China’s FinTech startups, VCs to look inwards rather than going global

China’s FinTech sector is growing rapidly, with domestic investments dominating the landscape for the foreseeable future, according to Sky9 Capital founder and managing director Ron Cao in a research interview with FinTech Global.

The FinTech sector in China has received over $20bn since 2014, with the country having collected $1.1bn in the opening quarter of 2018, according to data by FinTech Global. This colossal level of investment has been deployed across just 10 deals, with this being largely down to OneConnect’s $650m Series A funding round. The company develops banking technology services for small and medium-sized banks, providing them with cloud banking, online insurance and investment solutions.

While a lot of money is being deployed into the country, Cao suggests this capital will predominantly come from investors residing in China. This is due to the difficulty for investors to establish a footprint externally.

He told FinTech Global, “It’s hard to form VCs in a foreign country. You’ve got to have knowledge on the ground, policies, networking among peers, so I think these opportunities are going to be very unique to China and its VCs because there is so much going on that you can do so much without having to go global.”

It’s not just the investors that will look inwards, as Cao sees most start-ups in China continuing to focus inland and not looking to go global. China is a diverse market and offers a lot of different types of opportunities, and this can help companies become big without the need of expanding outside of the country. However, in the next five or 10 years’ time some of the companies will begin to look more globally and start to expand, particularly within southeast Asia, he added.

Funding into the Chinese FinTech space saw a dramatic fall from $12.1bn in 2016 down to $1.9bn in 2017. The high level of capital was due to a handful of big deals, such as the $4.5bn Series B of payments company Ant Financial. Another reason for the dip could be due to People’s Bank of China putting an emphasis on regulating its FinTech ecosystem. However, things are looking to change with reports from the media emerging around Ant Financial being close to a $10bn funding round, with a $150bn company valuation.

Cao sees China’s FinTech sector as ‘very hot at the moment’, with there being a lot of opportunities and chances to become a big company. Most of the financial institutions in the country are fully or semi state-owned which creates the chance for FinTechs to bring new types of products to the market. The country has also seen more and more regulation around certain areas like lending and cryptocurrency exchanges. He added, “There’s certainly some uncertainty around regulations but overall it’s a very deep sector and we’re still in the early days of the sector.

“As a technology investor I would say it’s one of the biggest areas for growth. I think the government has embraced the support of these technologies, so you do have good support, but at the same time there always some regulation in the space, so you’ve got to tick the right lists,” he added. Areas like marketplace lending and payments have been ‘played out’ in China, and focus will be put towards technology like blockchain and how it can help. This will be met with more regulations, but this is the same with any new technology and over time they will understand it more.

Payments and remittance companies received the biggest share of funding in China’s FinTech sector last year, with the space pulling in $1bn, according to data by FinTech Global. The next biggest area for funding was marketplace lending, with a total of $827m being invested over the year, which represents around 34 per cent of total investment volume.

The FinTech sector in China is not really disrupting traditional financial institutions, instead its providing solutions for gaps within the market, according to Cao. Marketplace lending companies are providing micro-loans which are not available from other places as banks do not provide that type of loan. The same is for payment companies and wealth management companies, they are not taking away services, instead they are solving problems faced by consumers.

Blockchain technology is one area that Cao is interested in due to its ability to ‘change the way industries work’. It can help to make processes like lending and payments more secure and transparent. He added, “China is sort of ground zero for this kind of work because the government is very keen on pushing for the use of blockchain and the consumers are much keener to adopt these new services.”

However, there are still some boundaries for the new technology and it needs to find its spot in the market. There are various areas where it wouldn’t work, but it can greatly improve areas like credit scoring. “Blockchain is quite dynamic and there are a lot of factors involved. on one hand its quite innovative and on the other its quite disruptive, so that has to be controlled and managed. It’s almost kind of a give and take in that space.”

Earlier in the year, Sky9 Capital held the $200m final close for its third technology investment fund. The China-based investor looks to make seed and Series A deals between $1m and $10m, as well as $10m-plus expansion-stage investments. Sky9 has already tapped the fund to back B2B e-commerce platform ZhaoYouWang, online wealth management company eBroker, and power bank sharing platform Energy Monster.