The global fintech ecosystem has been presented like the board game Risk, with banks, fintech startups, traditional IT providers and GAFA companies (Google, Apple, Facebook, Amazon), distributed at each corner slowly advancing. As apt as the Risk analogy is, it tends to miss out the most important geopolitical force on the board: China.
Fintech people don't appear to understand the power of China. The Chinese government's fintech war chest is about $100bn, four times the rest of the planet. China's platform approach to finance being done by companies like Alibaba and banks like Ping An Bank, isn't just a couple of years ahead of the US and Europe, it's a light year ahead.
And then there's the scale. But it's not just that China has well over a billion people - it's now reaching into markets like India and Africa, consolidating those bi-lateral trade corridors. This means China has captured markets that account for more like three to four billion users, in places with fast emerging middle classes. It is using a web-based platform approach, to the degree that this constitutes a revolution in the actual structure of trade.
An expert on this geopolitical phenomenon is Haydn Shaughnessy, author of the upcoming Platform Disruption Wave, that tackles these issues head on, and SHIFT: A Leader's Guide to the Platform Economy.
He lists Alibaba as the most innovative financial institution on the planet. The likes of Alipay, WeChat and Tencent have developed platform-based financial services, starting with things like ecommerce, to include integrated escrow, all manner of payments, wealth management, small business loans, logistics, the list goes on.
Shaughnessy sought to clarify a misconception: that disruption is about the rise of new payments platforms. He told IBTimes: "It's really important to understand that this is not about payments as such. That's a low margin, high volume business and a very over-crowded market.
A new global trade system
"What's relevant to Alibaba is that it has integrated logistics with payments with merchant to consumer trade. What you have there is the beginning of a new global trade system. That's what I think people miss.
"If you are banker and you are in transaction banking, you are foolish if you think in five years' time the majority of your customers' transactions will be conventional supply chain transactions, or conventional trade transactions. They and a growing host of new businesses, often global SMEs, will be trading through platforms like Alibaba. So the banking side of the business will gravitate towards Alibaba, and there may be one or two other platforms competing alongside them."
Shaughnessy pointed out that Alibaba has established all the necessary trust factors after being in that business for 15 years and is now an integral part of what China is trying to achieve politically. "So you should see Alibaba being a platform for Chinese soft power developing the Indian small business community, incentivising the Indian small business community to sell into China, helping the Indian small business community to grow.
"You could see that bilateral trade corridor being incredibly effective for China as a power base as well as for becoming a more powerful economic engine for the region.
"I mentioned India, and I could have mentioned Africa, and you might also think of other parts of Asia. China has these as captured markets now. China is developing bi-lateral trade corridors with countries that have strongly emerging middle classes, and is playing a long game. I think it feels somewhat excluded from the multi-lateral agencies, and it can control its currency relationships in a bilateral way much more effectively.
"There are a good number of reasons for trading bi-laterally between Kenya and China, for example, and between certain parts of India and China, rather than trying to become a major player in the global multi-lateral trading environment that western financial institutions dominate and where the dollar will remain king.
India, Africa, Asia
"The upshot of this is I think what China does in India and what it does in Africa and Asia will, over time, compress opportunity for western multinationals. That's probably a more effective way of competing with them than to try and come to Europe and to the US and try and do plot market entry strategies against strong incumbents. That was possible for Japan in the 1970s and for South Korea in the 1990s and so on. China and Alibaba are practising a different type of geopolitics, if you like. If you look at the overall picture western multinationals will be short of growth at home and competing on China's terms in the main growth markets. That will also be problematic for banks whose job is to help companies find growth."
So is this strictly sui generis? What sort of cultural or regulatory climate has fostered China's platform innovation, and how could it be emulated here? Apparently, a large segment of Chinese millennials trust their bank (91%), and yet some 45% said they would switch to a tech platform tomorrow – something of a paradox. In this respect China follows a global millennial mind-set; they probably have more in common with US millennials than their parents' generation.
Shaughnessy likes to point out that Chinese companies respond nimbly to business needs and are not held hostage by IT departments, the way that particularly banks in the West are. Another key differentiator is the participatory element in most Chinese innovation.
"In the West we're in this very backward situation where we are thinking to ourselves, we must do something like 'lean innovation': we will ask customers what they think about a product before we build it.
"Well, in China it wouldn't be a stretch to get 20,000 customers participating on a platform very quickly. We are a light year behind. We think that if you can five or six customers in the room, that's your minimum for products in a lean innovation process. That means you have done customer participation. It's just a total joke.
So which technology companies are positioned to possibly weather the Chinese fintech storm – Google and Facebook?
"I don't think they are in the running to be honest," said Shaughnessy. "What are they really doing? I think Apple has just found itself a new revenue stream by badging up somebody else's payment network. I think that Facebook could be doing ten times more than it is doing in real trade, I mean promote trade rather than be a platform for ads; I think its timidity is shocking. I don't think that Google at this stage in its development knows where it's going."
Instead, he rates SAP, the enterprise accounting software provider, as the great white hope within the Europe/US sphere. "If you look at what SAP is doing with SAP Financial Services Network, and with its AribaPay platform - it is mimicking, in microscopic terms, what's happening at Alibaba.
"The thing about what SAP is doing is that, because the banks are its customers, it's not going after their business yet. But there comes a point where SAP's business is going to be cannibalised by somebody or disrupted by somebody.
"You can imagine that in five years' time something like ERP becomes so modularised and commoditised and 'appified' that SAP has to say, 'we have to get out of this business and by the way we've got one cooking over here; here's one we did earlier.' And that's a platform that takes business off banks."