Chinese-owned social media app TikTok is a global phenomenon. In the United States, TikTok seems to have taken over public discourse, if not the public’s phones: policymakers continue to express concern over the app, trying to force the sale of the company to a U.S. entity or pushing to ban it entirely, while teenagers, unbothered by the fuss in D.C., use it to get beauty tips or try out the latest dance challenge.
Yet, for every TikTok, there is a WeChat, an app that is ubiquitous in China but that has failed to catch fire abroad. WeChat is just one of many Chinese apps incorporating financial technology (fintech), helping remake how more than one billion people think about banking and spending money. Yet, the rest of the world remains virtually unaware of these apps’ existence.
Still, as Peterson Institute for International Economics Senior Fellow Martin Chorzempa argues, Chinese fintech companies and their super-apps will still revolutionize global finance. In this excerpt from his book The Cashless Revolution: China’s Reinvention of Money and the End of America’s Domination of Finance and Technology, Chorzempa explains why Chinese fintech has thus far struggled to gain a foothold in the international market, but will likely inspire other companies to replicate the fintech super-app model in their home countries.
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Both the good and bad sides of Chinese fintech are migrating to the rest of the world. For smaller fintech companies, tighter regulations [in China] combined with the domestic dominance of Ant Financial and WeChat are leading them to try their models elsewhere. Entrepreneurs like the Chinese founders of Ant-backed Indonesian fintech start-up Akulaku gained experience in China but started their company in Indonesia.
On the negative side, once peer-to-peer (P2P) lending platforms learned how to reach users on the Internet, they took their fraud to other countries, including India, Vietnam, and Indonesia, where it has become a real challenge to regulators, who have to resort to Chinese-style website blocking. P2P is symbolic of an important global shift: China is now too large and interconnected for its domestic issues to stay isolated there—they will eventually spill over. China’s inability to manage supply in its domestic steel market led to oversupply that caused global prices to crash and distorted markets around the world. Similarly, its inability to handle illegal P2P lenders has led Chinese problems to affect others.
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In April 2017, Ant Financial was engaged in a fierce bidding war with Euronet, a U.S. payment company. The prize was MoneyGram, an American company with 350,000 agent locations in 200 countries for money transfers and cross-border payments. If it won, Ant would instantly turn into a global player with billions of clients and relationships with financial institutions outside China. Immigrants sending money from Florida to Venezuela and members of the U.S. military sending money back home to Arkansas would be part of a Chinese payment network. It would also scoop up licenses that would allow it to offer payments all over the United States, potentially taking on Visa and Mastercard on their home turf. Ant won with a last-minute $1.2 billion offer, but it still faced a U.S. national security review. Less than a year after the merger was announced, Ant gave up. The Committee on Foreign Investment in the United States (CFIUS) was convinced that the deal would impair U.S. national security. Such a high-profile failure to complete a deal is a sign that going out may not be easy for Chinese fintech. Outside China, many of their home advantages either will not help or could be impediments.
WeChat tried to promote its domestic branded apps to users in overseas markets, but it lacked the user bases and ecosystems that served as anchors in China. Ant will face the same problem if it tries to promote Alipay for foreign users. Problems adapting to local markets are even harder to surmount when you need to start from scratch, before any network effects take hold. WeChat itself can attribute much of its success in China to QQ. People could easily add their existing QQ friends into the WeChat network, and users in turn helped lure in businesses as partners. To get off the ground, Chinese apps will need to wrest market share away from companies like Facebook, which is far ahead of WeChat in messaging and social networks around the world, and local e-commerce companies, which already have relationships with sellers, merchants, and logistics networks. So far, TikTok is the only Chinese contender that has managed to successfully take on Facebook in social media at a global scale, although it is primarily an entertainment short-video app with less of a clear path to becoming a super-app.
WeChat’s India launch has become a cautionary tale. In 2012, more than 20 million Indian users joined WeChat in the early months of an advertising campaign that featured Indian celebrities. The advertising was adjusted to Indian culture and conditions, but the app was not. WeChat was not as easy to use as WhatsApp, and the “people nearby” feature turned on location sharing that confronted women with a “stalking problem” of unwelcome messages from men. Indian smartphone users tended to have less advanced phones, as well as less reliable and more expensive data service than in China. The large memory requirements and costly data demands of a super-app thus made it less convenient than bare-bones WhatsApp, which dominates the Indian market today. WeChat’s challenges echo the issues that foreign giants like eBay had competing against Alibaba, especially the lack of adjusting the app design for another country. In this case, the U.S. company adapted better to the Indian market.
In June 2013, though, a greater challenge came—users realized the app was Chinese when India’s government leaked that it was considering banning the app on national security grounds. U.S. companies such as WhatsApp were also suspect, but local media reported at the time that “the security agencies are more worried because it is a Chinese company.” Active users fell to 6-8 million by October 2015, and most of the local team disbanded. Tencent then invested in a local player called Hike, which has also not had much success against Facebook and WhatsApp. It was not an auspicious start for a company used to dominance in its home market, and the security concerns in India would only get more severe. Most Chinese apps that were once popular in India are banned today.
WeChat expanded in South Africa in 2013 but could not dent the market dominance of WhatsApp, which has been owned by Facebook since 2014. Nor was WeChat able to do so in Brazil. It succeeded in China by starting with a successful chat app and then gradually adding functions to turn it into a super-app, but abroad the strategy was reversed, with Tencent trying to pull users into a chat product with super-app functions. It did not work. Tencent’s partner in South Africa admitted the difficulty: “Because there is so much competition for the chat product you need a certain audience engagement before any of those other products can become mainstream.”
Despite raising hundreds of millions of dollars, Tencent’s India investee Hike learned this the hard way. In January 2019, it announced it would reverse course from the super-app model and instead release separate apps for its key functions. Hike will “undo some of our experiments away from the Core to bring more focus and much needed simplicity to the product.” Tencent’s trouble abroad may be evidence that the super-app model can’t be built from the ground up or that it is just less suited to other markets than it is in China. It seems the super-app model is an all-or-nothing phenomenon that works only if you have a platform that is already dominant in other key markets. Therefore, until Chinese firms prove able to build out such a dominant platform abroad, Chinese fintech will pose a minimal threat to U.S. payment companies and the U.S. dollar.
The super-app model is designed to plug into as many parts of users’ lives as possible, harvesting and using sensitive data from real-time location and contacts to financial health, while connecting to a country’s critical financial infrastructure. If one Chinese app gains this much power over and information about its users, would it be in a position to refuse high-level Chinese government information requests for insights it is gleaning about the foreign country?
Ant also has many state-owned shareholders, making the Chinese government an indirect partial owner. Ant’s multi-billion-dollar fundraising rounds in 2015 and 2016, which in part aimed to give it the capital to expand abroad, included China’s sovereign wealth and social security funds, China Development Bank (one of the main funders of China’s Belt and Road Initiative), one of its largest state banks—China Construction Bank—and major state-backed insurers. As the Chinese Communist Party extends its reach into private companies, giving Party committees more influence and forcing the alignment of business with its priorities, Chinese companies may find it harder to pursue purely commercial interests. In 2018, Ant’s record-setting $14 billion funding round for “globalization and technology innovation” listed 14 foreign investors by name but said little about domestic participants downplayed as “mainly existing shareholders.” However, many are state-owned, almost certainly a liability when the U.S. national security review killed Ant’s MoneyGram acquisition.
On the other hand, the regulatory history of fintech shows that powerful companies like Alibaba and Tencent cannot be boiled down to pure tools of the Chinese state, even if their power has been curtailed significantly in the recent regulatory reset. They have neutered government regulations, and their thinking on technology has influenced government policy. Police officials say that companies like Alibaba push back on government requests for data they find unwarranted. The Party needs firms like them to thrive to achieve its economic goals and reach the frontiers of technology development. Alibaba and Tencent know that if they have a reputation of sharing foreign users’ private data with the Chinese state, then regulators and users abroad may block them. This tension between a status as national champions symbolizing China’s rise and the desire to be viewed as purely commercial entities abroad is becoming more difficult.
When China’s fintech giants expand abroad, they cannot rely on government protection from foreign competition. Other countries are protecting their own local fintech companies from stronger foreign competition. China’s experience has taught these nations not only the power of super-apps but also the value of ensuring that foreign giants cannot nip the progress of their local firms in the bud. In Indonesia, for example, a central-bank official said about Chinese fintech firms “that all global players can bring their payment instruments to Indonesia” but that Ant and WeChat are restricted to foreign users and the foreign-currency business, just as China has largely kept Visa, Mastercard, and American Express out of China’s domestic market.
Ant and China may get the same treatment in other countries that Yahoo! and Softbank got in China in 2010. If Chinese regulators were unwilling to allow their online-payment market to be controlled by Alibaba because of its large U.S. and Japanese equity holders, why should other countries allow theirs to be controlled by one with a major Chinese equity holder?
Protectionism may have also contributed to the failures in localization and international expansion that WeChat and Ant have faced. Companies like Facebook and Google are blocked in China, so Chinese tech has limited experience competing with them. The large, protected home market helped them reach an enormous scale, but they may have become like a species on an isolated island uniquely evolved to that environment. Just as WeChat has failed to attract foreign users for its chat products, Alibaba’s efforts abroad in e-commerce have floundered. In India, Amazon and Flipkart, owned by Walmart, are far ahead of PayTM’s Alibaba-invested e-commerce arm, which has struggled since its IPO despite all the help from Ant.
Although Chinese fintech giants and tech players have been adept at adapting foreign technologies and models to fit China, they are struggling to adapt Chinese technologies and models to foreign markets. Chinese fintech might be coming to the rest of the world only in its ideas and inspiration, rather than as a direct competitor.