The Great Khaleesi Daenerys Stormborn Targaryen from Game of Thrones wasn’t the only one riding dragons to victory last year. So-called Chinese "fintech dragons" have breathed some financial fire of their own in 2016, capturing the top spot in the fintech investment space. The big question is whether winter is coming for US and EU fintech firms, or whether this is just a temporary shift in focus from venture capitalists.
In a report released this month by Citi we found that China's share of global fintech investment more than doubled in 2016 — from 19% to 46%. During the same period, the share in the US dropped from 56% to 41%.
Regulation Frameworks and Sector Shifts
What accounted for the shift in investment? Different regulatory structures. China’s open regulatory structure allowed fintech firms to innovate more freely in the bank platform services space, delivering more complete banking and insurance digital experiences.
In the US and EU however, firms have tried to innovate in much murkier regulatory waters. While it seems likely that bank regulations in the US will be eased by the new administration and Congress, US bank platform provider hopefuls still face massive regulatory barriers to entry and therefore have generally chosen to pursue (less regulated) sector based strategies.
The shift in investment also follows the dramatic technological improvements in the country, as Chinese adoption of mobile internet reaches 100%.
Will the Fintech Balance of Power Shift East or West?
Regulations weren’t the only problem for US fintech in 2016. Fraud and PR crises at Lending Club and Zenefits put more pressure on the US lending and compliance sectors and these actions, in turn, invited more scrutiny from bank regulators and Congress. These actions did not kill the sector however. In fact, lending and payments remained two of the most popular US Fintech sectors in 2016. In addition, US fintech firms enhanced models in B2B and “InsurTech” sectors.
If established regulation regimes and corporate integrity issues weren’t enough, 2017 has ushered in tidal waves of international trade and regulatory uncertainty. Bank of England Governor Mark Carney warned that fintech’s democratic revolution could pose liquidity risks to the established banking system. President Trump has (as expected) pulled out of TPP and is looking at renegotiating all multilateral trade deals. The new inward facing US has created trade and finance void that in the digital banking space, won't take long to fill (especially by the competitive Chinese dragons).
While the US had its fair share of fintech sector success in 2016, the bigger question is whether we're seeing a more permanent shift toward the Eastern fintech and innovation in 2017? Late in 2016, Chinese President Xi Jinping said, “China will not shut the door to the outside world but will open it even wider,” also vowing to "fully involve ourselves in economic globalization." If that statement holds true, inward facing Westeros leaders may want to watch out for a serious challenge from the Essos dragons in 2017. Hold onto your hats!