Financial Technology Goes Global: Opportunities, Progress and Risks
Time： 2023-12-06 13:50
The development of financial technology (fintech) remains extremely imbalanced globally. While 89% of users own mobile phones, 44% have never adopted e-payment methods. This reveals a massive unmet demand for financial services and corresponding business opportunities for fintech firms worldwide.
Specifically, 1.5 billion adults globally still lack bank accounts. Among the 2.8 billion account holders, a considerable number battle insufficient balances and lack access to credit cards. Developing countries in regions like Southeast Asia, Latin America and Africa lag behind in building both the mobile internet infrastructure and e-commerce platforms that could help address such needs.
Over the past decade, China’s fintech sector has made remarkable strides, accumulating experience and capabilities that could aid development overseas. But exporting any domestic success formula without considering local conditions often proves ill-suited. Each market comes embedded with its own unique risks and challenges.
Expanding overseas is by no means smooth sailing for financial technology companies. To gain a foothold in foreign markets, companies need to strategize carefully, with particular attention to the following six areas:
1. Infrastructure constraints
Chinese financial companies venturing overseas face many infrastructure hurdles. Southeast Asia, Latin America, Africa, and many other regions lack database capabilities. Local regulations often require financial institutions to build their user identification systems, either by seeking third-party providers or by building such capabilities in-house. This means substantial upfront investment is needed even at the first step of going global.
2. Regulatory risks
While respecting local regulations is a must in any market, countries differ greatly in regulatory standards, ranging from lax to overly strict due to ambiguous rules. For overseas companies, the soundness of the regulatory environment cuts both ways. Some markets have financial technology regulations still in flux, allowing certain companies to take advantage of regulatory arbitrage opportunities at the perpetual risk of seeing those gains wiped out by sudden policy changes. Companies should opt for markets with stringent regulations and clear rules to protect their long-term, healthy development.
3. Religious and cultural risks
When operating in countries with diverse religious and cultural traditions, financial technology firms should pay close attention to compliance risks related to local religious beliefs and cultural norms. For instance, Islamic law prohibits interest, so product design needs to work around this restriction.
4. Geopolitical risks
Some countries have volatile political environments where power changes hands swiftly, causing investment to collapse repeatedly.
The geostrategic rivalry between China and India is a typical case. The enormous Indian market has proven to be a graveyard for Chinese fintech firms, due in large part to geopolitical factors. With China-U.S. tensions, more countries are likely to come under pressure in their political alignments going forward. Companies need to stay keenly aware of such undercurrents and be prepared with contingency plans.
5. Legal risks
When going abroad, financial technology companies need to watch out for the extra-territorial reach of foreign jurisdictions. For instance, even if their operations are not based in the United States, simply having some nominal exposure there means they could still be subject to the long-arm jurisdiction of the U.S. Cutting off access to international payment and funding channels is the most potent weapon for U.S. sanctions.
6. Tax risks
Proper tax planning greatly impacts profitability, but many overseas ventures fail to consider corporate structure design from a tax perspective. Once profitable, tax issues can blindside them. For example, a Chinese parent company owning a foreign fintech firm that generates revenue in neighboring countries without a physical presence runs regulatory risks akin to “naked exposure," since taxes follow income source rather than corporate domicile. Separating domestic cost centers from foreign profit centers does not shield companies from tax authorities either.
Financial technology presents immense potential for advancing fintech globally. Yet the path remains strewn with risks for Chinese companies seeking to harness opportunities overseas. Meticulous planning and mitigation around local infrastructural realities, ever-shifting regulations and policies, diverse cultural sensibilities and geopolitical headwinds constitutes crucial groundwork.
The destination promises great rewards, but only for those prepared for the journey.