Inside Bitcoins: Fintech in China: From Duplication to Innovation Zennon Kapron January 29th, 2015

Overview

•  China Today •  How the financial industry is changing •  Setting the stage for financial innovation •  Digital Currency •  Challenges •  Conclusions

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Macroeconomic / Financial Industry Development

•  GDP Slowing •  Shadow Lending •  Increased focus on changing the industry

–  Regulation / government driven

China economy still strong, but growth has slowed / structural issues creeping in

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6

8

10

12

Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2

GDP Growth: ChinaQ1 2010 - Q3 2014 Y-o-Y growth (%)

2010 2011 2012 2013 2014

10.3

9.6 9.8 9.7 9.59.1

8.9

8.1

7.6 7.47.9 7.7

7.57.8 7.7

7.3 7.57.3

China: China Basics – China Today

•  World’s biggest land-grab •  1.5B+ people = competition for scare

resources •  Increasingly wealthy middle-class •  Sacrifices for economic growth (bad

pollution, poor medical care) •  Developing country with modern

problems –  Obesity –  Income distribution –  Health care –  Starbucks…

•  It is in this context that we are seeing one of the biggest shifts in how a population interacts with the financial industry anywhere…

4  

China is talking more on the phone: Mobile Uptake

Mobile payments in China are increasing rapidly as more and more users start to use smartphones and payment options increase.

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7.47 8.59 9.86 11.12 12.29 12.86

56% 64%

74%

83% 91% 93%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

2

4

6

8

10

12

14

2009 2010 2011 2012 2013 2014

China Mobile Phone Users and Mobile Phone Penetration: Unit 100 Million, Percentage

China Mobile Phone Users Mobile Phone Penetration

Chinese Phones are getting smart: Smartphone Penetration

Increased availability of faster data-services through 3G and 4G has supported an already strong shift to smartphones.

224 266 390 449

30%

65%

88% 90%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

50

100

150

200

250

300

350

400

450

500

2011 2012 2013 2014

Smartphone sales volume and % of Overall Mobile Phone sales 2011-2014 (Unit: Millions & %)

Mobile Phone Sales Volume Smart Phones as % of Overall Mobile Phone Sales

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People are doing more stuff on their phones: Mobile Internet Usage

Continued growth and availability of data and smart phones has driven mobile internet usage setting the stage for increased e-commerce and mobile payments

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233 303 356 420 500 527

61% 66% 69%

75% 81% 83%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

100

200

300

400

500

600

2009 2010 2011 2012 2013 2014

Mobile internet users and Mobile Internet Usage as % of Overall Internet Usage

Number of Mobile Internet Users Percentage of Mobile Internet Usage

Buying online: E-Commerce

•  In 2013, China became the world’s largest online market, surpassing the US.

China’s e-commerce industry has ballooned in the past few years, as consumers become used to shopping online; still, it represents < 10% of total consumption

461

783

1320

1885 1840.81

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2010 2011 2012 2013 2014Q1-3

China Online Retail Market, Units: Billion RMB

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This is why E-commerce in China matters

E-commerce in China is eclipsing that of the west

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Comparison of China's Singles Day to America's Cyber Monday and Black Friday US$Billion

Source: Kapronasia, company reports

Singles Day Black Friday Cyber Monday

0

2

4

6

8

10

201420132012

5.75

9.34

2.29

1.2

2.65

1.513.04 1.04

1.98

Buying Online…on your mobile: Mobile E-Commerce

Increasingly, Mobile shopping represents a growing share of overall e-commerce

98.50% 94.20% 85.50%

70.00% 57.30%

47.30% 43.10%

1.50% 5.80% 14.50%

30.00% 42.70%

52.70% 56.90%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014e 2015e 2016e 2017e

Breakdown of e-commerce purchasing Channels in China

Mobile

PC

Source: iResearch, Kapronasia Analysis 10 15-2-2

Paying Online: Mobile Payment Transaction Volume

•  E-commerce was specifically mentioned in the 12th five-year plan with mobile payment being a crucial aspect of that.

•  Development of information and communication technology (ICT) is also a measurement of the performance of local governments

As measured by value and volume, mobile payments are growing very quickly in China

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59 80 151 1,195 16,201 36% 89%

691%

1255%

0%

200%

400%

600%

800%

1000%

1200%

1400%

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2010 2011 2012 2013 2014Q1-3

China Mobile Payment Transaction Value and Growth Rate: RMB Billion

Transaction Value Growth Rate

Mobile Payment Preferences Chinese consumers are gradually shifting to contactless payments including NFC.

0.8%

1.9%

2.9%

4.0%

4.3%

11.7%

17.9%

27.5%

29.2%

0% 5% 10% 15% 20% 25% 30% 35%

Others

Plug-In Reader

NFC Payment

Bar Code Payment

QR Code

Mobile Phone Bundled Card

Mobile Web Payment

SMS Payment

Mobile App Payment

Source: iResearch  

2012 2014

Source: Kapronasia Primary Research, 2014  

0.2%

1.5%

3.7%

8.7%

9.9%

18.0%

26.2%

31.7%

0% 10% 20% 30% 40%

Others

Plug-in Card Reader Payment

Barcode Payment

NFC Payment

Mobile Web Payment

SMS Payment

Mobile App

Mobile Phone Bundled Card Payment (Quick Pay)

Question: What type of mobile payment method do you prefer to use?

NB: Kapronasia does not know the sample set or specific methodology that iResearch used for collecting 2012, and so 2012 vs. 2014 data should be used as a broad / general comparison only and should not be compared directly.  

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Peer to Peer (P2P) Lending

•  Small and medium enterprises have been starved of cash •  Online P2P lending has been in existence since 2007, really only gained traction in

previous 4 years •  The lending solves a problem => allowed by the government

The tacit acceptance of the government of P2P has allowed the industry to grow rapidly

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What is financial innovation?

•  May not be 100% transparent to end customers –  Credit scoring using big data => back-end –  Fraud detection

•  May not be 100% sexy –  Fraud detection

•  Both corporate and consumer –  Corporate – Australia real-time payments –  Consumer – Apple Pay

•  The last 5 years has been a renaissance in fintech investment –  Silicon Alley in NYC –  Silicon Roundabout in London

Leveraging technology to provide a product or service more effectively to a customer.

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What creates the perfect setting for financial innovation?

•  Government is committed to reform, but can only move so fast –  Crossing river by feeling for stones

•  The government is challenged to do it themselves –  Speed –  Agility –  Knowledge

•  Consumers are getting restless and want more => skipping ‘personal financial manager’

The confluence of slowing economy, reforming financial industry and fast moving technology providers is creating a ‘perfect ricebowl’ for financial innovation.

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What drives financial innovation?

•  Although 1.4 billion customers is a lot of people chatting, it is only 1.4 billion •  Imagine if you can get those 1.4 billion to start booking taxis too => 2.8 billion

customers •  In fact, tech companies are in a massive land grab and effort to create one-stop

platforms for consumers •  Numerous examples of non-financial institutions leveraging tech to get ahead:

–  Mobile payments (Alipay, Wechat) –  Big data for finance (Baifa) –  P2P Lending (Dianrong, Creditease)

•  Majority of innovation helps the industry, so regulators are taking backseat…for now •  Personal financial management is new in China -> retail investors are being given tools

So many customers, need more products.

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Bringing it all together: Platforms that Work

China’s large internet services have also provided social ‘hubs’ with integrated payment functions, completely avoiding the need to work with MNOs and Banks

•  Wechat, an online chat app from Tencent => incredibly popular in China. •  Functionality: Book taxis, Pay friends, Buy movie / show tickets, Pay bills, Mobile top-up •  Platforms are underlying innovation

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Bringing it all together: Platforms that Work – for the consumers

Websites in China are notoriously cluttered – initial focus was on supporting that – increasing focus on fluidity

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Check Point China

•  Economy is not in the best of shape, but still better than most •  Consumers are getting online and getting mobile – mainly on smartphones •  As more people are mobile, shopping and payments are following •  Younger generation is increasingly used to doing everything online •  Regulators are pushing change – 2013-2016 reforms:

–  Direct Banks Implemented –  Private Banks on the way –  P2P lending continuing w/o regulation –  HK / Shanghai connect –  Deposit Insurance –  Stock Options –  Financial Futures –  Interest Rate Liberalization –  Online Finance –  Growth Enterprise Board –  Negotiable Deposit Certificates –  NFC Standards –  Credit Asset Securitization –  Bankruptcy Provisioning

An increasingly online / mobile user base is enabling a massive shift to online payments and finance.

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And the list goes on…..

Opportunities for Digital Currencies / Digital Technology

•  Younger generation, and increasing the older generation are used to new technology •  QQ coins have been around for ages => population is used to virtual goods •  Solutions that focus on making something easier •  Chinese government’s attitude towards Bitcoin

•  Will they regulate further? •  Law targeting virtual currency in 2009; forbade virtual currency for purchase of real

items. •  Focused on Q Coin, paid for online services such as games. However, it seemed to

be easily applied to Bitcoin •  Unlike Q coin, the Ministry of Commerce and the Ministry of Culture can’t target a

company or entity to regulate or to submit the circulation and transaction volumes of Bitcoin.

•  Is the government happy enough with the status quo? Not much has changed, what were they unhappy about before?

China’s financial industry is still relatively immature => scope for providing new and innovative solutions

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Why should you care?

•  Although 1.4 billion customers is a lot customers, it is only 1.4 billion •  Compare:

–  Alipay 1.4 billion native potential customers => why expand? –  Paypal 250 million native potential customers (US) => they had to expand

•  Western financial industries are either hampered by regulation or don’t care… •  Some have tried

–  Paypal’s online money platform => closed –  Amazon wallet => closed

•  Significant opportunity for domestic companies expanding abroad

China’s tech companies have a massive userbase to test financial solutions and products at scale => lessons learned for moving abroad

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Challenges

•  P2P Lending allowed as fits with reform and helps the industry by reducing risk •  Bitcoin was speculation => didn’t solve any issues in the market •  Too many business models for too few users => demand needs to increase •  Crypto is a solution searching for a problem

•  Current Bitcoin business models don’t fix much in China: –  Merchant fees are low with CUP cards –  Security no longer seems to be a concern for users –  Real time domestic payments through banks or 3rd party platforms –  Exists on its own – not tied into social

However, solutions need to fit with the government’s path for the economy and reform

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Conclusions

•  We will look back at China’s financial industry in 5 years as the most innovative globally •  Crossing the river by feeling the stones => path to reform •  Government is not anti-bitcoin, they are just anti-risk •  Business models that will succeed are those that help the industry from the beginning,

not hurt

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Visit www.kapronasia.com or send us an email: research@kapronasia.com Twitter: @chinafintech

Thanks / Q&A

Backup

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Source: Kapronasia Primary Research, 2014  

NFC – Preferences and Reasons for Using NFC

Metric

Would Pick NFC

1

Likely to Pick NFC

2

No Impact 3

Likely to Pick Other Mobile

Payment Method

4

Would Pick Other Mobile

Payment method

5

Notes

Transaction Speed

Convenience of Bundle w/ bankcard

Example: Quickpay

Convenience of wallet functionality

Current SIM-NFC solutions often have multiple cards in a single mobile wallet

Simplified Operation

Perception that NFC payment simplifies payment

Higher Security NFC payments’ generally seen as safer

Widely Known and Used

NFC marketing has helped awareness

Broad Usage Available solutions in the market

Try New Payments

Curious about new payment methods

Used Currently for Payment

Many users are used to their current payment method, so there seems to be stickiness.

2.33

2.50

2.24

2.42

2.22

2.65

2.42

2.13

2.83

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