Embattled financial technology businesses in China, which have come under tightened regulatory scrutiny, are becoming acquisition targets for banks accelerating their digitalization drive, according to global management consultancy McKinsey. Joe Ngai, Managing Partner for Greater China at McKinsey, said that tremendous changes are taking place in China’s fintech sector amid the clean-up campaign by regulators to ward off financial risks. “The fintech businesses originally envisioned mounting a challenge on established banks, but the new trend is that more partnerships and acquisitions will be seen as the lenders count on the latest technologies to bolster their development.”

Since 2011 peer-to-peer (P2P) lending platforms, third-party mobile payment service providers and online insurers rapidly penetrated into people’s daily lives in the absence of efficient supervision. A wave of collapses in the P2P sector is estimated to put several hundred billions of yuan of investors’ money at risk as many of the operators are found to have illegally raised funds from savers while re-lending them to cash-hungry businesses at high interest rates. The People’s Bank of China (PBOC) is also conducting a thorough inspection of online payment firms across the nation to uproot irregularities. Players including Ant Financial Services, Union Mobile Financial Technology and Gopay have been fined.

A stepped-up regulation is a boon for banks as fintech companies, once perceived as a headwind to the lenders, will have to consolidate their ties with the established and licensed financial institutions to survive the crackdown. “They developed financial technologies, only to find that they are not allowed to offer financial services,” said Ngai. “By the end of the day, big banks will come out and buy them over to boost their digitalization drive.” Chinese banks have become increasingly aware of the significance of developing digital banking as the economy moves towards a cashless society spurred by the widespread use of mobile payments among residents, the South China Morning Post reports.