As China steps up oversight on cross-border capital flows, Australia-based payment unicorn Airwallex considers it a beneficial approach to clamp down non-compliant operations and promote overall industry development.
“I think it is a good thing that the [Chinese] authorities are tightening regulations in the cross-border payment field because it can help reduce ‘noises,’ or non-compliant operations, in the market,” said Lucy Liu Yueting, co-founder and president of Airwallex, in an exclusive interview with DealStreetAsia.
The remarks come about two months after China’s State Administration of Foreign Exchange (SAFE) strengthened regulations of cross-border capital flows. In a notice sent to payment institutions and commercial banks on August 22, the regulator blacklisted 43 forex trading firms and circled two companies under suspicion of conducting illegal forex activities, including “Airwallet (Hong Kong) Limited” (assumed to refer to “Airwallex”).
Airwallex is not on the Watch List set forth in the annex to the recent renewal document from SAFE after the company “actively” communicated with the regulators to clear up “misunderstandings about its business model” and erase concerns over the legitimacy of its business, said Liu.
China’s regulators have launched a crackdown on illegal leveraged forex trading and sent blacklists of illegal enterprises to banks and payment institutions since 2018, in an attempt to restore financial order and revive a gloomy macro-economic environment.
“The authorities have to step in and regulate the industry once it develops wildly and creates many structural risks,” said Liu, warning that the cross-border payment industry should avoid the path of China’s collapsed online peer-to-peer (P2P) lending market where over 80% participants were not proper businesses.
The cross-border payment industry is burgeoning in China, driven by the increasing popularity of cross-border e-commerce business, outbound tourism and overseas studying.
The total amount of cross-border online payments booked by Chinese licensed third-party financial institutions has exceeded 490 billion yuan ($69 billion) in 2018, up 55% compared to 2017, according to the Payment & Clearing Association of China (PCAC). PCAC is operated by the country’s de facto central bank, People’s Bank of China (PBOC).
Airwallex, launched in Melbourne by four Chinese founders in 2015, is a cross-border payment solutions provider that allows companies to manage cross-border revenue and financing in their business through an online platform. Its corporate clients can set up overseas bank accounts to collect revenues and move the money back to their headquarters on the platform.
High market entry barrier
“The cross-border payment market has a very high entry barrier because the regulator will not grant licenses to all companies in the market,” said Liu.
Despite serving a significant amount of business in Hong Kong and mainland China, Airwallex does not have a license in mainland China – the same for some of its counterparts including PayPal, PingPong and Payoneer.
Most of them now partner with local third-party payment companies to do business in the region. PayPal acquired a 70 per cent equity stake in China’s GoPay in late September to become the first foreign payment platform eligible for offering payment products and services in China.
Since the Chinese regulators kicked off the cross-border payment license application process in March 2013, the country has so far granted licenses to some 30 domestic companies including Alipay, Lianlian Pay and Hong Kong-listed Huifu Ltd.
“The regulators in mainland China have been protective toward the domestic market as they are cancelling some licenses, and it’s less likely that they will issue new ones,” she said. “Whether Airwallex will obtain a license in mainland China or not really depends on the timing, our business development, and strategic demands in the future.”
Airwallex currently holds licenses in Hong Kong, Australia, EU and the UK, and operates as a registered financial institution in Canada and the United States, although its business also covers mainland China and Southeast Asia.
As a direct result of the more stringent control of licenses, the number of market players in mainland China has become relatively stable with only a few new firms emerging nowadays. Commercial banks still play a dominant position in the market even though they highly rely on manual operations instead of automated solutions.
Even so, Liu still considers mainland China as a mature cross-border payment market compared to countries like the United States and Britain. “Japan, South Korea, India, and the Philippines could be the next batch of economies to catch up with the development due to their large populations and high market demands,” she added.
Airwallex reached the unicorn valuation at over $1 billion after a $100 million Series C round led by late-stage venture capital firm DST Global in March 2019. Sequoia Capital China, Tencent Holdings, Hillhouse Capital, Gobi Partners, Horizon Ventures and Square Peg Capital also poured money into the previous round. Liu said that the company is well-funded after the Series C round, and it is not in a rush to kick off a new funding round at this stage.
Lucy Liu Yueting serves as the co-founder and president of Airwallex, mainly in charge of the firm’s branding and operations. Prior to Airwallex, Liu worked as an investment consultant at China International Capital Corporation (CICC) and as a board director at Hong Kong-based investment firm Hong Stone Investment Development Limited.
Liu spoke to DealStreetAsia about Airwallex’s experience of communicating with the Chinese authorities, the cross-border payment market development in Greater China, and the unicorn’s major business plan. The interview was conducted in Chinese. Below are the translated and edited excerpts:
In early September 2019, China’s foreign exchange regulator blacklisted 43 forex trading firms and singled out two companies, including Airwallex, which were suspected of illegal forex activities. Airwallex has been removed from the latest list updated by the authority. What exactly happened in the past two months?
We were actively in talks with the regulators to explain our business model. Actually, we are not a licensed financial institution in mainland China so theoretically we are not directly regulated by the State Administration of Foreign Exchange or the People Bank of China (China’s de facto central bank). However, this doesn’t mean that we cannot communicate with the authorities through window guidance.
We were initially informed of the blacklist by a third-party partner in China. Previously, there were some misunderstandings about our business model and concerns over the legitimacy of our services, as you can see most enterprises among the blacklist were suspected of illegal trading of foreign currencies. But we have never involved in such a business.
The company has conducted active communications and eventually obtained recognition from the authorities.
China’s regulators are stepping up scrutiny on cross-border payment through measures like blacklisting suspected enterprises. What impact will the stringent regulations have on the industry in China?
I think it is a good thing that the authorities are tightening regulations in the cross-border payment field because it can help reduce “noises,” or non-compliant operations, in the market.
Many startups may think that they deserve some preferential policies and less tight regulations because they are still small businesses. But they should also consider protecting clients and the development of the industry as a whole. China’s peer-to-peer (P2P) lending industry, for example, completely failed because over 80 per cent of participants in the field were not proper businesses and they had doubtful or even illegal operations.
I think in all countries – Asian countries in particular – regulations always lag behind innovation. This is mainly due to two reasons: Firstly, the authorities want to give time for the industry to develop instead of shutting down the door from the very beginning; Secondly, the authorities have to step in and regulate the industry once it develops wildly and creates many structural risks.
Chinese companies often talk about “fundraising pace,” like some claim to raise one funding round every six months. Is the fundraising pace theory applicable to Airwallex?
Not really. Because we operate as a to-business (To B) company that mainly serves corporate clients. Most of our operating costs are generated from employment, license applications, product research, and development, as well as the construction of technological infrastructure. Compared to to-customer (To C) companies who spend most capital on marketing, Airwallex has a lower cash burn rate (which refers to the cash spent by the firm per month).
Airwallex is currently well-funded after our Series C round so we are not in a rush to collect capital for a new funding round. Although we do have some conversations going on with top-tier investors, we don’t have any scheduled fundraising plans that need to be publicized at this stage.
What are the unique challenges you are seeing in the Chinese market as Airwallex continues to grow its business in the country?
Firstly, small and medium-sized corporate clients in mainland Chinese don’t usually have a long life cycle. Chinese companies listed on the Amazon platform, for example, survive for about six months to one year in average. This has created a great challenge for Airwallex in client acquisition. We constantly encounter situations in which we just established cooperation with a company, but it quickly went out of business.
This is challenging for data-driven companies like Airwallex trying to draw a comprehensive user profile that can be used to launch customized campaigns for different clients across different media channels.
Meanwhile, companies [developing in mainland China] usually need to rely on messaging apps developed by the country’s homegrown internet giants, most prominently WeChat mini-programme and official account services, compared to overseas countries where emails and live chats are more popular. Such a difference in user habits is common for all service-focused industries.
What are the major features you are seeing in the current cross-border payment market competition in mainland China?
First of all, the number of market players has become relatively stable with only a few new firms emerging nowadays. The cross-border payment market has a very high entry barrier because the regulator will not grant licenses to all companies in the market.
The regulators in mainland China have been protective toward the domestic market as they are cancelling some licenses, and it’s less likely that they will issue new ones. It is a similar case in many other countries. Regulators will stop granting new licenses once they find the number of players is enough in the market. Whether Airwallex will obtain a license in mainland China or not really depends on the timing, our business development, and strategic demands in the future.
Secondly, commercial banks are still in a dominant position even though they don’t offer automated solutions. This is because the end-users of financial systems are often professionals, like an accountant or a company CFO. They are used to manual operations like filling out forms at a bank. It will also take some time for them to accept automated operations.
Thirdly, the businesses of different companies are increasingly overlapping with one another because most firms tend to construct “a closed-loop” to cover all aspects of cross-border transaction, instead of only focusing on payment or collection. Airwallex is also spending a lot of time on the construction of our own network, which currently bridges over 130 countries with local and international clearing networks.
Mainland China is already a mature cross-border payment market compared to the United States, Britain, Hong Kong, Singapore and other countries that use G10 currencies as their main currencies. Japan, South Korea, India and the Philippines could be the next batch of economies to catch up with the development due to their large populations and high market demands. But these markets are yet to be further developed as the local authorities are strongly protective toward the domestic markets.
What areas do you think will have the largest business potential for cross-border payment in the following years?
The cross-border business is growing amid a general trend of Chinese companies “going overseas.” This is not only limited in the fields of e-commerce and international goods trading, but also in areas like online education, live game streaming, microfinance and fintech. Companies operating under business models like software as a service (SaaS) and marketplace development are also among the main group of enterprises that are bringing their businesses overseas.
These are all popular non-traditional cross-border businesses in recent years from which Airwallex has acquired many corporate clients. Some of our clients in these fields include Tencent, JD.com, online travel agency Huang Bao Che Trip (HBC), and mobile live streaming community Bigo Live.
Where are you seeing the largest chunk of capital flows on the Airwallex platform?
A significant amount of Airwallex’s clients and primary source of income come from mainland China and Hong Kong – Hong Kong in particular in terms of capital flows. Airwallex’s business has so far covered Europe, North America, Australia, Southeast Asia, as well as Hong Kong and mainland China, among which the company has licenses in Hong Kong, Australia, EU and the UK. In Canada and the United States, it operates as a registered financial institution.
Since we can only sign contracts with clients in regions where we have licenses, our existence in certain areas does not mean the local clients can directly use our platform. Hong Kong is still a region where we earn a significant part of income. But it is noteworthy that many cross-border companies in Hong Kong have close ties with their parent companies or subsidiaries in mainland China.
What is Airwllex’s major business plan in the following five years?
The company has put a lot of time and energy to build our own payment network and forge cooperation with local banks worldwide in the past few years. We are satisfied with our current business coverage which spans across a wide range of countries. The company will focus on improving our offerings in some certain regions and countries as the next step.
This year, for example, we have been paying more attention to enhance services in the comparatively-dispersed markets in Southeast Asia, including further lifting the service system in Indonesia to realize connections with more local banks.
In the next five years, besides keep expanding our business-coverage, we aim to upgrade Airwallex into “a company that builds expressways” for transactions across various digital endpoints and online payment platforms worldwide, such as Alipay, WeChat Pay, Union Pay, Visa, Mastercard and Line. We have already started the business.