We have often heard financial experts say that it is not a big deal. Some point out that the United States does not have an extensive Internet finance network, and what China has is a phenomenon involving regulatory arbitrage that will bust like a bubble once financial regulations are tightened and improved.
Chen Long, chief strategy officer of Ant Financial Services Group, has argued that China’s future may not necessarily look like the United States of today. With its relatively young financial market and Internet technologies, China is overtaking the United States. What it could achieve tomorrow may become an American goal, he said.
The United States undoubtedly has the world’s most advanced financial system, and toughest and most rigorous regulations. Regulation is crucial to maintaining order and controlling risk, but it also hurts innovation. The reason China can take the lead in developing Internet finance is because it has the soil in which innovation in this area can grow.
First, its financial policies have long fallen short of meeting the needs of a great number of people and companies. They not only repress the cost of capital but also directly interfere in the allocation of loans. So despite the huge size of the country’s financial market and the assets in it, the only people and companies that can enjoy good services are the wealthy.
The demand for financial services of ordinary people and many small and medium-sized companies has still not been met.
Second, China has a huge population of smartphone users, providing a large enough testing ground for Internet finance. The number of smartphones in the country has already surpassed 600 million, and social media platforms such as WeChat and Sina Weibo each have at least 200 million loyal users who spend a lot of time using the services every day. This represents a huge potential market for Internet finance, which is hard to come by in even big countries, let alone small ones.
Third, the development of big data and cloud computing technologies has enabled the process of managing risk and reducing information asymmetry to rely more on simply data crunching.
It is fair to say that not one Internet company has really mastered big data in the real sense, but there is no denying that analysis technologies are beginning to play a really important role.
It is economically unwise for big, established financial institutions to provide small loan services like those offered by Ant Financial because lending 20,000 yuan is not worth the amount of time and energy a loan officer must spend to verify and assess a borrower’s financial situation and risks. The good thing about big data is that it can make a risk evaluation without having to send people to investigate on the ground.
In general, financial intermediaries using big data technologies will need fewer workers and physical offices. The supply of financial services will no longer be subject to the restraints of time and space.
China is now at the starting point of Internet finance. This is where it may overtake the United States, and the opportunity is the combined result of policy, market and technologies.
A comparison between China and the United States of the three aspects mentioned above shows drastic differences. America does not have as much unmet demand for financial services, meaning that it does not have as big a potential market for non-traditional financial institutions. Americans use social media tools like Facebook and Twitter a lot, but the number of users pales compared to that in China. When it comes to big data, the United States may have an edge, but few of its financial institutions have really put the technology to use. But that does not mean China could not do better.
Internet finance has undoubtedly become an important force that may bring revolutionary changes to the financial industry. One of the most perceptible changes that is taking place is the democratization of financial services. For ordinary people who have only a few hundred or thousand yuan in their bank accounts, the services of many traditional financial institutions have been out of reach. But with services such as Yu E Bao, a money market fund investment tool offered by Ant Financial, everyone can make an investment.
Another change is the marketization of capital interest rates. Under current financial regulations, the central bank sets benchmark levels for both deposit and lending interest rates, and banks must set their rates accordingly. Internet finance, however, sidestepped the restriction and allowed people to transfer money directly from their bank accounts to Yu E Bao, which offers higher yields. This is liberalization of interest rates.
Internet finance also signals the direction of disintermediation, meaning financial intermediaries are becoming obsolete. In a sense, Ant Financial is accelerating the trend by allowing people to shop for financial products from institutions.
But the evaluation of big data needs to take into account two things. First, it will be a long time before we learn enough about it because until now it has remained more of a promising direction for development than a reality. Also, even the most advanced big data technologies will not fully eliminate all uncertainties because even if we know all about an enterprise or a project, we cannot predict the future with 100 percent certainty.
So the application of big data will to some extent substitute financial intermediaries but it will not entirely replace them. What traditional financial institutions thought of as their advantages, such as an extensive office networks and many employees, could become a burden, but there will always be a need for banks with a physical presence because field inquiries by real people will always be needed no matter how advanced data analysis becomes. In the past, ordinary people may have no choice but to deposit their money at a bank, but they will soon be able to choose among a variety of investment tools online.
Using data analysis to do the work of certain field inquiries is at the core of the movement that is pushing the financial industry’s reform. The United States is no exception to this trend and we must prepare ourselves for the day when it becomes reality.
Huang Yiping is a professor of economics at Peking University’s National School of Development. This is a translated excerpt of a commentary first published on Caixin’s Chinese website