E

xp

ress

HD

FC

Ba

nk

U.S

. B

an

corp

Ba

nco

San

tand

er

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

of 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

Internet Giants

(Market Cap.)

Baidu – Search,

US$91 bn

Alibaba –

E-commerce,

US$535 bn

Tencent – Social

media / Gaming,

US$499 bn

JD – E-commerce,

US$54 bn

Ping An – Financial

conglomerate,

US$178 bn

Leading

Life and P&C Insurance

Lufax: 38

OC: 7.5

Doctor: 4.9

HK: 8.8

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

opportunity

Insurance

Increasing focus on mobile /

online 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%

6284

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 AmericanExpress

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

Other8%

Alipay54%

Tenpay38%

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+ 0

To

tal P

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en

tV

olu

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We

hca

t P

ay

MA

U

We

alth

Ma

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rs

Co

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er

Fin

ance

Users

SM

EB

orr

ow

ers

Insu

ran

ce

Use

rs

Cre

dit B

ure

au

Use

rs

$9.2 tr900 mm

120 mm

$10.3 tr

1,020 mm

600 mm

100 mm

11 mm

392 mm

257 mm

To

tal P

aym

en

tV

olu

me

Alip

ay A

nnu

al

Active

Use

rs

We

alth

Ma

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Co

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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

115107

53

38 35 30

25 21 20

Visa MasterCard

AntFinancial

TencentFinancialServices

PayPal Fiserv Lufax FIS Square Worldpay Wirecard JDFinance

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