The Fintech Vision of TikTok and its True Ambition Behind
The timely partnership with JPMorgan can't solve a deeper problem and leaves several long-term issues.
If you have been following Chinese internet companies, you must be very familiar with the acronym BAT — the 3 giants of Baidu, Alibaba, and Tencent. In my previous post, I elaborated on the fintech ambitions and actions of the 2 largest ones Alibaba and Tencent. Nonetheless, the more headline and eye-catching ones are the 3 newer giants TMD — Toutiao, Meituan, and Didi. Toutiao is the name of ByteDance’s first viral app in China before TikTok and Douyin became better known, so people sometimes still use Toutiao as the nickname for ByteDance.
TikTok of ByteDance might be the most controversial Chinese internet company over the past few years. With a global DAU at about 800 million by the end of 2022, policymakers around the world are scared of it, but their grandkids — the Gen Z’s — love it and can’t live without it.
Among a new wave of noises about banning TikTok in the US, a piece of news seemed a bit funky. Forbes broke the news on Jan 5 that JPMorgan, the largest and most powerful bank in the US, is working with ByteDance to facilitate its payment functionalities. It was not TikTok or ByteDance’s first fintech attempt, but definitely the most noticeable one.
Why is this a special milestone for TikTok?
1. ByteDance’s Fintech Journey
I last wrote about ByteDance’s fintech ambition 5 years ago in Jan 2018, back then still a startup, when it was reported to be in negotiation to acquire a local Chinese payment company ULpay. It ended up taking ByteDance 2 more years to close the deal, or rather, to be approved, in Aug 2020. Anyhow, at last ByteDance finally won the limited-supply payment license in China.
During those 2 years, ByteDance obtained 2 other fintech licenses in China — insurance brokerage and online small loans — in June 2018 and July 2020 respectively. The licenses were received through acquisitions: of Beijing Huaxia Insurance and Shenzhen Zhongrong Small Loans.
After collecting all the necessary licenses, finally, in Jan 2021, ByteDance launched its first fintech product: Douyin Payment, as a wallet in its flagship Douyin app. It marks an important milestone of ByteDance’s ecommerce close-loop by completing the transaction step — the missing piece of the loop.
Since then, users of Douyin, have had a drastic difference in fintech user experiences compared to users of TikTok — Douyin’s international counterpart. Douyin Payment enabled a seamless experience for in-app purchases, top-ups, and withdrawals; whereas TikTok was still limited by the choices of payment methods, long settlement cycles, and processing scalability. Even though ecommerce was back then only available in the Chinese domestic Douyin but not yet in TikTok, there was still a high demand for a better fintech user experience on the TikTok side - e.g. payouts to influencers.
That’s why ByteDance has been pushing for this ground-breaking global partnership with JPMorgan, and in the meantime building its internal global payments team with experts and executives from JPMorgan, besides many of my friends in payments from other fintech or internet companies.
2. TikTok’s Real Ambition — Ecommerce
Many reporters and analysts in the US like to compare TikTok with social media platforms like Facebook, Instagram, Twitter, and thus focusing on its advertising revenue. However, I believe that’s missing the real ambition of TikTok.
To better understand it, you need to put yourself in the right context — the Chinese internet market where TikTok (and its founding team) got its DNA from. Advertising-centric social media has never been a successful business model in China.
Renren, the once pixel-level copycat of Facebook in China, was totally disrupted by WeChat, which has been trying hard NOT to make money from advertising. Guess what Renren is doing now? Livestreaming ecommerce.
The whole Chinese internet market was so profoundly shaped by the success of Alibaba, that almost all internet-based businesses only see the transaction part of the value chain as their primary focus.
You may also argue that it has roots in Chinese culture — be practical, not ostentatious. There’s a famous old saying — 酒香不怕巷子深 — if your liquor smells good, you won’t be afraid of selling it from deep in an alley. Throughout Chinese history, advertising was never seen as an essential part of doing business, even though later on exposed to and educated by the western business culture. Of course, businesses can generate significant revenue from advertising, but in terms of the “first principle”, ecommerce always has a higher priority than advertising.
From BAT to TMD, every Chinese internet company has focused on the transaction part — ecommerce and on-demand services. Even for livestreaming, most audiences were attracted by the crazy discount; thus the livestreamers and the livestreaming platforms also only focused on the transactions, not the modern and sleek designs that advertisers typically care about.
This could also explain why social commerce has not taken off in the US or Europe but has already skyrocketed in China and in markets with similar Eastern culture. More importantly for our story here, this is why TikTok has been pushing so hard on global ecommerce in recent years — as the domestic Chinese internet market has become saturated. This is the true motivation behind its fintech attempts.
3. The Lessons of TikTok Shop
In 2020, ByteDance’s founder Yiming Zhang made cross-border ecommerce one of the 3 priority new business lines. In the following year, many experiments around ecommerce took place, including the cooperation with Walmart, and more importantly and seriously, the launch of TikTok Shop in the UK and Indonesia in 2021.
It was a natural next step after Douyin’s success in ecommerce — when its GMV reached 800 billion RMB (or $118 billion) in 2021 and could be comparable to that of Pinduoduo. That number has grown even further to $208 billion by 2022. If TikTok can leverage this success on its global user base, the potential can be even larger than the domestic Chinese market.
Before TikTok Shop, if anyone wanted to purchase something from short videos or livestreaming, they would have to be redirected outside of TikTok to complete the transaction. Now with TikTok Shop, the whole transaction loop can be kept within TikTok — a better experience for the users and a better data feedback loop for TikTok.
Since 2022, TikTok Shop has expanded beyond the UK and Indonesia to more countries in Southeast Asia, such as Thailand, Vietnam, Malaysia, the Philippines, and Singapore. In Nov 2022, it was reported that TikTok would finally launch in the most attractive market: the US.
However, TikTok Shop’s global success is not evenly distributed. In 1H2022, its global GMV reached $1 billion, of which the UK accounted for only $24 million, compared to Indonesia’s $200 million. Its lukewarm traction in the UK has stalled further expansion plans in Europe, including launching livestreaming ecommerce in Germany, France, Italy, and Spain.
Most TikTok users in the US and Europe see TikTok as an entertainment-only app. TikTok doesn't occupy much mindshare as a place for shopping. This is quite different from China and Southeast Asia, where consumers are already used to doing everything in the super apps, including social, entertainment, and shopping.
4. The Real Fintech Opportunity (and Challenge) for TikTok
Compared to Southeast Asia, ecommerce in the US and Europe enjoy much higher ATVs. No wonder all the Chinese ecommerce rising stars have been eager to enter, including TikTok, SHEIN, and Temu (Pinduoduo).
But frankly speaking, the key to ecommerce success in developed markets is actually no longer in payments, since mobile consumer fintech has basically leveled the playing field. The differentiation is actually in the supply chain.
For Southeast Asia, the ATV is lower and users are not used to complaining much about bad quality, terrible return policy, or long delays and loss in delivery. However, in the US and Europe, consumers value reputation and user experience a lot more than in developing markets.
Analysts estimated that in China, the average return rate for Douyin ecommerce is 50%. That level is ok for the domestic Chinese market, where ecommerce logistics is super developed and ultra-low cost. However, such a level in the US and Europe would force TikTok to raise the price by about 100% to make it profitable. Thus, user friction caused by the supply chain can deeply hurt TikTok’s sustainability.
Therefore, instead of just focusing on the user in-app payment experience, TikTok should really think of a holistic fintech strategy to include the supply chain in the framework. But this would require a strategy shift, as TikTok has been more focused on the user side than the seller side, let alone the heavy infrastructure investments associated.
However, there are still potential solutions — such as partnering with platforms like Shopify and leveraging their supply chain ecosystems. In recent years, there are also a new wave of B2B fintech companies as well as embedded fintech players that can be plugged into the TikTok platform to smooth out a lot of kinks in its supplier loops.
Furthermore, TikTok can better utilize its powerful data machine — ByteDance’s core competitive advantage — to develop a tiered system based on sellers’ credibility, and offer value-added services or even supply chain credits to premium sellers, in order to fundamentally and consistently improve the shopper experience.
Judging by TikTok’s lack of capability to develop decent SaaS functionalities — its ads platform is notoriously hard to use compared to that of Facebook — this seller SaaS tool could be quite a challenge for TikTok to build.
Even ByteDance as a whole is not good at making B2B SaaS products in the international (non-China) market, as Lark — ByteDance’s attempt to compete against the distributed work suite of Slack, Zoom, Asana, and Notion - had been a failure in the US and European market over the past years and lost most of its teams.
5. Futuristic Thoughts on TikTok’s Fintech Strategy
As much as I believe TikTok’s partnership with JPMorgan is a win-win-win on multiple fronts…
users benefit from a more frictionless in-app experience
TikTok benefits from close-loop user data and a politically important endorser
JPMorgan wins a huge client for fintech, treasury, and potentially even IPO
…I suspect this partnership can actually make TikTok miss out on some profound long-term strategies.
For one, JPMorgan may be the best fintech partner in the US and even Europe, but for emerging markets such as Southeast Asia and Latin America (where TikTok is eyeing the imminent launch), the architecture that is built around a bank-centric system — and to some extent, the team, culture, and strategy too — may backfire when it’s working with various local payment methods in these markets. Lack of compatibility in infrastructure and team with the local payment systems could be a constraint on TikTok’s deeper integration into the local markets.
For two, this closer integration with a mega-bank may hurt its future with the “bankless” community. TikTok’s core user is Gen Z and much of that population is not a fan of banks. Especially in emerging markets where its ecommerce platform is gaining traction, an increasingly higher portion of its userbase there live (and work) on crypto.
It won’t be a surprise that along with the next crypto boom, more TikTok users would ask for integration with their crypto wallets or even various web3 ecosystems in gaming and music, two sectors that TikTok is tapping into now. By then, a bank-centric tech stack and team could cause TikTok to distance itself from its core user base and miss out on higher growth potential. This near-term win may turn out to be a long-term loss.
6. Enemies at the Gates
Local payment methods and long-term crypto vision are understandably in lower priority. since TikTok is facing short-term challenges from all fronts in its core markets:
Trust issue: it was reported that in an internal meeting in Dec 2022, TikTok CEO Shou Zi Chew mentioned “building trust” is the key priority now.
User and revenue growth pressure: the original 2022 goal of 1 billion DAU and $12 billion in revenue was missed. The estimated DAU is about 800 million only and the revenue target was brought down to $10 billion.
Loss of influencers: it was estimated that between July 2021 and July 2022, the number of TikTok influencers with over 1M followers has lowered by about 40% - from about 2000 to 1300-1400.
Fierce competition in ecommerce: SHEIN had a few amazing years in the US and Europe and is expecting an IPO soon, while Temu of Pinduoduo had a killer launch in the US with a GMV of $200 million within 3 years.
In the next post, I’m going to look into the recent buzz of Temu and unfold how fintech can make it a more formidable competitor of TikTok, SHEIN, or even Amazon.