Can the internet revolutionise finance in China?
Internet finance in China has developed rapidly over the past several years. Internet finance embraces a huge range of activities, including third-party payment, online lending, direct sales of funds, crowd-funding, online insurance and banking and digital money. Public sentiment towards internet finance has moved the full gamut from fever pitch to fear.
What is the future of internet finance?
Optimists argue that internet finance represents a third type of financial intermediation, after direct and indirect financing, which could completely revamp traditional financial industries.
Others point out that internet finance is mainly a Chinese phenomenon: a product of regulatory arbitrage, which could evaporate once financial regulations tighten to levels equivalent to those in advanced economies. From mid-2015, as internet finance grew and the associated risks escalated — as evidenced by growing numbers of problematic peer-to-peer (P2P) lending platforms — these pessimistic assessments gained traction among financial industry practitioners, scholars and even government officials.
Qilun Wu, a famous financial commentator on Chinese microblogging website Weibo, has argued that P2P lending is a Ponzi scheme. Many share Wu’s view. But is this really the case?
What’s driving internet finance?
The rise of internet finance in China has been triggered by at least three factors. First, repressive financial policy produces an undersupply of financial services, especially for small- and medium-sized enterprises (SMEs) and low-income households. This leaves a hole in the financial market that internet finance can fill. Second, regulator tolerance has provided space for internet finance to emerge and grow. And third, IT tools, especially mobile terminals and big data analysis, increasingly offer effective ways for internet finance to increase its efficiency and control financial risk.
A distinct advantage of internet finance over traditional finance is that it substantially reduces due-diligence costs. As a result, financial transactions that would otherwise be commercially unviable in the traditional financial industry are enabled. More importantly, the long-tail feature of internet technology implies that, once the system is established, the marginal cost of servicing additional customers is close to zero. So, the internet is a natural fit with the evolution of more inclusive finance in China. In this sense, internet finance is indeed a real innovation and not a passing bubble as some fear.
This suggests that internet finance has the potential to add real value to financial transactions, especially via enabling commercially profitable transactions from demand for credit that previously was commercially unviable. Whether this potential can turn into real business depends on several conditions, the most critical of which is the internet’s ability to continue to reduce information asymmetry for financial transactions.
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