The Nordic tech scene is impressive and especially interesting in the light of major changes taking place within banking and fintech. However, even with a focus on the Nordics, it is of course of central importance to stay updated with things happening around the world. That China is the second largest economy in the world is a well-known fact, but that it is also one of the fastest moving in terms of connectivity and mobile centricity and home to some of the world’s largest and most fascinating tech giants may be less so. After recently returning from a trip to China, we took the opportunity to catch up with Sofia Ericsson Holm, Head of Strategic Partnerships at Nordea Transaction Banking, to find out about her journey and hear more about the Chinese payments systems and companies.
What was the reason for your trip to China?
It was an initiative on behalf of Nordic Finance Innovation (NFI), which is Chris Skinner’s network in the Nordics. NFI initiated a dialogue about arranging a business trip to China to see the technological advancements taking place there primarily within payments. The joint group was basically a mix of banks and retail companies around the Nordics. For example, Vipps from Norway and Swish from Sweden were represented, and of course there were a few representatives from Nordea. We all shared an interest in payments and were eager to understand new trends and opportunities from a Chinese perspective.
What were the most interesting trends that you saw in China?
Well, first and foremost mobile payments. China has come far in terms of mobile payments compared to the rest of the world. I was in China in 1991 and 2014 and, in terms of payments, just as much has happened between 1991 and 2014 as it has from 2014 up until today. Mobile payments provided by WeChat Pay and Alipay dominate online as well as in-store at department stores, restaurants, tourist attractions and wet markets stalls alike. Now it wasn’t even possible to pay with my Visa/Mastercard at Starbuck’s. The clerk pulled out a dusty card terminal but didn’t know how to use it — everyone pays everything using QR codes and mobile apps from WeChat Pay or Alipay.
A great example is a restaurant that we visited with walls covered by small lockers with glass doors and no frontend staff on location. Instead, you ordered the lunch in app, paid with Alipay, got a confirmation QR code which you used to unlock the box with your prepared lunch. The whole process was completed through one single app. What is noticeable is that all everyday stores from small to large merchants offer both Alipay and WeChat Pay, and most times Visa/Mastercard are not accepted at all. The Chinese card scheme Union Pay (CUP) is available but not as widely spread as mobile payments.
QR codes might sound old, but it’s easy and cheap to implement for merchants and payment providers and easy to use for consumers. The only alternative for any one lacking a Chinese bank account, necessary to become an Alipay or WeChat Pay user, is cash. The untechy touch of QR codes shouldn’t fool you — the backend systems are by far the best in the world in terms of capacity (325,000 TPS, transactions per second, in 2017) real time fraud detection and two seconds credit approvals for consumers, merchants and corporates.
Alipay is offering the “best” transactions in the world but doesn’t earn any substantial fees on the transactions themselves. This makes me think about the traditional card schemes, all the intermediaries and banks, each taking a small transaction-based fee for making sure that money moves from A to B. How long will this business model survive?
Alibaba’s/Alipay’s main revenue sources are ads on their market places, packaged data insights and credits. Providing an instant credit rating to previously unrated corporates and consumers has become a key growth driver to the Alibaba marketplaces, but it’s also a driver of financial inclusion and rural development in China and other Asian countries where Alibaba has been established.
Could you tell us a little bit more about Alibaba?
Alibaba is everywhere in China, they are the perfect example of a platform that controls the 3 cornerstones of shopping: market places, payments and logistics. Next to the cornerstones are a multitude of services covering insurance, B2B commerce, cloud services, agritech to increase harvests, just to mention a few. When Jack Ma started Alibaba in 1999, the buyers and sellers did not trust each other so they created an escrow solution which later became something quite valuable. Due to the high inflow of money to the escrow account the world’s largest money fund was created and later the separate group of Ant Financials including Alipay.
In the west we often see Fintechs specializing in a specific niche and attempting to disrupt the large incumbents in that specific niche. In China, there are few limitations in terms of capital and regulation. When Alibaba started out, the low maturity level of the Chinese market and lack of competitors that understood the local market meant that the successful players could take a large share of the pie over many sectors that are separated in the west. Think of Alibaba as a combination of eBay, Amazon, PayPal and DHL or a platform business times 100.
Banking as a lifestyle
For many Chinese, the primary objective of banking is not to access financial information or traditional banking products as displayed in a standard Nordic mobile app or internet bank. Customers are not using the bank’s services because it is a “good financial service”. Instead, people are using WeChat Pay or Alipay because it is integrated into your everyday life whenever you need it. In China, banking is everywhere at any time — it’s easy, available and with high accessibility. Banking is invisibly intertwined with people’s lives and their actions and social networks have a direct effect on credit ratings.
The young gaming generation primarily uses WeChat/WeChat Pay (owned by Tencent) and the slightly older shoppers prefer Alibaba/Alipay. But many people have and use both payment apps depending on context. The common view is that WeChat has built the better almost “self-playing piano” in terms of relevant use cases engaging users many times every day.
What are your thoughts around data privacy in China?
In terms of customer data, it’s always the customer who should decide when, how and if services built on data increases the customer value — hence consent. Organizations can never adventure customer data, there must always be an increased customer value and a clear concept of how the data is used. Unfortunately, we have seen large companies that have misused data and customer trust. However, I also believe that we as users are too naïve sometimes because if a service is free, you (your data) are probably the product on sale.
We met a young Chinese man who is an entrepreneur with his own startup in Shenzhen. He had lived in the US for a few years, but still confirmed: “I know that the government knows everything about me, and if I have nothing to hide I’ll just continue my life as usual”. This statement might explain how many Chinese feel and think around monitoring and the use of their personal data: if you can’t do anything about it, try to not let it affect your life too much.
On the other hand, if a friend of yours, someone you interact with regularly on social media like WeChat, accumulates a debt that they are unable to settle, this will also affect your own credit rating negatively. In a big brother society there is a risk for very high social pressure to behave in line with the norm and of large groups being excluded from mainstream society. Whether your credit rating is also affected by the number of times you jay walk (as registered by street cameras) is hard to say, but data and privacy is a whole different game in China. It’s very hard to hide in a fully digitized world.
In what ways will China influence the west in the future?
Based on Alibaba’s recent Asian expansion I don’t believe that the European market is the main priority. Their main growth strategy is to bank the unbanked, or rather credit rate them, especially in countries with an increasing rate of smart phones. This is a huge business opportunity and they’ve already built the technology platforms to serve these markets.
On the other hand, Alipay is offering a payment solution for Chinese tourists in Europe that’s gaining traction. It’s hard for me to say what the next step is, but I have listened to a very interesting podcast “Den Digitala Draken” (English: the digital dragon) that addresses this and many other interesting questions regarding Chinese bigtechs. They speculate that Alipay may approach European retailers with a zero fee offer. Alipay wouldn’t earn money, but they would attract retailers to join their platform, get access to transaction data and improve services for Alipay users in Europe and they wouldn’t lose an existing income stream.
Lastly, what would you like to see in the Nordics?
I would like to see more seamless and “invisible” financial services that can support me in whatever situation I am in. I don’t believe that it’s possible for incumbent banks to build new giant platforms from scratch like the ones we see in China. Our markets are too mature for that. I think we will continue to see banks alongside smaller niche players and bigtechs adding new financial services based on customers’ needs. The strength of each will depend on how well they understand and serve the customer.
I also believe that banks will need to change their business models and approach to their customers, more in the direction of “banking as a lifestyle” or “running your company”/ ”doing your job” with banking behind the scenes solving customer problems much more seamlessly than today. For that to be possible, banks should use data to enrich the user experience in innovative ways with the customers’ consent and best interest in mind. How to make it happen? I am convinced partners will play a key role and that a key competitive differentiator between banks will be how well you partner, but that’s another interview.
About the interviewee
Sofia (Ericsson Holm) is Head of Strategic Partnerships at Nordea Transaction Banking, driving partnership projects between Nordea and fintechs. Before joining Nordea, Sofia worked as a venture capitalist at Industrifonden focusing on early stage Nordic fintech companies. Over the past more than 20 years, Sofia has gathered extensive experience with M&A, corporate finance and investments, held positions as CFO and VP of M&A at listed IT companies and worked as an adviser in M&A and as board member.