China’s cashless revolution is the biggest threat to banks

According to Howard Covington, of the Alan Turing Research Institute, credit provider PayPal handles 250 transactions a second. Visa and Mastercard handle 2000 cash transactions a second.

But Ant Financial — part of Alibaba, the technology group created by Chinese entrepreneur Jack Ma, and formerly known as Alipay — puts these Western organisations to shame. It handles an astonishing 250,000 transactions a second.

Could Mastercard or Visa match this? Unlikely in the near term, said Anthony Hilton, the financial editor of London Evening Standard. And even if they did, Ant Financial is already upgrading. The plan is that it will handle a million transactions per second some time in 2020.

Ant Financial is the main player in China to use electronic devices to replace cash and some say that 80% of China’s biggest cities are cashless.

It seems even beggars do not expect to get cash any more. Some have readers which are a bit like bar codes, and people who wish to give money do so via their mobile phone. Alternatively someone buying Kentucky Fried Chicken can pay simply by using his or her face, which the merchant can scan. The app then extracts the money for the chicken from the person’s account, all in some fraction of a second. It is the merchants who have been vital for this growth. Ant Financial first tried to get the public interested in cashless transactions, but it quickly switched and gave retailers the app for next to nothing. And it took off.

Then the merchants were getting cash in far quicker than before so Ant Financial used money-market fund Yu’e Bao to set up somewhere for them to put it. Today it is the biggest in the world — $200 billion (£160 billion) and rising.

The second thing to note is the data — every transaction from every phone — is collected, processed and used to refine the app and to develop new features: where customers shop, the things they buy, when they shop, their financial planning and so on. The Chinese are not bothered by harvesting this data, whereas Europe has privacy laws which will make it much harder to use machine learning and artificial intelligence. This gives a massive advantage to the Chinese authorities in bringing things to market.

Parker Fitzgerald, the London consultancy, has recently produced a report which shows how much British banks are falling behind technologically in China and America. Since the financial crisis the banks have been making their systems more resilient, shrinking their balance sheets, meeting litigation costs, and coping with regulation.

But this has meant they have been focused on operational efficiency, not transformation. They have not focused, as the Chinese and American technology companies have, on getting rid of banks altogether and doing things differently.

WhatsApp recently said it was going to set up its payments base in London. Amazon is already doing small-business lending; Apple is into credit cards and Facebook — separately from WhatsApp — is also in the payments space. Google (with HSBC) and Apple (with Goldman Sachs) are also working alongside incumbents.

Banks traditionally have understood their customers and what they want. Now this is challenged by the data collection and superior analytical ability of the tech companies so the challenge is not just what needs to change but who is driving the process. The banks still have the customers but not for much longer if they do not rapidly digitalise. They also have to be resilient to cyber-attacks, or the tech companies will wipe the floor with them.

Indeed the Financial Stability Board recently said that if the tech sector took on the origination and distribution of finance, some two-thirds of present bank profits would shift.

It should not be long before Ant Financial comes to London, and other cities, brought over by Chinese tourists. They will assume merchants have contactless cash systems, so the system will develop among merchants. The Chinese — and resident British — will achieve critical mass and suck money into Ant Financial. In time this may become acute and may mean banks will suffer a shortage of liquidity. They will not be able to lend even if they want to.

Meanwhile the data will go to Beijing. And the financial system may soon be dominated by Chinese processing companies. Not many people in London are focusing on this.