The Financial Transformation Begins: How to Build the Next "Hundsun"?
The Financial Transformation Begins: How Can Startups Compete and Cooperate with Financial Institutions for Mutual Success?
As personal wealth has grown, Chinese households' investable assets surpassed 200 trillion RMB in 2019. At the same time, with China allowing foreign financial firms to enter as wholly-owned enterprises, the launch of stock market registration-based IPOs, and the gradual implementation of innovative technologies like blockchain and AI in finance, China stands at the starting line of a new wave of financial innovation.
We believe that truly outstanding companies will have the opportunity to participate in this fintech innovation wave and contribute their value.
How to seize the trillion-level opportunity brought by this structural shift? FreeS Fund has partnered with LiveX, CreditEase Wealth Management, and Plug and Play to present the FreeS Fintech Venture Summit 2020, featuring four themed online livestreams and one offline FreeS Fintech Open Day.
Today, we're sharing highlights from the second session of the FreeS Fintech Venture Summit 2020 series, focusing on enterprise services for fintech. We believe this direction holds the potential to birth a new "Hundsun Technologies." A few years ago, FreeS Fund internally discussed Hundsun's history and identified two critical factors behind its rise: catching the historical opportunity of public fund development, and delivering excellent service around major clients.
In this livestream hosted by Weili Dong, FreeS Fund's North America head, FreeS Fund VP Pengqi Liu interpreted the macro opportunities driving the rise of fintech enterprise services today. Two FreeS Fund portfolio founders — Ke Xu of Vantiq (钒钛智能) and Dianming Hu of GanYi AI (感易智能) — shared their thinking and practice around serving financial institutions. They explored: how to capture the dividend of serving licensed financial institutions through transformation, and how startups can compete and cooperate with financial institutions for mutual success.
Before diving in, here are a few key takeaways:
- The tech companies that can truly provide new technologies, products, and innovation support for the financial industry actually have opportunities for new development in this cycle — they are the B2B fintech companies. Whoever finds better ways to serve end assets will seize the next wave of FinTech opportunities.
- Financial institutions' fintech transformation is still in an early, accelerating phase, with very strong demand across the industry.
- Financial institutions' in-house fintech departments and third-party fintech service companies have a classic co-opetition relationship. The better the client (甲方) performs, the more room there is for startups' technology to create value.
- What fintech companies deliver is financial technology products carried by software. Software is the medium, but the more important element is understanding of financial business. What ultimately gets presented is business, not simply code. When you present business, your value becomes measurable — and that's when buyers become more willing to pay for your product.
- In serving financial institutions, fintech companies aren't doing projects, traditional services, or consulting. They're trying to become a module within financial institutions' production processes, product innovation, and service delivery.
Below are the highlights from the discussion. We hope you find them helpful. The fourth session of the FreeS Fintech Venture Summit 2020 will air on September 27, 10-11 am — scan the QR code in the image below to participate.
Contact Us
Fintech has been a key focus for FreeS Fund since our founding. We've invested in over 10 companies in this space, spanning consumer finance, supply chain finance, wealth and asset management, and new technologies related to financial big data and insurtech. Entrepreneurs and industry experts, please reach out:
Pengqi Liu, VP at FreeS Fund
We're also hiring — interested candidates can contact us at hr@freesvc.com.
/ 01 /
Why are we bullish on fintech?
Over the past two years, China has entered a cycle of stringent financial regulation. We've seen the gradual implementation of asset management新规 and the crackdown on P2P lending. In discussions with peers and entrepreneurs, there's been some controversy and pessimism around fintech. But in this cycle, the real impact has fallen more on the narrower concept of internet finance within fintech — essentially shadow banking in internet clothing.
The tech companies that can truly provide new technologies, new products, and innovation support for the financial industry actually have opportunities for new development in this cycle. They are the B2B fintech companies — our topic for today.
What can we learn from the rise and subsequent regulation of the last wave of internet finance?
While it did introduce risks into the financial system, it also undeniably stimulated massive social demand through innovation. This demand includes both personal and corporate borrowing needs. These demands won't disappear because of regulation — they'll quickly shift to licensed financial institutions. Whether banks or brokerages, this represents a new development opportunity, and a costly miss if they don't seize it.
Additionally, the government has in recent years strongly promoted inclusive finance to support small and micro enterprises. But banks have never handled this type of asset before and lack relevant experience and capabilities. The risk control logic for small and medium enterprises is completely different from that for individuals or large corporations, posing significant challenges for the industry.
From these two perspectives, licensed financial institutions will actively seek partners to capture new development opportunities — this is where B2B fintech companies come in.
From a capital markets perspective, our previous guests Feng Shu and Mr. Tang also discussed that society is facing a trillion-level asset transformation opportunity. Let's look at this from both macroeconomic and personal asset perspectives.
From a macroeconomic standpoint, over the past four decades, China's economic growth has been primarily driven by infrastructure, real estate, and traditional manufacturing. These industries were mainly supported by a bank-dominated indirect financing system.
But in recent years, China's economy has entered a "new normal," with attention shifting from infrastructure and manufacturing toward high-tech, high value-added industries.
Entering these new industries, the original indirect financing system cannot sustain them. Developing a direct financing system and leveraging capital to power "new infrastructure" is an inevitable choice. The launch of the STAR Market and registration-based IPOs reflects the government's desire to bring quality assets aligned with new industrial directions into the market, improving financing efficiency.
From a personal perspective, everyone has wealth management needs. Previously people parked money in Yu'e Bao, but its annualized return has dropped from a peak of 6% to below 2%. Real estate investment? There's broad consensus that it's no longer a primary asset class. The inevitable trend is for households to shift more asset allocation toward equity assets.
Combining these two dimensions, we believe financial institutions play a crucial role — they need to adapt to and support this transformation. With continuous government policies encouraging them to do new things, they must develop new businesses to sustain long-term growth.
To summarize simply: across retail banking, inclusive finance, asset management, wealth management, and insurance product innovation, China's entire financial industry is undergoing massive change and transformation. Licensed financial institutions will play the central role here. With intensifying market competition, opening of foreign access, and rapid technological change, third-party fintech companies serving them have real opportunities to complete this transformation alongside licensed institutions in this cycle.
Whoever finds better ways to serve end assets will seize the next wave of FinTech opportunities. This is why FreeS Fund is very bullish on the B2B fintech space.
/ 02 /
Which business directions merit attention?
Weili Dong: From the perspective of startups' own businesses, what are the reasons financial institutions are accelerating fintech development? Which business directions do they care most about innovating?
Ke Xu: From our observation, there are two reasons financial institutions are accelerating fintech development.
First, the mega-trend of financial services going online and digital continues to accelerate. From the consumer perspective, mobile banking and mobile wealth management are already quite pervasive. But if we look at financial services as a whole, a large proportion of business has yet to complete digital transformation.
To borrow a phrase from Feng Shu when he invested in Vantiq: China's financial industry today — the securities sector is undergoing its third information technology upgrade: first was PC internet-ization, second was mobile internet-ization, and third is the upgrade toward intelligence and scenario-based services. Banking is just undergoing its second IT upgrade, while insurance is just beginning its first true IT upgrade. The entire financial industry's informatization level still has massive room for growth.
Here's a recent example. After the financial markets resumed post-Lunar New Year, when everyone was still working from home, Chinese stock market trading volume suddenly spiked — at one point, multiple securities firms' trading servers couldn't handle the load, reminiscent of Taobao's early Double 11 events. Despite being in their third IT upgrade cycle, securities firms still couldn't handle this kind of sudden traffic surge.
The insurance industry saw the exact opposite problem. Many insurers saw business volume drop 95% during the pandemic because their operations were primarily offline — when the pandemic hit, they simply couldn't function.
So as long as the shift toward digitalization and online services continues accelerating, I believe the underlying demand for fintech will remain extremely strong.
On the other hand, there's demand for business innovation. Many securities firms' brokerage headquarters have rebranded as wealth management headquarters — transforming from brokerage and channel-type businesses toward wealth management and allocation-type businesses, from sell-side to buy-side. This requires genuine business innovation, not just department name changes. Banks are similar — many quickly spun off independent wealth management subsidiaries. Insurers are increasingly emphasizing "insurance plus services" attributes... These new business demands can't be simply covered by financial institutions' existing business models.
For fintech companies, these new demands aren't just about cost reduction and efficiency gains. More importantly, they're about using new technologies and products to help financial institutions address unprecedented, new, mission-critical challenges.
Over the past year, one of Vantiq's priorities has been applying our accumulated securities industry informatization experience to accelerate insurance industry informatization, because the underlying infrastructure of financial services is interconnected.
Take a health insurance business we recently participated in. This is a very typical "insurance plus services" model — not just claims payment, but also connected to specialty drug delivery, green-channel medical access, and VIP family healthcare services for entire households. Packaging all these health services into financial products requires many innovative connections — this is where fintech companies can add significant value.
So from our observation, financial institutions' fintech transformation is still in an early, rapidly accelerating phase. Demand across the entire industry is very robust.
Hu Dianming: I'm aligned with Mr. Xu on the broad direction. Let me offer some additional perspective from different angles.
First, emerging market economies are slowing. Specifically, we're seeing global macroeconomic growth under pressure, and financial regulation tightening since 2018. McKinsey & Company data shows global credit growth slowing, lagging behind GDP growth. Global banks' return on tangible equity (ROTE) has hovered around 10.5% since 2013. Banking growth is below pre-2008 crisis levels — we're in a late-cycle era.
Second, competition within the financial industry is intensifying. Competition has shifted from traditional channels to customer experience, product and service quality, operating costs, and risk management capabilities — from scale-oriented to structure, quality, and efficiency-oriented transformation. The entry of foreign financial institutions has further intensified competition.
Third, changing customer behavior is placing higher demands on financial services for convenience, intelligence, and security. This year, compounded by the pandemic and the current environment of heightened uncertainty, the need for fintech-driven technological transformation has become even more urgent.
These three factors together create a common demand: digital transformation in the financial industry. What does this digital transformation mainly entail?
From our observation, three main areas.
First is digital transformation of traditional business processes — credit risk control, marketing and customer acquisition, customer service. These have always existed at financial institutions, but now we're trying to use data technology to re-engineer them, improve efficiency, enhance customer experience, and even further improve business returns.
Second is innovation in channels and products. Our clients are actively expanding into new scenarios, finding differentiated new business opportunities through new markets and channels, while also upgrading legacy channels. Beyond channels, there's product innovation — using digital methods to provide differentiated, personalized innovative products and services to their customers.
Third is comprehensive big data capability building at the infrastructure level. Over the next decade, a bank's core competitiveness will definitely lie in big data capabilities. Research estimates that big data technology can help banks increase cross-selling volume by 10% to 30%, reduce credit costs by 10% to 15%, and cut back-office operating costs by 20% to 25%. This is the value big data brings to financial services.
Dong Weili: From the service delivery perspective, which new technologies can better serve customer needs?
Xu Ke: We're a technology-driven service company, so we get this question a lot. We believe each wave of step-change technology advancement brings structural changes to entire product models. The wave we're seeing now is the AI-driven intelligent technology cluster.
Applying new technologies in finance requires a holistic architectural understanding of this generation of intelligent technologies, so that when you encounter real use cases, you can deliver comprehensive, closed-loop solutions that drive overall improvement.
Take intelligent advisory in wealth management. Around 2013, robo-advisors were introduced by new-generation fintech companies like Betterment and Wealthfront in the U.S. But when this concept came to China, before the 2018 asset management regulations, financial products were still predominantly fixed-income — most ordinary people didn't need robo-advisors, everyone just picked the highest-yielding product. At that time, this technology was mainly applied to intelligent stock selection, but compared to the hundreds of trillions in asset allocation, stock selection is obviously a much smaller need.
As banks' high-yield products dwindled and fixed-income products decreased, when allocating equity assets, how do our wealth managers introduce products to users? How do they help users achieve their investment return goals at appropriate risk levels? This entire series of work actually requires holistic technology solutions.
After the 2018 asset management regulations, China Merchants Bank launched "Capricorn Intelligent Investment," and this year Ant Group partnered with Vanguard to launch "Help You Invest." China's robo-advisory has been continuously upgrading, and I believe there will be more innovations with Chinese characteristics going forward. Because robo-advisory in China is still in the early stages of rapid development, there's still enormous room for growth — user demand is massive. Addressing this massive demand is a long-term challenge that requires technology, continuous integrated application of technology, and deep understanding of the essence of financial business.
Dong Weili: Which frontier technologies will deliver greater value in fintech's major scenarios? Mr. Hu just mentioned digital transformation including risk control, customer service, and customer acquisition — could you elaborate?
Hu Dianming: Without question, cloud computing, big data, artificial intelligence, and blockchain as foundational technologies will profoundly impact the financial industry. All major fintech application scenarios must be built on these technologies.
Frontier technology innovation in this space definitely comes from the intersection and application of these foundational technologies. Take financial information as an example. Robin Li mentioned a set of data in Intelligent Revolution: in the 1990s, a fund manager needed about 10 hours to review all of that day's market financial information — including sentiment, research reports, news, trading data. By 2011, this required 10 months. By 2016, it had stretched to 20 years — essentially an entire career.
This involves massive, diverse, heterogeneous financial information that has severely exceeded human processing limits. Especially given the large volume of web pages, text, images, video and other unstructured data, we must combine natural language processing, image recognition, knowledge graphs, and big data analytics to achieve deep processing and effective integration of this information — and only then can we effectively help clients with digital transformation in risk control, marketing, customer service, and other areas.
This intelligent processing of data — what we often call data intelligence — is the foundation of digital transformation, and it's also the direction that Ganyin Intelligence's R&D focuses on. I'll emphasize just this point.
How Should Startups Find Their Positioning and Choose Business Models?
Dong Weili: When startup fintech companies partner with financial institutions, how do they find their positioning?
Hu Dianming: In 2019, there were nearly 4,600 banking financial institutions in China. That year, 53% of all profits across these institutions went to the six state-owned banks, and 21% went to 12 joint-stock banks. Meanwhile, these 18 banks' technology spending in 2019 alone exceeded 100 billion yuan.
As startups, we must actively partner with them. However, the reality is that their R&D teams are definitely larger than our entire company. This demands that we get our role positioning right.
After two years of exploration, we believe startups must be able to provide differentiated, specialized products in these partnerships.
How to achieve differentiation? How to achieve specialization? We believe focus is particularly important.
On one hand, we must focus on underlying technology innovation. On the other hand, we must focus on understanding business scenarios. Especially for AI technology-driven startups like ours, AI application maturity is still in a very early stage. Only by continuously focusing on specific technologies and forming differentiated advantages can we achieve complementary cooperation with financial institutions' R&D departments, technology subsidiaries, or even their AI research institutes — and only then can we work with them to bring better efficiency and ROI to their businesses.
I believe we must learn to make trade-offs. We're not trying to serve every industry, nor every business unit's every need. We must adhere to professionalism and long-termism. Within selected business scenarios, meeting clients' different needs, solving their different problems, and building cumulative experience across different stages — only through this can we develop deep understanding within existing scenarios, striving to understand their business better than they do themselves.
Xu Ke: When large financial institutions' own R&D teams keep growing, does that mean startups have less and less to do? From our observation, it's exactly the opposite.
Among the financial institutions we partner with, the stronger their own fintech capabilities, the stronger their demand for external, open-banking-technology-architecture-based, extension and derivative fintech services like ours. Financial institutions' internal fintech departments and us as third-party fintech service companies have a very typical co-opetition relationship. The better our clients do, the greater the potential application for our technology.
As I shared earlier, financial institutions' underlying informatization infrastructure is still far from adequate, and much of this foundational work needs to be done by their internal teams. Only when the financial underlying operating system foundation is properly laid can there be room for external fintech services to jointly push forward overall fintech transformation.
As a startup, I strongly agree with what Mr. Hu just said: you must focus, you must differentiate. One thing must be very clear — fintech companies are not simple software outsourcing firms. Fintech companies deliver fintech products with software as the medium. Software is an element, but the more important element is understanding of financial business. What you ultimately present is business, not simply code. When what you present is business, your value becomes measurable, and then your buyer becomes more willing to pay for your product.
Fintech is still in its early stages of development. The further along it goes, the more segmentation and differentiation we'll see. Good products are those that better serve customer needs, cost less, and deliver higher returns.
We have a running joke internally about how we position ourselves: "Don't be the Nationalist Army, don't be a bandit, be a good collaborator." That's a principle we stick to internally — know your place.
Dong Weili: So how should fintech companies choose their business model?
Hu Dianming: The financial industry has entered a late-cycle era. This scenario actually bears some resemblance to the multiple challenges German automakers faced during the economic downturn of the 1990s. Back then, global auto demand was weak, costs remained stubbornly high, and competitors like Japanese automakers had low-cost operating models. How did German automakers respond? They deconstructed the automotive value chain and identified several general-purpose modules, such as braking systems and electronic components. They handed these modules over to specialized suppliers who could achieve economies of scale, shifting from one-off procurement to long-term supplier relationships — essentially moving from platform strategy to modularity. This successful transformation helped drive the globalization of the automotive supply chain.
Today, as service providers to financial institutions, we can learn from this. How do we insert ourselves into the value chain, meet the differentiated needs of financial institutions, provide them with modular products, and achieve economies of scale at the same time?
The core of this lies in identifying the needs of financial institutions while combining them with each company's own strengths. With these two elements aligned, we try to establish long-term cooperation models with financial institutions. We're not doing projects, not providing traditional services or consulting — we're trying to become one module in their production process, their product innovation, their service delivery. Get this entry point right, and I believe both the business model and the products we build will develop successfully.
Xu Ke: From our perspective, there are broadly two directions. One leans toward back-office technology services. The other leans toward front-office and middle-office, with direct exposure to C-end customers.
Our company is in the wealth management space, so our business covers the full spectrum of technology services from middle-office to front-office. First, we're not afraid of differentiation, because differentiation and personalization are the most basic standards of truly high-quality fintech services. What we fear is meeting differentiation crudely — interpreting it as satisfying every whim of the client.
If you're just trying to satisfy every client demand, this kind of "differentiation" is inexhaustible because there's no unified standard. But if, as we discussed earlier, you combine understanding of a specific business with fintech practice methods and software expression methods, then think through it in a closed-loop way and abstract it, measuring it against a business efficiency standard — then this "differentiation" becomes enumerable and architectable in software.
For example, when we connect with different financial institutions, insurers, and brokerages, their trading interfaces are all differentiated. But as long as the business model's goal is to connect to your financial institution's trading interface in the shortest time and most efficient way, these differences can be enumerated, considered, and anticipated in advance.
But if your business goal is to make a marketing poster for the client, and you yourself don't know how to market to ultimately win user approval, and you're just waiting for the client's product manager to revise some detail of the poster — this differentiation is never exhaustible. And the client's satisfaction with your service can only be measured by your attitude, as the standard of service satisfaction.
I believe that for fintech companies, third-party tech companies, and especially startups — even if the company is very small in its early stages — when cooperating with clients, our thinking model should be: business thinking, empathy, abstracting a minimum viable closed loop within the overall financial business process to form product value, and within the product architecture, satisfying maximum differentiation and personalization.
Liu Pengqi: To briefly summarize what the two founders shared: first, on positioning, it's probably more about focusing from the bottom up on both technology and business. Once positioning is well chosen, the business model follows naturally.
Beyond these two points, I'd like to add something based on our usual conversations with entrepreneurs. What technologies can actually help upgrade the financial industry? We see many teams entering this industry with various technologies, partly thinking the financial industry has money — one bank client might equal an entire industry elsewhere — and it's close to the money. But when they actually do this, the challenges are quite significant, especially for startups.
My advice for entrepreneurial teams: first, you really need to have respect for the financial industry, to respect the essence of finance. The key here is respecting risk and holding the bottom line — this is foundational. Another point is that founders truly need to keep learning and understanding this industry. As both founders mentioned repeatedly, it's about business needs. Only by genuinely standing in the user's shoes rather than the technologist's shoes can you capture this industry's needs. Also, you need to fully consider localization. Mature foreign products and tools cannot simply be copied to China.
So for early-stage companies, how do you uncover client needs? I think in the early days, try to find and bind yourself to one bank or brokerage willing to cooperate long-term — preferably a benchmark client that's among the best in the industry. Initially, you don't need to make much money from them. Instead, you want them to share more of their own business logic and methods, and their technology needs in the business. You cooperate with them to serve and satisfy those needs well, build the product, and then it becomes easier to serve other similar clients in the future.
One final point: within the brokerage system, Hundsun Electronics has very strong influence. So how do B2B fintech startups form good cooperative relationships with upstream and downstream players in their relevant business areas? There's no standard answer to this, but it's something everyone needs to think about seriously.
Upcoming
FreeS Fintech Venture Capital Summit 2020 — Session 4 will go live on Sunday, September 27 at 10:00 AM Beijing Time. This session will cover new venture opportunities in insurtech. Welcome to register and join us.
Contact Us
Fintech has been a focus area for FreeS since our founding. We have invested in more than 10 companies in related directions, including consumer finance, supply chain finance, wealth management and asset management, as well as new technologies related to financial big data and insurtech. Entrepreneurs and industry experts are welcome to reach out:
Liu Pengqi, FreeS Fund
We also look forward to those interested in joining our investment team (contact: hr@freesvc.com).
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