Learning from China’s e-commerce and e-finance breakthroughs

Financial services and logistic industries must adapt their business models and strategies to meet the challenges posed by China’s mobile and Internet technology experiences.
Learning from China’s experience, foreign companies can strengthen their own online strategies and improve their credit cultures.
By 2013, China had more than 600 million Internet users, a 44-per-cent penetration rate and a smartphone penetration rate of 70 per cent. These penetration rates were expected to grow at 15 per cent per annum into 2017.

Transforming economy
China’s sudden e-commerce emergence is a world-changing development that is also quickly transforming its economy.
Using global-leading innovation, China is quickly transforming its old cheap labour, heavy capital investment and manufacturing exports business model into a knowledge-based and consumption- and services-driven economy.
“Technological innovation is the central driving force shaping China’s breakthrough out of the middle-income trap and its emergence as a highly service-oriented and knowledge-based economy.”
Thailand can learn much from China’s experiences because its online small and medium enterprise (SME) retailers have benefited largely.
Rapid logistic and transportation industry improvements allowed China’s online retailers to surpass all department stores sales.
“.... e-retailers now deliver purchases door to door within 24 hours.”
Today, many Chinese consumers browse in retail shops or department stores, before buying on the Internet.

Technology simultaneously creates and destroys value
While technology may create tremendous pressure on traditional bricks and mortar businesses, Li Sai Yau and Cathleen Yi Tin in Chapter 6 – “Impact of technology on China’s financial system” – said online retailing growth doesn’t necessarily mean reduced bricks and mortar retail industries.
Innovation, they said has created new value and allowed manufacturers to reach new markets previously constrained by the old business model’s geographic and demographic limitations.
E-tailing growth has been massive third-and-fourth tier Chinese cities where retail stores were more expensive and little product choice was available but coastal first-and-second tier retailers have improved service quality while allowing SMEs to sell directly in e-retailing market places.
“E-market places allow SMEs to scale rapidly at low cost, as well as provide instant and direct access to customers.”
 According to the authors, net benefits are currently unclear, but the mobile e-commerce and e-finance trend is irreversible.

Rise of e-finance and its implications
Similar to Thailand, China’s existing financial sector was long dominated by the formal banking sector.
The large state-owned commercial banks primarily serviced state-owned enterprises, leaving its small and medium enterprises underserved even though they accounted for a large share of GDP, employment and innovation.
The Chinese banks also preferred to serve high-net-worth customers, and imposed stringent investment thresholds for wealth management financial services that precluded low- and- middle-income savers and investors.
Moreover, officially commercial banks paid only about three per cent interest rates for one-year savings deposits.
Recognising the demand for financial services from SMEs and savers investors, China’s e-commerce and other Internet companies have progressively entered into financial sector, with payment, lending and wealth management businesses.
“The rise of e-finance brings clear benefits – greater convenience, efficiency and market access at lower costs.”

China’s e-finance business
Led by Alibaba’s Alipay China’s online third-party payments businesses grew fivefold from 2010 to 2013. By July 2014, China had 269 licensed third-party payment operators and Alibaba had almost half the market.
Li and Tin said China’s third-party online payment companies have transformed the traditional cash- and-carry SME business model into thriving e-commerce operations.
China’s third-party payments systems reduced transaction costs because they require little or no installation or transaction fees and escrow facilities have become an essential e-commerce element that speeds-up transactions at lower costs.
E-commerce has also provided an easy-and-convenient source of alternative SME financing source that doesn’t require collateral because it uses big data analytics to assess credit risks.
Strategic partnerships between Internet finance companies and formal banking sectors have enhanced mutual benefits and market evolution.
For instance, Alibaba and China Minsheng Bank (CMB) entered into a partnership leveraging CMB’s financial services expertise and Alibaba’s borrower credit data.
Technology has also become a major player in China’s Wealth Management Business because it could offer higher deposit interest rates to investors.
Launched in June 2013, Alibaba and Tianhong Asset Management offered Yu’E money market funds that raised US$92 billion from 100 million investors in its first operating year and became China’s largest and the world’s fourth-largest money market funds.
“Yu’E offers alternative private wealth management solutions – low entry barriers [as little as RMB 1] – competitive yields 5 to 7 per cent.”

New risks and challenges
China’s rising e-commerce and e-finance industries also pose new risks and challenges that require rethinking regulatory and policy development.
“With proper management and safeguards, e-finance can play a valuable role by channelling funds to capital-starved sectors and promoting financial inclusion in areas that are underserved by the formal banking sector.”