Chinese cross-border fintechs "racing to build networks"

By David Beach | 28 June 2018

As Trump threatens a trade war with Beijing, companies around the world are all the more concerned with how they get money in and out of China.

“There’s that joke that Americans owe the Chinese lots of money,” says Raymond Qu, CEO of Chinese cross border payments company Geoswift, “but I like to combine that with the Wall Street saying: If you owe a bank $100, that’s your problem. If you owe the bank $100m, that’s the bank’s problem.

“The US owes a lot to China and that makes the Chinese government nervous in case the US crashes, defaults and leaves a huge debt.”

As of March 2018, the US debt owed to China was $1.19 trillion, with the Chinese keeping its US debt ownership consistent in order to keep the yuan weaker than the dollar, its exports cheaper and its 1.4 billion people in employment.

Qu believes the Chinese government is the differentiating factor with three key changes set to come in to reduce the debt risk: “Firstly, they reduce the percentage of US dollars in the currency basket, reducing the risk. The second change is that they converted cash into assets. The third one is that they try and convert renminbi to be the international currency so they created a new term, CNY - the domestic restricted currency and CNH - which is a free currency.

“That means that China can start to owe money to other people, reducing the risk from US debt. However, for the CNH programme it’s easy out, difficult in to encourage more people to use that currency without bringing that money back to China easily causing inflation.

“The conclusion will be that China will be more open for business.”

Qu, with a wealth of experience and advisory positions in both China and North America, was joined by Western Union chief product officer, Adam Tiberi when they spoke to bobsguide at Money20/20.

Tiberi tells bobsguide about his stint with Western Union growing the company’s Chinese offering in 2013 and how foreign companies have reacted to China’s economic rise, dubbed the gold rush of the 90s and 00s, and the subsequent realisation they couldn’t easily repatriate profits.

“That forced companies like IBM, Oracle and SAP to reinvest in the country in the form of R&D; that was smart from the Chinese government,” says Tiberi.

Qu agrees: “The Chinese government has become more and more smart, with lots of investment in technology to become a global leader in the sector rather than rely on cheap manufacturing,” he says.

"We see that investment first hand with the Geoswift student market - the Chinese students are educated in prestigious US and UK universities and return to China to use those skills and develop and test new technologies with a huge subject pool that is the Chinese consumer market.”

Chinese students have historically found moving money out of China difficult to pay tuition, fees and maintenance. This led to the partnership between Western Union and Geoswift - the former providing connections to western universities and the latter the local Chinese banking infrastructure.

“Geoswift helped connect us into the WeChat Pay network and that went live six weeks ago. Without advertising, that payment channel alone accounts for 16% of Western Union’s payment volume from China,” says Tiberi. “China’s like nowhere else. Some 35-40% of payments are completed end-to-end on smartphones.”

The success of China's fintech market is staggering. WeChat as well as Alipay now account for 90% of market share while China is home to 59 fintech unicorns, behind 109 in the US and outstripping the 26 in the EU.

But Qu does not believe those statistics are particularly useful: “The chinese skipped the PC stage and went straight to 4G - that’s a very unique market - Alipay and Wechat focused on mobile tech. If Alipay and WeChat simply copied their model to Europe they’d have to change consumer behaviour first and I don’t think it would be successful.”

Qu believes the opposite is true in explaining the rise of Chinese fintech: “In the past, startups followed the phrase ‘Copy to China’ particularly the Google model.”

But now, under today’s conditions, Qu thinks the secret recipe for cross-border fintech success, particularly with China, is to understand the local culture and infrastructure, usually by hiring local people. “That understanding combined with our value added services, that delivers a successful product that is customer driven rather than product driven. We’re the bridge between both.”

The wider cross-border emerging fintech market inevitably draws on the SWIFT debate.

“Our philosophy, where possible” says Tiberi, “is to avoid using SWIFT for all the challenges that come with it - speed and cost, namely. We [cross-border fintechs] are racing to build our own networks. Western Union has its own 500 bank accounts around the world. In 85 or so countries the last mile comes from one of those bank accounts and not an intermediary.”

When asked if the recent partnership with Geoswift would fit into a wider future trend of greater collaboration between cross-border fintechs to compete at a similar scale to SWIFT, Tiberi responded: “I’m not sure that will happen. You’ll see all the cross-border payments fintechs building out their networks and whether they’ll converge at some point, we’ll see.”


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