The growth of China’s fintech scene is providing a less developed financial market with much-needed updates. But those improvements also serve as a stepping stone to bring Chinese fintech players to Western markets.

It would be oversimplifying to say China’s overall payment systems were not as advanced or robust as those in the U.S. Actually the digital payment systems run by the state-owned banks were modern and basically real-time, but real-time isn’t what you want for eBay-like marketplace transactions, said Zennon Kapron, founder and director of China Fintech, which focuses on cross-border collaboration between tech companies in China and those in other countries.

In such situations, an escrow service is more appropriate to deter fraud among individual buyers and sellers. Thus, China's fintech revolution arguably began with Alibaba Group’s development of the Alipay system for its portal, Taobao.

Chinese “incumbent players are very astute at noticing the gaps in the market,” Kapron said.

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Alibaba has since developed a money market fund, Yu’e Bao; a peer-to-peer lending platform, Zhao Cai Bao; and a wealth management app, Ant Fortune which gives consumers access to both (Alipay is operated by Ant Financial, an Alibaba affiliate).

Other internet-based companies, including Baidu, and Tencent have also flourished in China’s financial technology market.

While the first wave of fintech in China was about filling gaps of traditional financial services, the second wave is all about disrupting traditional models with new models, such as online peer-to-peer lending, said Kapron. These companies have stepped in where state-owned banks have been unable or unwilling to play.

“We saw regulators take a step back and and let the industry grow and only step in when it was really necessary. For all the talk about London and Singapore being fintech sandboxes, China really is the largest fintech sandbox.”

For example, China doesn’t have a credit scoring system like the credit bureaus and Fair Isaac's FICO provide in the U.S., leaving potential borrowers squeezed for liquidity. This made room for P-to-P lenders like Lufax to capture market share.

China's regulatory environment also played a part in the rapid expansion of payment and lending startups. For example, P-to-P lenders have operated in the country since 2010 and garnered a significant amount of steam in 2014 and 2015; yet the industry didn’t see regulation till this year.

“We saw regulators take a step back and and let the industry grow and only step in when it was really necessary,” Kapron said. “For all the talk about London and Singapore being fintech sandboxes, China really is the largest fintech sandbox.”

Matthew Wong, senior research analyst at CB Insights, agrees to a certain extent, noting the vast number of Chinese P-to-P lenders that scammed consumers. Sometimes, he said, moving slower in financial services is better.

But the risks have not deterred investors from providing funding to China and other parts of Asia.

According to CB Insights' latest Pulse of Fintech report, Asia is on track for a record-breaking year of fintech venture capital investment. Investment in Asian fintech rose to $1.2 billion during the third quarter of this year from $800 million in the second quarter. China dominates those investments, taking more investment money than all the other APAC countries, according to Accenture Research’s analysis of CB Insights data.

By contrast, Europe and North America saw funding decline during the third quarter of 2016 — although Wong cautions against reading too much into the numbers. Some startups might be over-funded, he said, noting the US example of Munchry’s 2015 valuation of $300 million. The meal-delivery startup has since faltered, and its interim CEO acknowledged that it didn’t try hard to correct the mistakenly reported valuation.

One thing China has going for it is its huge, tech-savvy population, especially younger consumers who have used non-financial products such as messaging apps from Alibaba Group, and Tencent for years, Wong said.

These companies have integrated just about everything from paying friends to requesting taxis to purchasing goods on marketplaces into their “super apps,” said Chris DeAngelis, the general manager of Alliance Development Group’s (ADG) team in China. ADG helps companies in the U.S., the U.K. and Canada expand into China.

DeAngelis, who spends most his time in China, says he hardly takes his wallet with him anymore.

This strategy is what these Chinese companies hope will resonate with consumers in other countries, said Kapron. And the impact of that on U.S. financial services could be huge.

“People have been ignoring China fintech too much,” Kapron said. “These companies are now moving into more developed markets with these models that are tried and tested in China.”

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