A fintech revenue surge helped Tencent smash quarterly expectations (TCEHY)

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Tencent posted record quarterly profits and smashed market expectations in Q1 2019, driven largely by surges in its fintech and cloud revenue, per Reuters.

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The firm’s struggled in recent times due to regulatory action aimed at weaning players from addictive and violent games hobbling its gaming division. Even so, strong performance in its nascent fintech business has enabled the firm to offset the losses in its core division.

Here’s what it means: Tencent will likely double down on its fintech unit as it continues to struggle in its gaming and advertising businesses.

Fintech and business services is now Tencent’s second largest division, responsible for a quarter of its revenue. This was the first time the tech giant broke out earnings for the unit, which brought in revenue of Rmb21.79bn ($3.2 billion), a 44% year-over-year (YoY) spike. Key in driving this growth is its payments wallet for WeChat, whose 1.11 billion users make it the largest social media platform in China, as well as its insurance services, which include a 20% stake in Aviva Hong Kong, and its cloud computing service. Such has been the growth of its fintech unit, on the one hand, and the impact of regulatory action on its gaming business, on the other, that fintech has now surpassed smartphone game revenue for the first time.
In addition to regulatory action, macroeconomic conditions are likely to see the firm up its fintech efforts beyond the mainland. Tencent’s online advertising grew 25% YoY, compared with 55% YoY in the same period last year, suggesting that China’s slowing economy and continued trade tensions with the US are hitting the firm. These pressures could see Tencent accelerate its fintech efforts abroad. The firm already has a sprawling fintech portfolio outside its home market: It invested $180 million in Brazilian neobank Nubank, led a $160 million Series C in German neobank N26, and invested in Philippine fintechs Voyager and First Circle in 2018 alone. Additionally, it secured a virtual banking license in Hong Kong just last week. With regulatory and macroeconomic pressures showing no signs of easing, the firm is likely to aggressively expand its fintech reach across Asia and beyond to buffer against those domestic concerns.

The bigger picture: Tencent’s struggles in its core business should worry banks, as it has all the tools to become a financial services giant.

Tencent’s already redefined financial services in China. Its WeChat app enables users to engage in an extensive list of financial activities, from paying bills to making online purchases, money transfers, and buying wealth management services.

Its range of services offered, both financial and nonfinancial, has enabled WeChat to embed itself in the lives of its massive user base: 60% of time spent on the internet in China is on the app. Upping its fintech efforts appears only natural, as it would allow the firm to extract even more value from its existing user base.

And the firm’s huge resources and scale make it a much more serious threat than fintechs to established financial institutions (FIs), not least because they allow it to expand its digital platform and technological capabilities beyond Asia, with its recent virtual license in Hong Kong a case in point.

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