Financial and technological innovations deeper and deeper penetrate our lives. It has become a usual thing for us to buy pizza online or pay a taxi using mobile phone, despite the fact that Kazakhstan is far from being in the global top ten in terms of the financial technology development. In order to keep pace with the advanced countries, it is interesting to study the experience of China, where the new online giants successfully supplant the traditional financial institutions. What are the drivers of fintech progress in our neighbor and are they possible in our country?
At present, China is an undisputed leader of the global financial technology market. According to CB Insight, in 2016, China attracted a record amount of investments in the industry – $10 billion, bypassing the US for a first time and becoming the world leader. 8 out of 27 fintech “Unicorns” – technology companies with an estimated value of more than $1 billion, were established in China.Online fund for asset management Yu’e Bao (owner – Ant Financial, a subsidiary of the Internet giant Alibaba) after 4 years of operations in 2017 became the world’s largest short-term investment fund, managing a capital of $160 billion on behalf of 260 million customers. Lufax – the world’s largest P2P loan platform (owner – Ping An Insurance) in 2016 was valued at $18.5 billion and had more than 23.3 million users. According to Ernst & Young, more than 100 out of 130 insurance companies offer their services online. The diversification of the fintech products resulted in the appearance of fully digital banks – MyBank and Webank. It is not just an “expansion” or “deepening” of the financial sector in China, but transformation to radically new form.
In Kazakhstan, fintech is also actively developing, although the results are not so impressive. For example, the market was strongly influenced by sharp changes in the national currency (KZT, tenge) exchange rate, especially in online payments and transfers segment. But even in spite of these difficulties, 2016 can be considered as a “breakthrough” year, as the domestic fintech indicators have increased several times.
Currently, there are 63 companies in 10 segments of the Kazakh fintech industry. The main segments are payments and transfers (26 companies) and microlending (15 companies). There are even three P2P loan platforms, but there is no open data on their activity.
(Abbreviation of “financial technology”) – a line of business that uses new technologies and innovations in the financial services market. It includes digital and mobile payments/transfers, electronic wallets, online lending, P2P platforms, crowdfunding, online funds, online insurance, etc.
Fintech market structure in Kazakhstan
Source: aggregate data of RusBase, National bank of RK, Fintech Association, RFCA Rating Agency calculations
In 2016 Kazakhstan’s Internet/mobile banking accomplished 58.3 million transactions for a total of KZT934 billion, which is 69.4% and 2.3 times more y-o-y. These transactions represent 44% of all non-cash transactions conducted through remote access systems.
Internet/mobile payments in Kazakhstan
Source: National Bank of RK
Recently, the use of electronic money has spread very rapidly. In 2016, the number of e-money transactions increased 2.7 times to 43.3 million, the volume increased 3.5 times and reached KZT154.2 billion. At the beginning of this year, Kazakhstani consumers had 5.9 million e-wallets (2.9 million in 2015).
There is a certain progress in online lending sector: in 2013 the first companies entered the market, on April 1, 2017, their loan portfolio was KZT18.8 billion (according to the First Credit Bureau). However, this is still a “drop in the bucket” – the share of online loans in the total volume of consumer loan portfolio does not exceed half a percent.
E-money transactions in Kazakhstan
Source: National Bank of RK
What has contributed to the impressive progress of the fintech industry in China? According to experts, it was a successful combination of several factors.
Driver #1 – Internet accessibility
First of all, this was a rapid increase of broadband Internet access for population. According to Internet World Statistics 2016, China had 731.4 million Internet users (more than in the US and Europe combined). The penetration rate was 53% and 92.5% of users went online through their smartphones, thanks to the wide access to public wireless communications in cities. Although the penetration rate is still lower than in developed countries (for example, in North America – 76%, in Europe – 74%), its absolute values gave an excellent “quantity” background for a variety of online services development.
The share of Internet users
Source: International Telecommunication Union statistical database
Kazakhstan is not just catching up, but it is ahead of China in terms of Internet infrastructure development. According to the World Economic Forum’s “Global Information Technology Report 2016”, Kazakhstan took the 39th place in the Networked Readiness Index, while China is at 59th place. According to TNS Infratest, Kazakhstan is a leader by share of smartphone users among post-Soviet counties – 65% of the population. There are 2.1 mobile devices with Internet connection per person on average. Thus, from the Internet accessibility point of view, Kazakhstan has a solid foundation for the online business development.
Driver #2 – E-commerce development
A successful combination of the developed goods production, a capacious domestic market, the rapid growth of consumer purchasing power and the development of Internet technologies led to the phenomenally rapid spread of electronic commerce – another important driver of the fintech development in China.
In 2016 online retail sales in China reached 40% (or $769.5 billion) of all electronic commerce in the world, including 12.6% ($626 billion) of all retail consumer goods in China. The appearance of such virtual trading giants as TaoBao / Tmall (Alibaba) and JD.com on the stage has provided the development of financial companies, first of all in online payments segment. Most of fintech companies were or later became their own financial divisions.
As a result, by the end of 2016, 163 billion transactions worth $14.8 trillion were made through payment systems of non-banking organizations (an increase of 100%), which is 30% more than China’s GDP for the same period.
In Kazakhstan e-commerce development is not so impressive. In 2016 its volume increased by 45% y-o-y and amounted to KZT226.4 billion. However, the share of online sales of goods is only 3% of all retail goods sales in the country. According to national Committee on Statistics survey, only 17.8% of consumers prefer to make purchases via Internet.
E-commerce in Kazakhstan
Source: Committee on Statistics of RK
In 2016 electronic payments for goods and services increased to KZT93.6 billion. However, this amount is only 41% of all online sales. It means that making purchases online, Kazakhstan’s consumers prefer to pay with cash, which is confirmed by the same survey’s data: 44.2% of respondents pay cash when receive goods, only 15.1% of consumers prefer mobile payments.
Thus, taking into consideration a very low reference base, the electronic commerce and online payments development demonstrate good positive dynamics. But e-commerce has not yet matured enough to become a noticeable driver for fintech development. At the moment, the Internet sites serve more like a “showroom” where the consumer check the goods, while transactions are mostly carried out offline.
Driver #3 – Unsatisfied financial needs
Experts call the “underdeveloped” banking sector as another fundamental reason for the fintech development in China. According to Ernst & Young, the number of commercial banks branches per 100,000 people is only 8.1 in China (for comparison in Europe and the United States – 28), the number of ATMs – 69 (in the US and Europe, 222 and 81, respectively), POS terminals – 1831 (USA – 3,700). The retail loans penetration rate is one of the lowest in the world – only 20%. A fifth of Chinese adults is not covered by banking services at all.
The reason for the weak banks activity in the retail and SMEs sector is well known – most of Chinese banks are affiliated with the government to some extent and mainly focused on corporate sector. Private clientele is the least interesting segment. The banks offer customers homogeneous, uncompetitive, unimaginative financial products that are not in accord with their current needs. It is believed that only fintech companies were able to meet the demand of the Chinese consumers, offering them alternative forms of financial services. Thanks to this situation, fintech companies attracted to some of their products up to 40% of traditional banks customers.
Percentage of banking/financial services customers using fintech services in China, 2016
Source: DBS Bank, 2016
Kazakhstan banks, in comparison with their Chinese colleagues, are more focused on retail lending: the level of credit penetration among the economically active population in 2017 is 56%. However, at the same time, there are only 600 POS-terminals and 53 ATMs per 100 thousand people. More than 90% of Kazakhstan banks provide Internet banking services, but only 20% of individuals use these services. Thus, while the online transfers and payments companies are only entering the market, the traditional banks have an opportunity to “stake out” their positions.
At the same time, the activity of traditional banks in the consumer lending is constrained by the huge amount of “bad” loans and increased non-return risks due to customers’ real income decline. This situation provides favorable conditions for online lending development. At the current stage, online lenders rather supplement traditional banks than push them out the market, focusing on the uncovered and underbanked segments (borrowers without official income, with a bad credit history, etc.).
Driver #4 – “Next” generation
An important support of fintech development in China is provided by digitally savvy young people. At the end of 2015, the Gen-Y or millennials (from 20 to 34 years) accounted for 25% of the population, but they consumed 45% of online services. They are not only open to new technologies, tolerant toward financial risks, more inclined to spend than the older generations, but also demonstrate more individual preferences, and demand real-time, hyper-connected, client-centric services. They do not acknowledge the authority of traditional banks.
It’s interesting, that historically established social norms in China predetermined a rather “relaxed” attitude of the population towards the confidentiality of their personal data, which are actively used by fintech companies. According to the Harvard Business Review, in 2015, the maximum amount of money that Chinese respondents would pay to protect digital communication information was $4.48 per person, compared to sizable $184.2 by the Germans to protect data on their health history.
In Kazakhstan, the most Internet-advanced Y generation also made up 25% of the population. However, unlike China, where the population is rapidly aging, in Kazakhstan the proportion of potentially active online consumers by 2030 will increase by 45% up to 37% of the population. This will happen thanks to the increasing inflow from generation Z (born after 1995), which is called the “genuinely digital generation”. This is another ray of hope for the fintech development.
Kazakhstan’s online services potential customers forecast
Source: RFCA Rating Agency calculations on the basis of Committee on Statistics of RK data
But for today, our consumers do not trust even purchase online, not to mention carry out more complex financial transactions. According to the national Committee on Statistics survey, 79.2% of respondents do not see any need to buy online. Thus, in order to realize the existing fintech potential, it is necessary to take measures to overcome customers’ negative perception of online services and improve their financial literacy.
Conclusion: Kazakhstan’s fintech has its own path
For now, the fintech development in Kazakhstan is at its initial stage and only “tests” the market for the adoption of radically new products. The economic and social prerequisites in our country are very different from those that provided fintech breakthrough in China. On the one hand, a wide availability of the Internet as infrastructure background for fintech development has been created. But on the other hand, the unfavorable economic conditions of the last decade, the devaluation, the sharp drop of the population’s real income restrain the activity of consumers in the network, limit the improvement of their financial literacy, increase customers’ sensitivity to the risks associated with using of new virtual products.
As for the banking sector, if in China it is actually “pushed out” from the consumer market, in Kazakhstan, banks have already created a certain background (successful card business, developed Internet banking, trust of many consumers) in order to develop fintech on their own basis and become a part of this market. If only they will be on time to integrate into a dynamic virtual market. After all, a “holy place is never empty”.
While this article was written, several significant events took place on the market, which in the near future can have a significant impact on the development of the domestic fintech. One of them is the announcement of the first use of blockchain for the sale of state notes by the National Bank – a revolutionary technology, which will allow to conduct fintech operations more efficiently and safely. Another event is the intention of the chief financial regulator to introduce remote bank client identification system, which will simplify the access to virtual financial services by customers, as well as enable the financial companies to develop and offer new products.
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 Tenge exchange rate per 1 USD in 2016 – KZT342.2, in 2015 – KZT221.7