Learning From China’s Digital Disrupters

Digital newcomers who understand their consumers can change the economic status quo.

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An MIT SMR initiative exploring how technology is reshaping the practice of management.
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Alibaba, a relative newcomer to financial services, has seen its small and medium-size enterprise (SME) lending business grow rapidly in the last four years, making it one of the leading lenders in China. Western banks should take note. Such explosive growth is a harbinger for an unfamiliar kind of competition — legacy business incumbents pitted against new digital giants.

In 2017, Alibaba issued SME loans worth 446 billion China Yuan Renminbi (RMB) (about $63.4 billion U.S.), amounting to 30% of the loans issued by the Industrial and Commercial Bank of China, the top SME lender in the country. Alipay, Alibaba’s payment wallet app, and Mybank, its internet bank, attracted deposits of 1.6 trillion RMB, matching 89% of the total value of deposits attracted by Bank of China.

These results mirror the competitive threats Amazon, Facebook, and Google pose to incumbents in the retail, health care, insurance, music, entertainment, and automobile sectors. Such digital giants, whether from China or the United States, are poised to unleash a new category of digital disruptions powered by their digital ecosystems.

We looked at recent events in the Chinese banking industry to highlight how these massive digital newcomers gain powerful consumer experience insights from their digital ecosystems and how this changed the nature of competition for incumbents.

Chinese Digital Giants Forge Into Banking

From its early days in Chinese e-commerce, Alibaba saw the need for digital money to alleviate the inconveniences of collecting cash on delivery, because credit card penetration was poor. Alibaba’s solution: a digital wallet, Alipay. The wallet allowed customers to deposit money in lump sums, then use that balance for the real-time purchases needed for seamless e-commerce.

Soon, Alibaba expanded this service outside its own e-commerce platforms, letting other retailers and small businesses use Alipay. Quick response (QR) codes, bar codes readable by cellphones, allowed millions of mom-and-pop merchants to begin using Alipay, without expensive credit card readers and with dramatically reduced fees. With Alipay, small businesses built digital storefronts, transforming them into online businesses. By adding a vast range of services such as booking taxis, hotels, and airlines, the company transformed into an omni-service platform.

Tencent, one of the world’s most valuable technology companies, followed a similar pattern. Its WeChat messaging platform attracted millions of users through services such as curated content, gaming, social networks, chat, and search. The company added peer-to-peer money transfer, cleverly adopting a digital version of the old Chinese tradition of gifting money to family and friends in red envelopes. Within six days of its launch around the New Year in 2017, WeChat users sent 47 billion red envelopes to one another. Alibaba and Tencent both now support 80% of the day-to-day online activities of Chinese consumers.

Following their surge into payment services, Alibaba and Tencent quickly shifted their attack to both the liability and asset services of traditional Chinese banks. They added checking and savings accounts, deposits, and wealth management, in addition to standard personal and small-business loan services. In four short years, these companies seized a significant market share of loans and deposits from formidable Chinese incumbents. In large part, their approach relied on utilizing unique consumer insights gleaned from their ecosystems.

The Structure of Digital Ecosystems

In business, ecosystems are built around interdependencies, or how entities and their activities mutually support and draw value from each another. Traditionally, we’ve recognized such interdependencies in producing and selling goods or services as production ecosystems. Looking at banks, generating deposits, allocating and servicing loans, collecting interest, dispensing cash, and managing a vast network of branches are all interdependent activities that shape their production ecosystems.

A different ecosystem comes from the interdependencies of consuming products or services — consumption ecosystems. For banks, interdependencies in how people consume money shape their consumption ecosystems. The consumption of a mortgage is interdependent with getting home insurance, buying furniture, or doing home improvements. But before modern digital technologies, such interdependencies were difficult to leverage for economic advantage.

Chinese digital giants were uniquely positioned to leverage advantage from the consumption ecosystems of banks. They used their deep consumer insights to attack incumbent banks’ production ecosystems and built new services consumers needed.

How Economic Newcomers Cause Digital Disruptions

Alibaba and Tencent had five core interrelated components in their digital platforms: search, e-commerce, payments, social networking, and entertainment. Collectively, these services routinely extract treasure troves of information about users and their interests and needs. This information allows digital platforms to build unique individual profiles on each customer’s intricate money consumption needs, thus placing these new platforms at the epicenter of the consumption ecosystems of banks.

Traditional banks, on the other hand, are organized primarily around production ecosystems: attracting deposits, delivering loans, or dispensing cash. Because they are solely focused on production ecosystems, they lack reliable mechanisms for predicting the financial needs of their consumers. This lack makes them vulnerable to attacks from digital giants, who can leverage their consumption ecosystems to anticipate and precisely detect their consumers’ needs for money, much sooner than traditional banks.

Impacts for Lending

One example of digital giants spotting and leveraging consumer needs is a customer looking for car recommendations on chat or search. The act of looking is an early signal of a need. E-commerce or payment site history adds insights into spending and borrowing power, leading to suitable buying recommendations. Offering a loan to this customer is the next logical step. The pattern is similar for college loans, appliance purchases, or short-term loans for vacations.

Similarly, by providing small and medium-size enterprises with digital payment processing, storefronts, logistics, and digital marketing, digital giants gain insights into a merchant’s business. With this information, they can predict an SME’s creditworthiness and when it will likely need funding. This strong position in the consumption ecosystems is a compelling lending advantage over traditional banks.

Finding Consumer Opportunities for Deposits

When customers use Alibaba for a vast majority of their day-to-day activities, they can easily be convinced to park deposits, too. Unlike in Western countries, government regulations in China did not prevent these digital giants from collecting deposits and acting like banks, ostensibly to bring millions of rural adults into the banking system.

Chinese customers soon found depositing money with digital giants attractive, because their digital loan processing was faster, needed less documentation, and provided competitive interest rate offers using smart algorithms that leveraged credit history profiles. Customers spending 80% of their money in Alibaba’s ecosystem, and also making deposits with the company, are likely to get a loan faster because of precise insights based on their profile: the right car, the right college, or the right home.

Digital Disruption’s Unique Features

The digital giants’ strength for disrupting legacy businesses comes from their ability to swap information from consumption to production ecosystems and vice versa. The most powerful disruptions are two-sided attacks — those aimed at both production and consumption. These disruptions earn the “digital” label because they get their power from the newfound information and connections in the digital economy.

Modern digital connectivity has created consumption ecosystems and provides a strong launchpad for competitive attack, as seen in the case of Alibaba and Tencent. Because these companies could track activity within the users’ ecosystems, they possessed superior consumer information compared with incumbent banks. They could also use this information to overwhelm incumbents by offering more prolific and customized services associated with a loan. For a home purchase, they could direct customers to the most appropriate available home, provide relevant information on the home, and connect them to real estate agents, furniture suppliers, or moving companies on their digital platforms. Such customized consumption-based services ultimately relegate traditional banking activity of approving and offering mortgages to just a commodity.

The concept of consumption ecosystems is still new to many legacy businesses, because they don’t track products and services digitally after they are sold. Competitive attacks from consumption ecosystems can be lethal because legacy companies may not even see them coming, and these attacks can detach or weaken the incumbent’s connection to customers.

The growing digital economy means legacy financial companies must develop a better understanding of their digital ecosystems, reframe how they assess competition, and position themselves to influence consumption of their products and services, as an integral part of their competitive strategy.



An MIT SMR initiative exploring how technology is reshaping the practice of management.
See All Articles in This Section


We gratefully acknowledge the assistance of Padmanabh Munje, Yiqun Zhang, and Hanying Liu of Virtusa and their China Insights Group in this paper. We also thank V.G. Narayanan, Jay Patel, Anu Chitrapu, Abhilasha Mehta, and Jay Tuli.

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