Digital, mobile, global and real-time
Dr. Daniel Fasnacht on the future of money and the evolution of world trade in times of Chinese growth
In an interview with the Konfuzius Institute, Daniel Fasnacht, an expert for digital platform and business ecosystems, explains how the importance of money is beginning to change how digital payment systems work in China and what role China could play in financial services and trade worldwide.
Interview: Magrit Manz, China Report – Chief Editor & Journalist, Beijing, Zurich, Berlin
KI-MAGAZIN: Your main occupation is consulting in the financial sector. Is this still fun in times of negative interest rates?
DANIEL FASNACHT: There are many ways of dealing with money. One of the most important is payment transactions, where banks have earned money for a long time with bank transactions or credit card processing. Because of digital innovations, in particular the introduction of the QR Code payment service in China in 2014, payment has changed radically. New players from China, such as WeChat Pay or Alipay, will completely transform this market. Our banks should adopt this innovation, which causes significant efforts. If they don’t, old sources of income will break away. Whether dealing with money is still fun or even makes sense? Hardly so with the classic payment transactions of the banks. But money will always have relevance, and we will not return to the barter business. Only the way we handle money is currently changing rapidly.
At the beginning of 2019, the Chinese online service provider Alipay in Luxembourg received a license for electronic money, which is valid for the entire EU area. This means that the payment service is no longer reserved for customers with a bank account in China, but can also be offered to European consumers. Is Alipay on course for expansion?
FASNACHT: Many of the 30 to 40 million Chinese tourists who spend their holidays in Europe, spending well over 100 billion euros on shopping, accommodation and restaurants, use QR code payment services. With the e-money license, consumers who do not have a bank account in China can now also benefit from these services. Alipay already has partnerships with 140 financial service providers in Europe, including Barclays and Solaris Bank. What works with Chinese tourists could also work with European consumers in the future. That will undoubtedly take some time.
Meanwhile, Alipay has agreed to cooperate with UEFA for the next eight years. The goal is to create a digital fan culture for Chinese people, including ticketing via Alipay. With this first step towards cashless stadiums, European consumers could be won over to the new payment system.
Are there data protection and security concerns with regard to digital payment systems? According to reports, these systems have already been hacked.
FASNACHT: I don’t know how secure it all is. Credit cards came out in the l950s. Everyone was insecure and thought their money was safer at home. Then the first credit card scams happened and we still see them on a daily basis. The uncertainty has remained, but people still use the cards. There is no other way. It’s precisely the same as with the so-called e-money. We know that it can be hacked, but then the operators develop countermeasures again. This is a cat and mouse game. Whether it is historical copper currencies, credit cards or electronic money transfer – it has always brought criminal activity to the scene. Only the nature of crime has changed.
What does it mean when supply and demand are increasingly linked by artificial intelligence?
FASNACHT: Customers with their data and information are becoming increasingly valuable. For example, when the Chinese travel through Europe, department stores, luxury shops, hotels and restaurants receive customised information from their lifestyle apps. Already when booking via the digital platform, the customers’ stored data is evaluated and possible future purchasing behaviour is calculated. So the customer walks through London, then the app beeps and tells him that his preferred bag store on the next corner offers a 70 percent discount. The system knows where he is and what he is looking for. The AI links the information.
Apps such as Alipay or the messenger WeChat have already integrated functions from Amazon, Uber, Skype, Facebook, Instagram, Expedia as well as mobile payment and asset management services. And our smartphones are also upgraded. Does that make everyday life more comfortable?
FASNACHT: Something exciting is happening. In our attempt to organise our daily lives as comfortably and efficiently as possible, we are increasingly using the services of smartphones. I need a lot of apps every day, for example to initiate payments, book hotels and flights, e-commerce, weather, news and chat services. Chinese providers have quickly recognised this and integrated all the apps related to daily life into one super app. These mini-apps include everything from asset management to taxi booking. In the future, people will be able to obtain information and act only via their smartphones. For the consumer, who has less and less time, the complexity must be reduced. For example, if you read through the general terms and conditions of an insurance contract, it doesn’t make much difference whether you study them in paper form or on the homepage. Most of it cannot be understood anyway. But with an app, the text is kept simple, and the content is easy to understand. The complexity is reduced because the space for it is limited. So in the future, the app will be preferred.
Are these payment apps a threat to our financial sector?
FASNACHT: Seven of the ten largest companies in the world have their own payment systems. But it remains to be seen whether the threat comes from Apple Pay or Amazon Pay. Alibaba and Tencent are already much further along in terms of processing speed, functions and needs-oriented range of services. At the moment, European banks do not yet want to deal with the Chinese disruptors. This certainly has a cultural background.
On the one hand, the incredibly fast-acting Chinese companies and on the other hand our traditional banks trying to protect themselves. They prefer to look at American companies, whose business models they are familiar with and understand. Amazon and Google are closer to them than Alibaba and Tencent. Let’s take an example from traditional asset management. Private banking in Switzerland scores not only with banking secrecy but also with competence, stability and trust. These values cannot be programmed into an app or an algorithm. Investments in sustainable products are another point. Many Chinese have become rich very quickly and at some point find that they can also invest in companies that meet ESG criteria for environmental, social and corporate sustainability. They are more likely to entrust this to our financial services providers because they are more advanced in this area, and investments in sustainable products have hardly been offered in China to date.
China is the world leader in investments in fintech and artificial intelligence. Can the country with its financial centres take over the financial services sector worldwide?
FASNACHT: There are always studies that analyse the global financial centres. We see the rise of China on the stock exchanges; Hong Kong, Shanghai and above all Shenzhen are now among the five largest trading centres in the world. Eight billion dollars of the so-called venture capital alone, which is invested in fintechs, for example, go to Chinese companies, as much as is invested in England, Germany, Japan and the USA combined. The market reacts quickly, and in China, you can earn more money with innovative solutions. When it comes to investments in the future, the music plays in Asia. At the same time, a lot of wealth is created there, with more and more affluent people who want to invest money. And so the circle closes, and the Asian financial centres take the lead worldwide.
China is the second-largest wealth management market after the US and is rapidly catching up. Every year, the number of Chinese billionaires and millionaires is growing faster than the rest of the world. How will this imbalance affect you?
FASNACHT: An imbalance always arises from a mass. On the one hand, we have the growing population of China with its 1.4 billion people, while Europe is shrinking on the other. A market or a region can only benefit if products and services are sold, or market shares are gained. Not everyone can grow at the same time and with the same amount. Economic growth began with China’s opening and accession to the WTO in 2001. China is initiating major infrastructure projects supported by the state, such as the Belt and Road Initiative, the so-called New Silk Road, in which over one trillion US dollars are being invested. A market with gigantic ports, roads and sea routes is being built there, and naturally, a lot of added value and wealth is being created. The first to benefit from the Belt and Road Initiative is Asia. And once the whole thing is in place, there will be new trade routes between Europe and China that will work faster and more efficiently. Europe can then benefit from this in turn. At the moment the growth is taking place in Asia. But we must not forget that China’s current per capita gross domestic product is the same as that of the USA in 1980. Current assets in China are about the same size as those of the UK, Germany and Switzerland combined, but four times smaller than the total assets of the US. Twenty years ago there were only a few computers and no Internet in China. In Western Europe and the USA, most people already had PCs or laptops back then. But in the meantime, China has been able to make great leaps in technology and advance digital innovation. In addition, everything that is developed for mobile devices can be tested by a large consumer community and thus improved continuously. This is, of course, a considerable competitive advantage.
In one of your articles, you wrote that China is about to enter the era of postmodernism and that the digital transformation will dissolve the boundaries between organisations, countries and cultures. What will happen afterwards?
FASNACHT: When transport and communication routes become shorter, cultures also grow closer together. European companies should open up because if cooperation becomes more straightforward, they will fertilise each other and promote a win-win situation. I see that rather positively. For example, Apple’s time might have run out because everyone has got an iPhone. Now there are Chinese brands, which are much better technologically. If you bring these devices into Europe quickly and cheaply, they could spread just as fast as Apple once did. It is also a generational question. The younger generation will reap the benefits of digital development. Whether the product or service comes from a traditional brand or a Chinese start-up is then irrelevant.
The Chinese science fiction author Liu Cixin has developed a frightening scenario in his story “For the Benefit of Mankind“. A company buys the air of the earth. Can this become reality?
FASNACHT: This science-fiction model of thought could be taken further. Let’s assume that a few people with lots of money from the USA or China could set themselves the goal of flying to the moon or Mars with private means. They don’t need the government for that. They build their own rocket centre with the latest technology. They find people to go to Mars and start a first private enterprise there. Maybe they discover something important to us. It won’t be air or water. But perhaps something else. Then who will own the resources on Mars? Who owns the resources in the world? During colonisation, the Portuguese made Brazil their outpost. Anything they could get out of the country, they shipped to Europe. The resources on earth are finite, but maybe the same thing as in Brazil will happen now on the moon or Mars.
How will we be able to withstand the competition from Asian companies and their digital business models?
FASNACHT: Digital business models are displacing old structures, and super apps are a first step towards satisfying people’s different life situations and needs. I am convinced that competition and cooperation will complement each other soon and have a positive impact on trade between market participants. Asia and Europe may grow closer together through the new sea and land routes and trade will increase just as it did in Marco Polo’s time when people were increasingly transporting goods along the Silk Road and serving supply and demand. This would be a great opportunity for Europe.
First published in German and Chinese in March 2020 in: Konfuzius-Institute Magazin, Issue 2, No. 37, p. 26-33. https://www.konfuziusinstitut-leipzig.de/fileadmin/user_upload/KI-Magazin/2020-02_KI-Magazin_web_DS.pdf