Killer Apps in China: Social Networks and Financial Inclusion
Are social networks relevant for financial inclusion? With two billion people around the world now using social networks and emerging international players such as Lenddo tapping them to drive microfinance, the question bears consideration. The link between social media and financial inclusion is dynamic in China, where 46% of the population, or 640 million people, are active social network users. Given that China has the world’s biggest internet population and that many of the global sites including Twitter, Facebook and YouTube are banned there, it’s not surprising that they have developed a wide range of alternatives that now make up six out of the top ten social media sites in the world. The profiles of China’s social media users are highly diverse, with some sites successfully reaching lower income users in poorer cities, remote areas, rural entrepreneurs and students. Recently, financial services offered through social media have begun to take off, with interesting potential to expand financial inclusion.
In China, social media has strong links to how people use their money. Use of social media to research and buy products and services plays a huge part in commercial life. In a country with skepticism about news and advertising, Chinese people seem more likely to buy a product or service if it is mentioned on a social media site and if it is recommended by the army of “netizens” providing peer-to-peer recommendations. New applications and services building on this link between social networks and payments are being introduced and adopted at an astounding pace. They are supported by strong communications infrastructure, albeit with strong state controls.
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Chinese e-commerce giant Alibaba’s ongoing IPO in the United States may well be the largest in history, detracting attention from the growing battle for dominance between internet giants within China. While the landscape is enormous, competition between Alibaba’s e-commerce model and Tencent’s social networking model is leading the way in innovation, increasingly linked to financial services.
Since its debut in 2011, Tencent’s WeChat social networking product has rapidly dominated the market, now reaching nearly 500 million users worldwide. Last year, Tencent linked its online payment tool, Tenpay, which can be used to send/receive payments, withdraw money to bank accounts, charge mobiles, deposit money to game accounts, etc., to WeChat. Now, more than 20 million users make purchases through Tenpay on WeChat, with an additional 200,000 people signing up every day.
Alibaba’s payment platform, Alipay, has a user base of 800 million, but WeChat’s pre-existing social network has led to fast market adoption. Tencent is now seeking to expand into e-commerce while Alibaba has created its own chat app, Laiwang, and barred vendors on its shopping site from using WeChat to market their products.
Alibaba has taken the lead in microfinance through its e-commerce platform. Alibaba’s financial arm, Alifinance, uses data analytics from Alipay and the Taobao trading platform as a credit scoring tool to provide small scale financing (average $5,000) to platform vendors who have difficulty borrowing small amounts from commercial banks. Alifinance has made more than a half a million microloans to online retailers on its marketplaces since 2010.
Both Alipay and WeChat are working to make financial services become lifestyle services, finding ways to be part of the user's financial routine, like paying for a friend’s dinner, ordering taxis, paying in convenience stores and topping up transportation cards. Alipay and WeChat provide functions that are useful and easy to use, so users want to put money with them, incentivized by aggressive use of discounts to drive adoption. This approach is different from banks and results in very different product strategies.
The potential market disruption of these internet services is becoming apparent in related industries. Online communications has already eroded the profitability of SMS services offered by China’s big, state-run telecommunications operators. The world’s largest mobile network operator, China Mobile, has reported that revenue from short message services peaked in 2009 at nearly $9 billion. Three years later, it is down nearly 20 percent and is expected to drop further China Mobile has attributed this decline to increasing competition in the Chinese wireless market and growing popularity of messaging applications including WeChat, although revenues are expected to increase again through China Mobile’s aggressive expansion in the 3G and 4G markets. China’s recent move to provide virtual MNO licenses to players including Alibaba could further impact the communications industry.
The effect on China's banking system could also be important moving forward. Given that 64% of China’s adults are already banked, linking user accounts to bank accounts would be a killer app for social networks. More importantly, the utility financial services through social media could be a driver to reach the unbanked. New client acquisition, data analytics, increased lending and group buying are just the beginning of the range of services that could well result. Both Alipay and Tencent have already introduced their first financial-services products, including investment products or “savings-like” places to store capital and generate a return backed by leading investment firms, but with no minimum investment. Millions of clients have flocked to these sites, forcing banks to adapt. In response, the five biggest banks have raised deposit rates, and at least two major financial institutions have launched their own investment platforms on WeChat.
In early 2014, the potential for social media players to drive financial inclusion expanded as China launched a pilot project to establish five new banks owned entirely by private investors, including Alibaba and Tencent. The new banks will be encouraged to focus on lending to small and medium-sized enterprises, as a part of the government’s strategy to formally recognize and regulate the shadow banking sector. The pilot, approved by China's government in January, is also the first step to open its banking sector to private investors. Private investment accounts for less than 12 per cent of the Chinese banking industry’s total capital, with the rest controlled by the state. China’s state-owned banks are noted for weak performance in serving the bottom of the pyramid. The stage may be set for change.
And the future for social media and financial inclusion beyond China? Internet availability and affordability are critical to determining whether social media can play a role in facilitating and increasing access to financial services. But note that Brazil, India, Indonesia and Mexico are the top Facebook users, right after the United States, while highest social media growth rates are coming from Africa.