2003 was a tough year for China. The SARS panic shut down the country, leaving many people grounded at home. A little known e-commerce company in an east Chinese city started offering “online payment” services as part of its efforts to enable and facilitate online transactions. Ten years later, a little-known asset manager in the remote northern region of Inner Mongolia leapfrogged industry leaders by working with this company to distribute its simple money market fund products through its vast network of users, offering them access to money market funds that were traditionally reserved for large institutional and corporate investors. The online payment service is called Alipay, and there is no better company to illustrate the miraculous rise of FinTech in China. Today the company has over 500 million users and is the largest online and mobile payment company in the world. Its parent company Ant Financial has been consistently ranked as the largest and most valuable FinTech company in the world. 

China’s leadership in FinTech is not just in payment services. In the peer-to-peer lending arena, China’s first marketplace lending platform PPMoney was founded two years after the London-based ZOPA, the first P2P lending platform in the world. But today, Chinese marketplace lenders account for more than 60 percent of global volume and some of them are global leaders in the sector.

The insurance sector has seen a similar rise. Riding on the boom in consumer insurance products, Zhongan, a purely online insurance provider, was recently listed on the Hong Kong Stock Exchange, making it the largest FinTech player in the insurance sector. 

From a macro perspective, China boasts a world-class FinTech ecosystem. A recent study by the Academy of Internet Finance, Zhejiang University, shows that the Pearl River Delta region (with Shenzhen as its core), the Yangtze River Delta region (with Hangzhou and Shanghai as the core) and Beijing have emerged as three world-class FinTech hubs. 

Though there is much celebration and consensus about China’s position as a global leader in FinTech, there are different theories about why China is on top. 

One school of thought is that the FinTech companies in China exploited loopholes in the Chinese market, which has struggled with less than sophisticated regulations. The one powerful argument in support of this theory is that money market fund Yuebao and bank deposits are subject to different regulations. For example, Yuebao is not subject to deposit reserves. Not surprisingly, this argument has a big following in the banking industry. However, the counter argument from the FinTech world is that the money market fund as a product had been around for a while, and anybody could have taken advantage of the perceived loopholes. Therefore FinTech’s innovative and powerful distribution channels made the difference.

Other arguments range from unequal treatment of consumer rights (pure FinTech players reportedly do not strictly abide by consumer protection rules on areas like data privacy) or fair competition (many FinTech players heavily subsidize their products). Different theories aside, it can be said that it is China’s generally friendly ecosystem that has made it a global leader in FinTech. Whether or not it was by accident or by design remains highly debatable.

As the Chinese government shifts its policy priority to focus more on financial stability, a flurry of regulatory and administrative measures have been rolled out to contain risks, and industry players are feeling the pressure. While the government has provided some general guidance, details remain sketchy. Will the government continue to encourage financial innovation and FinTech? Who has the primary regulatory authority? What regulations are coming? How are they going to be applied? The market needs and is anxiously awaiting clarity. 

It is generally agreed that there are three primary drivers behind innovation in FinTech: the market demand for affordable financial services, technological progress and a robust policy and regulatory regime. China and the developing world tend to have strong unmet or under-met demand for basic financial services, given financial repression in these markets. Technological progress in smartphones serves as an enabler, making it possible for services to be delivered digitally to large numbers of customers anytime, anywhere. In this area, China again is a leader, with global internet giants like Tencent and Alibaba. 

The third enabler is the policy and regulatory environment. China was probably the best playground for FinTech when it had few regulations or lax enforcement, leading to vibrant entrepreneurship and plenty of capital backing up investment opportunities. But the recent policy shift towards risk containment is swinging the pendulum, and along with it the risk of inhibiting the entrepreneurship that has made China a global leader in the first place. The policy risk and regulatory uncertainty have already had a negative impact on the sector, casting doubt over its long-term prospects. Will Chinese regulators be sound enough to strike the right balance between financial innovation and stability? Answers to this question will have huge implications for China and the FinTech sector for many years to come.