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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
In collaboration with the
Shanghai Advanced Institute
of Finance (SAIF)

At a Crossroads:
The Next Chapter
for FinTech in China
WHITE PAPER
MARCH 2021
At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
Images: Getty Images

Contents
Foreword                                                                            3

Executive summary                                                                   4

1 Introduction                                                                      5

2 Three stages of industry development                                              6

3 Three kinds of innovation dynamics                                                7

4 The first stage: computerization of finance                                       9

5 The second stage: internetization of finance                                    10

6 The third stage: intelligentization of finance                                  12

7 A balancing act: the role of the regulator                                      15

     7.1 A bitter memory                                                          15

     7.2 The balance is tilting                                                   16

     7.3 The evolution of the regulator: open questions                           17

8 Outlook and conclusion: the rise of new finance                                 19

     8.1 New economic benefits                                                    19

     8.2 Enhanced user experience                                                 20

     8.3 New competitive dynamics                                                 20

     8.4 Conclusion                                                               21

Appendix: Bibliography                                                            22

Contributors                                                                      24

Acknowledgements                                                                  25

Endnotes                                                                          26

© 2021 World Economic Forum. All rights
reserved. No part of this publication may
be reproduced or transmitted in any form
or by any means, including photocopying
and recording, or by any information
storage and retrieval system.

                                                          At a Crossroads: The Next Chapter for FinTech in China   2
At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
March 2021   At a Crossroads
             The Next Chapter
             for FinTech in China

             Foreword
             China has been more affected by
             technology-enabled innovation than
             any other jurisdiction globally.

                                                                                                       Kai Keller
                                         Jie Hu                                                        Initiative Lead, The Future
                                         Professor of Practice,                                        of Financial Services in
                                         Shanghai Advanced Institute                                   China and Beyond, World
                                         of Finance                                                    Economic Forum Beijing
                                                                                                       Representative Office

             The Chinese financial system has come a long way             of getting a glimpse of what the future of financial
             since the People’s Bank of China was separated               systems globally might look like, as well as an insight
             from the Ministry of Finance in 1978. While large            into the role of large technology firms and how existing
             state-owned banks continue to dominate the                   inclusion and literacy challenges might be solved.
             traditional banking sector, Chinese technology
             firms now play an important role in the delivery of          Given the unique nature of the Chinese financial
             services to individuals, corporates and institutions.        system, the outsized role of technology in the
             Technology-enabled innovation has transformed                delivery of financial products and the deepening
             system evolution in China more than in any other             global geopolitical tensions that increasingly affect
             jurisdiction globally.                                       financial markets, the World Economic Forum
                                                                          was asked by a group of senior industry leaders
             The COVID-19 pandemic further accelerated this               to explore the evolution of the Chinese financial
             transformation process as lockdown measures and              services system with the expectation that dialogue
             contagion fears gave technology providers a unique           between Chinese and global stakeholders will
             opportunity to prove their relevance once and for            build and deepen trust. The role of technology
             all. The reliance on digital or contactless payment          firms and FinTech proved a particularly important
             methods – already prevalent before the pandemic –            point of discussion, as developments over the past
             further intensified. FinTech was critical for facilitating   couple of months have highlighted. The Shanghai
             access to financing for liquidity-starved micro-,            Advanced Institute of Finance (SAIF) collaborated
             small- and medium-sized enterprises, and even took           with the Forum in this effort, and this report
             on the role of verifying an individual’s health status.      presents the initial findings from a workshop hosted
                                                                          in Shanghai, discussions at the Forum’s China
             Technology-enabled innovation is not a uniquely              Business Roundtable and expert interviews.
             Chinese phenomenon; it is transforming financial
             systems globally. However, system evolution is               Industry leaders and experts representing relevant
             playing out somewhat differently in China: the               Chinese institutions have contributed to the
             adoption of technology is taking place at an                 discussions reflected in this report. We hope
             unparalleled rate; large technology firms are playing        that you find this exploration insightful and look
             a significant role in the retail market, while Chinese       forward to your comments. The World Economic
             corporates are continuing to depend on bank                  Forum, through its Platform for Shaping the
             lending for financing. Equally important, given that         Future of Financial and Monetary Systems, and
             the modern financial system in China is younger than         SAIF will continue to facilitate dialogue between
             the systems in Europe and North America, regulation          industry and public-sector leaders. We welcome
             continues to develop at a different pace as well.            new perspectives and we hope to make a small
                                                                          contribution to ensuring the Chinese financial system
             Globally, stakeholders are paying close attention            continues to balance innovation and system stability
             to developments in China: some see an enormous               effectively, and that further transformation remains
             business opportunity; others study China in the hope         aligned with the evolution of systems globally.

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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
Executive summary
The evolution of China’s FinTech
industry has entered a critical third
development stage.

Innovation is no longer orchestrated by regulatory      As financial innovation has gained traction and the
agencies and merely implemented by financial            firms driving it have grown into sizeable players, the
institutions (top-down), as it was during the first     dynamic between innovators and regulators has
stage; nor is it driven by technology companies         begun to shift. Regulatory agencies have started
(bottom-up), as it was during the second stage.         to be more proactive in supervising the activities of
Current innovation dynamics reflect a complex           technology firms after realizing that the size of many
interplay of collaboration and competition between      technology firms and FinTechs means they could
traditional service providers, big tech firms that      threaten financial stability and peace in society if
have moved into financial services, independent         their innovation efforts and business practices were
FinTechs and regulators. As these players continue      overly aggressive. But the regulators and policy-
to find their places and roles in the newly emerging    makers also understand that overly restrictive
business environment, the future make-up and            regulatory approaches could stifle future innovation
characteristics of China’s financial industry remain    and economic growth.
to be determined.
                                                        What is needed is a thoughtful approach to
The approaches chosen by China’s financial              innovation and regulation that enables the many
regulators will be decisive in setting the future       benefits FinTechs can provide while controlling
direction. FinTechs managed to grow faster and          – and ideally eliminating – the potential risks.
influence the interaction between individuals and       Regulators and the industry face a delicate
service providers more deeply in China than in most     balancing act and need to consider questions
other jurisdictions. The industry’s success enabled     about the use and protection of data, potentially
hundreds of millions of individuals who were            monopolistic practices, and alignment with global
previously underserved by traditional institutions to   methodologies and standards.
access financial products. It also greatly enhanced
user experience and operating efficiency and            Only a collaborative approach among all
reduced transaction costs. The industry was able to     stakeholders – including smaller, independent
deliver these benefits because Chinese regulators       FinTechs – will ensure China’s FinTech industry and
took a “wait and see” attitude during the early         the country’s financial system continue to prosper,
stages of its development that allowed innovation       delivering benefits to society at large and leading the
outside the traditional regulatory perimeters to        world in financial innovation and inclusion efforts.
blossom, and then adjusted rulebooks only over
time in a process of “regulatory catch-up”.

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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
1   Introduction
    FinTech in China has reached a crossroads.

    FinTech’s rise in China has been facilitated by a      continue to shape the role of FinTech in China’s
    complex interplay of cooperation and competition       financial system, set the pace of the industry’s
    among technology companies, traditional financial      development and determine the eventual make-up
    institutions and regulatory agencies. The strategies   of the broader financial ecosystem. FinTech in China
    and positions adopted by these three players will      has reached a crossroads.

    Definition of FinTech

    The Financial Stability Board (FSB) defines            of financial services.1 This definition has been
    FinTech as technology-enabled innovation in            adopted by the People’s Bank of China (PBOC) in
    financial services that can result in new business     its FinTech Development Plan (2019–2021). Prior
    models, applications, processes or products with       to this, FinTech was often referred to as internet
    an associated material effect on the provision         finance in China.

    The numbers behind FinTech’s evolution in China        FinTech has gone through three stages of
    are nothing short of amazing: today, more than         development in China: computerization,
    1 billion consumers are enjoying the benefits of       “internetization” and “intelligentization”(the terms
    FinTech in areas such as mobile payments, banking,     used for the latter two stages are still new and
    insurance, investment and consumer lending.2           unfamiliar, and may develop over time). The
    FinTech has also enabled more than 30 million          marriage of information technology and finance at
    micro and small enterprises (MSEs) to access           these three stages has improved financial business
    loans.3 Thanks to the application of technologies      efficiency, created new service models, transformed
    such as big data and blockchain, companies             the original ecosystem and presented new
    across supply chains can now benefit from more         opportunities and challenges to regulatory agencies.
    inclusive and affordable financial services.

    A brief history of China’s financial system

    China initiated the reform of its financial system     by the government). Another RMB80 trillion’s
    and adoption of its opening-up policy in 1978,         worth of assets are owned by more than 70,000
    when the People’s Bank of China (PBOC) was             other financial institutions – including 60 firms
    separated from the Ministry of Finance. The            managing non-performing assets,7 240 insurance
    modernization of its financial system started in       companies,8 129 mutual fund companies, 24,494
    1984, with the separation of the Industrial and        private equity companies,9 12,130 financial leasing
    Commercial Bank of China (ICBC) from PBOC.             companies,10 7,551 microfinance companies,11
    Since then, ICBC has been recharacterized as a         8,397 pawn shops12 and 13,338 factoring
    commercial bank and PBOC as a central bank.            companies.13 In 1990, two stock exchanges were
    Since 1977, 43 years ago, China’s economy              launched, in Shanghai and Shenzhen respectively,
    has been growing rapidly alongside its financial       setting the stage for direct finance, with the
    system to reach a GDP of RMB99 trillion in 2019        combined valuation of companies listed on these
    ($15.85 trillion),4 with an M2 money supply of         two exchanges currently standing at RMB59
    RMB199 trillion.5 China’s financial intermediaries     trillion.14 Bonds traded in interbank markets and
    own combined assets worth RMB370 trillion,             exchanges are valued at RMB99 trillion.15 China
    including RMB290 trillion’s worth of assets owned      also has four futures exchanges, 133 securities
    by 4,607 banks6 (99% of which are controlled           firms16 and 149 futures companies.17

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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
2   Three stages of
    industry development
    China’s FinTech industry has gone through
    three stages of development, each
    exhibiting defining characteristics.

    1984–2003
    The computerization of China’s banking sector            dynamics during this stage were top-down,
    was completed to provide the country’s financial         which meant that the process was dominated
    system with a modern payment infrastructure.             and planned by regulatory agencies and was
    Notable events in this stage included the Golden         implemented by traditional financial institutions
    Card Project launched in 1993 and the Data               (which were state-owned and licensed).
    Centralization Project initiated in 1999. Innovation

    2004–2014
    The internet began to play a crucial role in financial   internet-based money market fund sales platform,
    businesses, particularly in personal banking, and        was launched. These financial innovations triggered
    the launch of Alipay in 2004 marked the defining         a new wave of FinTech progress, and innovation
    event of this second innovation stage. Alipay was        dynamics during this stage were bottom-up, driven
    the first company in China to offer online payment       first by technology companies (which were usually
    services and later to enable mobile payments.            not licensed, at least in the beginning) and then
    In 2007, China’s first peer-to-peer (P2P) lending        embraced by traditional financial institutions, with
    company, PPDAI, went online. In 2013, Yu’ebao, an        regulatory authorities gradually catching up.

    2015 until today
    Intelligentization, meaning the comprehensive            for personal credit reporting licences in 2015, the
    and penetrative use of D-BASIC technologies              rise of internet-based microlending companies in
    (see Section 6, The third stage: intelligentization      2017 and the rapid growth of the online mutual aid
    of finance) to replace manual labour in financial        market in 2018. Dynamics during this stage can be
    businesses, is the defining characteristic of the        characterized by a hybrid of top-down and bottom-
    third and current innovation stage. D-BASIC              up innovations. Technology companies, traditional
    technologies helped financial institutions lower         financial institutions and regulatory agencies
    costs, improve efficiency and disrupt old business       continue to attempt to find their respective places
    models while creating new businesses and                 within the new ecosystem, while competing in some
    products. Notable events during this stage               areas and collaborating in others.
    included the selection of eight pilot companies

    The impact of information technology on finance

    Finance requires a wealth of information for             Customers: The use of technology to reach
    its operation. Further progress in information           and profile customers online can improve the
    technology will result in new financial innovations      efficiency of selecting, acquiring and serving them.
    that will have an impact on, in particular:
                                                             Processes: Through the use of networks, data,
    Ledgers: Ledgers serve as infrastructure                 algorithms and computing, nearly all financial
    for the financial system. FinTech can make               business processes have been reorganized to
    payment and settlement more efficient, thus              become more accessible, efficient and smart.
    enhancing the user experience. Moreover,
    blockchain offers an alternative form of ledger
    and can help promote collaboration.

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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
3   Three kinds of
    innovation dynamics
    The direction, nature and role of future
    innovation will depend on how actors will
    compete and collaborate going forward.

    A close examination of the three innovation                major role in the transformation of China’s financial
    dynamics that have defined FinTech’s                       system so far. The direction, nature and role of
    evolution in China is required to understand               future innovation will depend on how technology
    the accomplishments made – and difficulties                companies, traditional financial institutions and
    encountered – by the industry in the past and              regulatory agencies position themselves vis-à-vis
    to make predictions about its future direction.            each other, and how they compete and collaborate
    Technology-enabled innovation has played a                 in the future.

    Top-down
    This innovation model, led and planned by                  coordination between industry and regulatory
    regulatory agencies, dominated the first stage of          agencies in the process of implementation. It
    development, and traditional financial institutions        is, however, unfit for spontaneous and constant
    simply implemented regulatory instructions.                innovation, as regulators can struggle to stay on top
    The strengths of this model lie in its ability to          of constantly evolving industry needs and are less
    concentrate a great abundance of resources to              technologically literate than industry players.
    upgrade strategic infrastructure and enable smooth

    Bottom-up
    This innovation model, which dominated the                 companies, in their early stages, innovating ahead
    second stage of development, is driven by                  of existing regulatory frameworks, thus creating
    technology companies that use IT to transform              probable sources of risk. Regulators will accordingly
    financial services delivery and processes.                 adjust their positioning towards innovators over
    Technology companies, most of which are privately          time. Moreover, the entry of technology companies
    owned, are encouraged to innovate and thus drive           into the financial services space may threaten the
    the transformation of finance. At the same time –          interests of traditional financial institutions and lead
    either because some technology firms were seen             to turf wars. Since some technology companies do
    as less perceptive of, or sensitive to, financial risks,   not have the required licences when they first make
    or as a result of financial regulators generally being     inroads into finance, or because of an absence of
    less familiar with risk-management innovations             applicable licences, incumbents often tend to be
    advanced by technology firms – perceptions of              well positioned in such confrontations.
    systemic risk arose. These were fuelled by some

    Hybrid
    This innovation model, which has been gradually            of the previous two models will depend on the
    evolving in the third stage of development, is             cooperative and explorative efforts of the three
    marked by collaboration between technology                 parties. The previous innovation dynamics seem
    companies, traditional financial institutions              unfit for the long-term development of FinTech.
    and regulatory agencies. This model remains                Therefore, whether the hybrid model will succeed
    experimental and immature. Whether it can                  will have profound implications for the future of
    combine the strengths and avoid the weaknesses             FinTech in China.

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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
INDUSTRY   Traditional financial institutions embracing change
PERSPECTIVE
              The China Construction Bank Corporation aims           its business footprint to a dozen provinces and
              to build its financial supply system into a “new       municipalities. As part of CCB’s TOP+ Strategy,
              finance” business environment that takes data          CCB FinTech is accelerating the development of an
              as its key factor of production, technology as its     intelligent, inclusive and boundless “new finance”
              core instrument of production, and platform as         system, while contributing to the upgrading and
              its main method of production. Initial experiments     transformation of China’s financial industry by
              and new finance practices have made the bank           providing “finance-level” digital capabilities for the
              fully aware of the following facts: technology         whole of society. As a pioneer of China’s FinTech
              reshapes customer behaviour and drives financial       industry, CCB FinTech is serving the bank at one
              services; the traditional role of technology as an     end and enabling the market at the other. With
              affiliate of banking businesses and processes must     leading systems, products and services, open
              be changed; and a FinTech mindset should be            platforms for technology sharing and inclusive
              adopted to transform financial technology into a       digital operations, the financial technology firm
              product, a service and a value-creation activity.      is supporting the industry to improve a full range
                                                                     of offerings, serve the real economy, build an
              Based on this understanding, in 2018 the bank          inclusive society, benefiting all, and contribute to
              established CCB FinTech, which has become              the country’s effort to go digital.
              China’s first financial technology company
              restructured from the internal research capabilities   Yan Liu, Director of Strategic Ecosystem and
              of a large bank and which has since expanded           Investment, China Construction Bank

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At a Crossroads: The Next Chapter for FinTech in China - WHITE PAPER MARCH 2021 In collaboration with the Shanghai Advanced Institute of Finance ...
4     The first stage:
             computerization
             of finance
             The primary focus of the first stage of
             FinTech-driven transformation was upgrading
             the banks’ ledgers and payment system.

             Driven by top-down innovation dynamics, China’s                 nationwide in 2005.21 In 2007, China introduced
             financial sector completed the computerization                  arrangements that enabled interregional and
             of its payment system and its banks’ internal                   interbank deposit and withdrawal.
             business management system by adopting
             computer and network technologies between                   The primary focus of the first stage of FinTech-
             1984 and 2003. Important events marking this                driven transformation was upgrading the banks’
             first stage of industry development included:               ledgers and payment system. In parallel, banks
                                                                         automated their business processes and
             –   1986: The Zhuhai branch of ICBC pioneered               enhanced the customer experience, including
                 the use of computers to process transactions.           the ability to withdraw and deposit cash and
                 In 1993, computers were universally used by             make transfers at ATMs, make purchases
                 banks and outlets nationwide for bookkeeping.18         on credit cards, and make deposits and
                                                                         withdrawals across banks and regions.
             –   1987: The Zhuhai branch of Bank of China
                 installed the first automated teller machine (ATM).19   Computerization laid a critical foundation for
                                                                         the future rapid development of FinTech. The
             –   1993: The Golden Card Project was launched.             top-down innovation model was a natural
                 In 1996, Bank of China (BOC) issued the                 choice for the country at that time. This stage of
                 country’s first RMB debit card.20                       development was also marked by the absence
                                                                         of any regulatory friction due to the dominant role
             –   1999: ICBC became the first bank to centralize          of regulatory agencies and the implementing role
                 data through a project called 9991, which               of traditional financial institutions. The second
                 was completed in 2002. Other banks quickly              stage of development would look very different.
                 followed suit and finalized the undertaking

CASE STUDY   The Golden Card Project

             In 1985, the first credit card in China was issued          June 1993, China officially launched the Golden
             by the Zhuhai branch of Bank of China (BOC) in              Card Project, which, as a currency electronification
             Guangdong. The credit card could be used only               project, was designed to promote the use of
             in Zhuhai and was available only to local residents         information cards and cash cards. By the end
             and those who were formally employed in the                 of 2000, China had preliminarily established a
             city. Any applicant who had deposited more than             national interbank exchange system and a national
             RMB300 with BOC and submitted a form affixed                information exchange centre that covered 18 cities
             with the seal of his/her employer was eligible              nationwide. As a significant milestone in the history
             for a credit card, which offered a line of credit of        of China’s payment industry, the Golden Card
             RMB300. Those who had deposited more than                   Project helped expand the use of bankcards and
             RMB1,000 could apply for a golden credit card,              accelerated the technology-driven modernization
             which extended a line of credit of RMB1,000.22 In           of the financial sector.23

                                                                         At a Crossroads: The Next Chapter for FinTech in China   9
5   The second stage:
    internetization of
    finance
    Tech-savvy internet companies set the pace
    throughout the second innovation stage.

    The launch of Alipay, a third-party payment product,        –   2011: The first third-party payment licence was
    in 2004 marked the beginning of a new era in                    issued, seven years after the first third-party
    China’s financial industry: over the course of the              payment platform began operations.
    next 10 years, almost all financial activity went
    online. Alipay was the first online payments service        –   2013: Yu’ebao was born and enjoyed rapid and
    and opened the door for other financial businesses              astonishing success, leading some to label 2013
    to move online. It is noteworthy that, when Alipay              as the “ground zero of internet finance in China”.
    was launched, third-party payment licences were
    not available in China. Instead, PBOC gave special          –   2014: Large financial service platforms
    approval for Alipay’s operations in the form of                 appeared in the wake of Yu’ebao’s success and
    registration, reflecting the relatively tolerant attitude       a variety of financial products moved online.
    of regulatory authorities towards financial innovation
    at the time.                                                From a business perspective, ledgers, customers
                                                                and processes were the three areas most affected
    Technology companies driving this second stage              by FinTech. The extension of payment services
    of innovation through the bottom-up innovation              to the traditional and mobile internet greatly
    model used the internet, mobile devices and                 enhanced user experience. Internet payments and
    cloud computing technologies to support financial           mobile payments quickly went mainstream and
    businesses. Traditional financial institutions also         redrew the landscape of the payments industry.
    caught up at this stage after gradually realizing           The third-party payment service providers that
    the enormous potential of internet technology.              had secured first-mover advantages locked in a
    They embraced, imitated and kept pace with                  sizeable share of customers’ access time and data.
    the innovations of technology companies. In the             Reaching, selecting and serving customers offline
    beginning, regulatory agencies were tolerant,               became less of a priority for service providers. As
    adopting a “wait and see” attitude in the face of this      physical proximity was no longer a critical factor in
    wave of innovation. However, when the risks of P2P          acquiring new customers, offline outlets became
    lending surfaced, regulators began to intervene and         less important and customer screen time became
    displayed a more proactive attitude to exploring            a much more valuable asset. More services were
    how best to regulate FinTech.                               moved online and soon customers could also
                                                                process nearly all financial transactions over the
    Tech-savvy internet companies, including online             internet, including investing in mutual funds and
    shopping and social networking platforms, search            asset management products, trading stocks,
    engines, games companies, news portals and                  buying insurance, seeking financial advice, making
    online-to-offline (O2O) service providers, continued        purchases and accessing after-sales services. With
    to set the pace throughout the second innovation            more business activity available online and mobile,
    stage. Although traditional financial institutions had      a huge number of business processes were also
    used computer and network technologies for a long           reorganized, simplified and optimized.
    time, they lagged behind technology companies
    due to their lack of understanding of internet              Yet, despite this wave of transformation bringing
    applications. Important milestones in this second           universal benefits, the revolution in the provision
    innovation stage include:                                   of payment services and the rise of platforms with
                                                                huge user bases had the most overall impact on
    –   2004: The launch of Alipay.                             the system. Interestingly, the disruptive innovators
                                                                were mostly technology companies from outside
    –   2007: PPDAI, the first P2P lending platform             the financial sector. At the same time, regulatory
        in China, came online, signalling the internet          agencies played a major role in the success of
        application’s expansion from payment to lending         these challengers. Generally, regulatory agencies
        and other financial fields.                             followed the principle of encouraging innovation and

                                                                At a Crossroads: The Next Chapter for FinTech in China   10
development, displaying a wait-and-see attitude     attitude helped create a favourable climate for
             while exploring creative regulatory measures to     innovation and contributed to the huge success of
             keep pace with innovation. This collaborative       FinTech at the second stage.

CASE STUDY   Getting to RMB1 trillion in four years

             In June 2013, Alipay partnered with Tianhong        achieved phenomenal success thanks to the large
             Asset Management to introduce Yu’ebao, the first    traffic pool of Alipay. Its assets under management
             money market fund that was sold through Alipay.     (AUM) exploded to more than RMB100 billion
             Although a number of funds were already being       within a short period of time. In early 2017, its AUM
             sold online, their growth remained unimpressive.    reached RMB1 trillion.24
             Alipay (which did not own any stake in Tianhong)
             and Tianhong, on the other hand, committed          Since then, financial institutions have realized that
             considerable numbers of staff, resources and
                                                                 maintaining an online presence for product sales
             funding to allow for optimizations in areas such
                                                                 is a business necessity. This change in dynamics
             as system development, user experience, the
                                                                 made large platforms more assertive when it came
             lowering of entry barriers and provision of real-
             time liquidity. Thanks to these efforts, Yu’ebao    to the sale of funds, enabled retail investors to
             became more intuitive and accessible, while not     move to top-tier brokerage firms and caused a shift
             charging processing fees and allowing users         of deposits among commercial banks at times. As
             to withdraw money whenever they wanted. As          a result, a number of stakeholders have started
             a result, Tianhong, which had originally been       expressing concern over these changes in the
             an unimpressive money market manager, soon          competitive landscape.

                                                                 At a Crossroads: The Next Chapter for FinTech in China   11
6   The third stage:
    intelligentization
    of finance
    The ubiquitous use of technology has
    given rise to new financial service models.

    The adoption of intelligent technology is the defining   and university graduates. According to the Plan
    characteristic of the current innovation stage, with     for the Development of New-Generation Artificial
    D-BASIC technologies becoming deeply embedded            Intelligence released by the State Council, China
    in finance. Many tasks that used to be performed         aims to expand the output of the core AI sectors
    by humans or that humans were incapable of               to RMB400 billion by 2025 and become a global
    undertaking are now automated, and the ubiquitous        leader in AI theory, technology and application, with
    use of technology has given rise to new financial        its core sectors worth more than RMB1 trillion by
    service models.                                          2030. iResearch estimates that FinTechs will spend
                                                             RMB58 billion on AI in 2022.27
    Compared with the previous two stages, service
    providers now make more comprehensive use of all         Security technology is one of the core
    of the D-BASIC technologies: big data, blockchain,       technologies benefiting digital finance. It offers
    artificial intelligence (AI), security technology, the   solutions for regulatory technology (RegTech), data
    internet of things (IoT) and cloud computing.            security and privacy protection. Since April 2018,
                                                             more than 10 provinces and municipalities have
    Big data technologies are widely used to enhance         worked with FinTech companies to deploy RegTech
    fraudulent transaction detection, targeted               systems that helped detect more than 12,000
    marketing, the fight against illegal cyber activities,   risky companies and identified more than 1,400
    consumer lending, credit risk measurement,               platforms suspected of illegal fundraising.28
    supply-chain finance, stock market and share
    price forecasting, investing advice, insurance fraud     The internet of things (IoT) can help improve the
    detection and risk pricing. According to the Report      way financial institutions reach users, enhance the
    on the Development of China’s Big Data Sector in         user experience and deliver financial services. By
    2019 by the China Industrial Control Systems Cyber       the end of 2020, China’s IoT market exceeded
    Emergency Response Team, the country’s big data          RMB1.7 trillion, displaying an annual growth rate of
    sector was worth RMB850 billion in 2019 and will         20% over the past five years. In 2019, there were
    grow to more than RMB 1 trillion in 2020.25              3.63 billion IoT connections (including 1.03 billion
                                                             mobile IoT connections) in China, accounting for
    Blockchain technology has enormous potential             30% of the world’s total. This figure is projected to
    to further transform financial services, and Chinese     grow at a compound annual growth rate of 14.1%
    FinTech companies are operating at the forefront of      to 88 billion by 2025.29
    the development of new applications as evidenced
    by the number of Chinese blockchain patents.             Cloud computing, mobile connectivity, data-based
    According to the International Data Corporation’s        AI and blockchain are enabled by computing, the
    IDC Worldwide Semi-Annual Blockchain Spending            cornerstone of all digital technologies. The ability to
    Guide, the total blockchain spend in China reached       process many concurrent requests, maintain a high
    $160 million in 2018.26                                  level of consistency and business continuity and
                                                             offer second-level disaster recovery and flexibility is
    Artificial intelligence (AI), enabling data insights     the precondition for secure financial applications.
    and real-time decision-making, plays an increasingly     According to the China Financial Cloud Market
    important role in risk management, forecasting,          Report released by IDC, China’s financial cloud
    analysis and customer service. By a rough estimate,      market reached $3.34 billion in 2019, $2.35 billion
    in the past five years China has invested more           of which came from infrastructure as a service
    than RMB100 billion in AI-related sectors, which         (IaaS) led by public and private cloud services. The
    employ more than 100,000 AI scientists, engineers        cloud solutions market was worth $980 million.30

                                                             At a Crossroads: The Next Chapter for FinTech in China   12
INDUSTRY          Incorporating digital into a mid-sized bank’s DNA
   PERSPECTIVE
                        Bohai Bank embraces the concept of “technology-           overcoming the divide of online and offline, building
                        driven services, technology-driven business,              a unified application platform for payments, image
                        technology-driven risk control, technology-driven         processing, internet accounts and intermediate
                        management and technology-driven innovation”.             business management asset aggregation, the bank
                        With data and technology as the core driving force,       realized the standardization of system development
                        it finds solutions for customer difficulties by acting    and one-stop access to integrated financial
                        swiftly and in a focused manner, delivering services      products and incorporated digital concepts into its
                        that are intelligent, convenient and efficient.           DNA.

                        By breaking the vertical division of traditional          Liang Xu, Head of Strategic Development and
                        banking technology along business lines,                  Comprehensive Research Team, Bohai Bank

   As a new             D-BASIC technologies now influence all aspects            While mobile payments were an important stepping
business                of finance and their impact goes well beyond              stone, the ultimate target for FinTech innovators
environment is          ledgers, customers and processes. Most FinTech            was capturing the crown jewel of finance: “money
                        innovations are now driven by AI or have AI               allocation” – that is, borrowing, equity financing,
being formed,
                        embedded within them. The combination of big              etc., which moves money from investors to money
both technology
                        data and AI is increasingly replacing humans; it is       raisers. It is therefore no surprise that transforming
companies and           now computing power that makes professional               money allocation has been the major focus of the
traditional financial   judgements.                                               current innovation stage. Although P2P lending
institutions are                                                                  models, tested during the second stage, ended
racing to secure        Important events in this current stage include:           in failure, other innovations undertaken during the
their place and                                                                   third stage, such as microlending, syndicated loans,
ensure their            –   2015: PBOC’s selection of eight private               online mutual aid and blockchain-driven supply-
survival in this            companies to pilot personal credit reporting.         chain finance, have so far produced promising
‘new finance’.                                                                    results, with industry leaders seeing tremendous
Regulatory              –   2017: The rise of microlending practices.             potential in these areas. The dynamic model
agencies face the                                                                 powering the current innovation stage is a hybrid
                        –   2018: The rise of new lending models                  of top-down and bottom-up approaches, defined
challenging task
                            such as syndicated loans and technology-              by an ever-changing interplay of cooperation and
of strategically            assisted lending.                                     competition between technology companies and
encouraging                                                                       traditional financial institutions. Therefore, as a
innovation while        –   2018: The success of online mutual aid.               new business environment is being formed, both
mitigating risks                                                                  technology companies and traditional financial
arising from the        –   2020: DCEP (Digital Currency Electronic               institutions are racing to secure their place
new innovations.            Payment, China’s state cryptocurrency)                and ensure their survival in this “new finance”.
                            piloted by PBOC.                                      Regulatory agencies face the challenging task of
                                                                                  strategically encouraging innovation while mitigating
                        China’s most impressive achievement throughout            risks arising from the new innovations – particularly
                        the first two stages was the introduction of mobile       systemic financial risks and risks that would affect
                        payments. As a by-product of the payment                  a large number of people. At the same time, they
                        revolution, innovative business models also emerged       will have to balance the interests of technology
                        in other sectors such as online shopping, gaming,         companies and traditional financial institutions and
                        live streaming, online movie and video streaming,         referee any conflicts between the two groups –
                        food delivery, travel and self-ordering in restaurants.   a demanding task.

      INDUSTRY          Supply chain finance facilitated by blockchain technology
   PERSPECTIVE
                        Blockchain technology is a powerful tool to help          chain. They can even be exchanged for cash.
                        free up cash that in the past has been trapped            By charging a fee for holding the tokens, service
                        along the supply chain. It allows service providers       providers incentivize companies on the supply
                        to tokenize a supplier’s receivables against a credit-    chain to speed up payment to their suppliers. A
                        strong company on the same supply chain, thereby          distributed ledger proved to be the most suitable
                        accelerating access to liquidity – this solution          tool for tokenizing receivables and accelerating
                        is particularly important for SMEs, which often           payment flow and this solution is now rapidly being
                        struggle to access financing. Backed up by a bank         adopted in China.
                        or other institution, these tokens can then be used
                        as a substitute for money to settle the payment           Ying Qiao, Chief Product Officer, Hao Kuai Tong
                        obligations among the companies within the supply         Bao (Hangzhou) Technology

                                                                                  At a Crossroads: The Next Chapter for FinTech in China   13
CASE STUDY   The transformative impact of intelligent financial services in China – two examples

             Online microlending: Data-based credit analysis          Mutual aid: Online mutual aid was created in
             has boosted the development of microfinance.             2011 to offer mutual protection against critical
             Weilidai is a product launched by Tencent’s              illness. Members in the online mutual aid plan pay
             WeBank, China’s first internet bank, and allows          periodically for claims they have already received.
             individuals to seek microloans online. From 2015         This is different from an insurance plan where a
             to 2019, Weilidai extended RMB3.7 trillion in loans      participant pays a predetermined premium whether
             to more than 200 million people and 900,000              or not any claims are filed. In 2016, a number
             companies.31 Loan applications are easy and              of notable internet platforms made a foray into
             simple, and a loan may be granted in three minutes.      the sector and introduced innovative processes
             The borrower can pay the loan back before maturity       and services that accelerated its development.
             and keep the credit line. Ant Group, similarly, helped   In October 2018, Ant Group launched Xiang Hu
             merchants go digital and has been using algorithms       Bao, an online mutual aid platform, which reached
             and technology to rate their credit. Through this        100 million participants in 13 months. At the end
             model, MyBank, an internet bank owned by Ant             of 2019, the number of participants in online
             Group, has extended loans to nearly 30 million           mutual aid programmes reached 150 million. The
             MSEs32 since 2015 – serving the largest number           sector has become an important supplement to
             of MSEs in China and, in fact, the world. In 2019        China’s basic government health insurance and
             alone, MyBank lent RMB1.7 trillion to MSEs.33 Due        commercial health insurance systems.
             to their technological prowess, these two online
             banks have a non-performing loan ratio of less than
             1.5%,34 lower than that of traditional banks.

                                                                      At a Crossroads: The Next Chapter for FinTech in China   14
7      A balancing act: The
                        role of the regulator
                        Chinese regulatory agencies possess an
                        impressive track record, having created
                        an orderly and favourable environment for
                        innovation and thus facilitated the growth
                        of the FinTech industry.

                        In theory, the regulators’ mission is to protect       the pace of the financial ecosystem’s evolution to
                        non-professional borrowers and non-professional        prevent systemic imbalances that might result from
                        investors and provide a level playing field for all    overly aggressive innovations; and 5) balancing
                        industry participants, while mitigating systemic       the interests of traditional financial institutions and
                        financial risks and any risks that may affect the      technology companies.
                        general public.
                                                                               While it may seem impossible to effectively balance
                        In practice, however, regulatory authorities face      these objectives, Chinese regulatory agencies
                        trade-offs among multiple – at times competing –       possess an impressive track record, having
                        objectives. Some of the most prominent include:        created an orderly and favourable environment for
                        1) encouraging and promoting innovation; 2)            innovation and thus facilitated the growth of the
                        identifying and taking precautions against risks       FinTech industry. China’s booming FinTech sector
                        associated with innovation, particularly those that    owes part of its success to this regulatory foresight.
                        might have systemic implications and affect large
                        swathes of the general public; 3) discovering,         However, regulators also made miscalculations on
                        banning and punishing harmful activities that are      this journey: the failure of P2P lending platforms
                        conducted in the guise of innovation; 4) controlling   lingers as a particular sore point.

                7.1 A bitter memory

                        In 2007, the first P2P lending platform began          growing into big ones, local problems turned into
                        operations in China. Regulators first displayed a      nationwide ones; one example, among the hundreds
   The ban [of P2P
                        tolerant wait-and-see attitude towards this new        of P2P firms going down, was Tuandaiwang (www.
lending] in 2020        business model. Similar platforms began springing      tuandai.com), which had investment from a number
presented a lose-       up nationwide and, at the peak of the sector,          of well-known venture capital funds but eventually
lose situation:         thousands of platforms offered these services. Most    went bankrupt in disgrace.
lenders suffered        P2P lenders did not possess capabilities in data
financial losses,       collection and credit analysis and, as such, were      P2P lending posed little systemic risk; it was always
entrepreneurs           poor risk managers. Their business model was           a small sector. At its peak, outstanding loans barely
were dealt severe       largely flawed.                                        reached RMB2 trillion, and hovered just below
blows and some                                                                 RMB1 trillion for most of the industry’s existence.35
even faced legal        As the problems these platforms were presenting        The main challenge the P2P sector presented was
consequences            became obvious, regulators implemented corrective      that each platform involved numerous investors,
                        measures. However, because the platforms were          often to the order of tens of thousands or even
despite their initial
                        numerous and scattered, the task of implementing       millions. Therefore, bad loans led to social problems
good intentions,        new regulations was assigned to local regulators in    as investors took to the streets demanding their
and the private         municipal governments, which were understaffed         money back, and regulatory agencies decided they
lending sector’s        and lacked the necessary know-how. Thus,               had to intervene. After several rounds of back and
experimental            they were too slow in identifying and handling         forth, P2P lending was finally banned at the end of
online efforts          the problems presented by P2P firms in their           2020, 13 years after its launch.
ground to a halt.       jurisdictions. Consequently, small problems started

                                                                               At a Crossroads: The Next Chapter for FinTech in China   15
The ban in 2020 presented a lose-lose situation:           Following the downfall of P2P lending, regulators
    lenders suffered financial losses, entrepreneurs           have become more cautious about potential risks
    were dealt severe blows and some even faced legal          resulting from FinTech innovations and are now
    consequences despite their initial good intentions,        quicker to intervene. The balance of encouraging
    and the private lending sector’s experimental online       innovation and preventing risks now seems to be
    efforts ground to a halt.                                  tilting towards the latter.

7.2 The balance is tilting

    In late 2014, the first internet bank in China,            in 2013 that caused panic and unease among
    WeBank, was granted a licence. In 2015, another            traditional financial institutions and regulatory
    internet bank, MyBank, obtained approval for               agencies. Policy-makers have an interest in
    operations. The two banks are not allowed to               ensuring that the evolution of the commercial bank
    open physical outlets and can only develop their           ecosystem is a step-by-step process and financial
    businesses online, including accepting deposits            stability is maintained. The shifting of bank deposits
    and extending loans. Their approval shows that             is a natural result of competition, thus further
    the use of FinTech to create new business models           consideration must be given to ways of balancing
    in commercial banking is being encouraged by               the promotion of healthy competition with the need
    regulatory authorities.                                    to safeguard financial stability.

    However, at the end of 2015, PBOC subsequently             Another example of how regulators are supervising
    released its Notice on Improving Personal Bank             the activities of technology firms more proactively
    Account Service and Strengthening Account                  is the case of syndicated loans. A syndicated
    Management, which imposed strict limitations on            loan is financing offered by two or more financial
    bank accounts opened online. These limitations             institutions (banks or microfinance companies),
    resulted from the argument that funds in remotely          with each contributing expertise, customers,
    opened bank accounts might cause legal and                 information, risk-control models and funds.
    security concerns. Such concerns may not be well           Regulatory guidelines require each participant in
    supported by the experience of around 270 third-           a syndicated loan to provide no less than 30%
    party payment companies, though – the clients              of the loan amount. This rule is unfavourable
    opened their accounts online and are free to use           for new entrants, such as internet banks
    funds available in these accounts, without excessive       and online microlending companies, as their
    legal risks or security hazards. Ultimately, the PBOC      balance sheet capabilities are usually weaker.
    stance towards internet banks limited their sources        Meanwhile, they tend to be more competitive
    of funds, thus slowing down their development.             in customer acquisition and credit analysis.

    In 2019 and in 2020 regulatory agencies intervened         Regulatory agencies seem to appreciate that the
    again, this time displaying misgivings about the           potential exclusion of technology companies from
    outflow of bank deposits. Since 2018, internet             lending would cause losses not only to the tech
    banks and similar institutions, particularly small         firms but also to small and medium-sized financial
    and medium-sized banks, have been competing                institutions, many of which are unable to access
    for deposits at interest rates that were close to          customers on their own and do not possess the
    the ceiling set by the Market Interest Pricing Self-       necessary data and analytical capabilities. One
    Discipline Mechanism administered by PBOC.                 approach to solving this is the developing field
    Regulatory agencies called a halt to this practice in      of technology-assisted lending in which one of
    2019, puzzling industry experts because the interest       the participants provides no capital and instead
    rate competition did not violate their rules: in October   contributes customer acquisition, credit analysis
    2015, PBOC had initiated the market-oriented reform        and pricing management. For now, regulatory
    of deposit interest rates by announcing the removal        agencies seem willing to keep the door open for
    of the deposit interest rate ceiling for commercial        technology-assisted lending. Open questions about
    banks and rural cooperative financial institutions.        the roles and responsibilities of each participant
                                                               and compensation structures remain, however, and
    Perhaps it was the memory of the astonishing               regulatory uncertainty will linger in this space for a
    success of Yu’ebao in attracting customers online          while to come.

                                                               At a Crossroads: The Next Chapter for FinTech in China   16
7.3 The evolution of the regulator: open questions

   It is necessary   China’s FinTech industry has entered unchartered          If they do not find a way to survive and thrive,
to build a new       waters. How technology firms, traditional financial       China’s FinTech industry as a whole will suffer.
regulatory           institutions and regulators interact will decide
framework that       whether FinTech in China can maintain its strong          How can data use and protection be balanced?
                     momentum, solve the bottlenecks lying deep                Solving this question is not only a challenge for
allows for a shift
                     in China’s financial system, address the long-            China, it is a test for societies globally. It is also
from entity-based    established deficiencies caused by mismatched             a challenge that goes beyond financial services.
regulation to        financial resources and thus inject new blood into        The increasing prominence of arguments over
activity-based       China’s real economy.                                     how to balance the benefits of data while
regulation. This                                                               addressing privacy concerns in recent years
new model will       As stakeholders shape a newly developing financial        can be attributed to the data explosion brought
enable regulators    ecosystem, they need to address a number of               about by the use of internet technologies.
to oversee all       important questions:                                      Workshop participants convened by the World
of the financial                                                               Economic Forum and SAIF allocated significant
businesses,          Are technology companies troublemakers? The               time to exploring and discussing the role of data,
strengthen the       collapse of the P2P online loan business may              and in particular three specific areas: 1) how
                     suggest that financial innovation by technology           to address the conflict between data use and
consistency of
                     companies is a source of trouble in the finance           privacy protection; 2) how to define and classify
regulation and
                     world. At times, innovation can go too far and            data collection rights, data usage rights and data
pilot ‘sandbox       cause concern. Plenty of case studies and data            ownership; and 3) whether data accumulation
regulation’ to       show, however, that financial innovation driven           by a company necessarily leads to predominant
increase the         by technology firms benefits the financial industry       market power and how do we set boundaries
interaction          overall. And while the P2P loan business episode          for the uncontrolled use of market-dominant
between regulators   indeed created some societal risks, it has not            positions that may trigger anti-trust regulation?
and innovators       triggered systemic financial risks.
so that regulators                                                             Data has become the most important means of
can remain           Can large technology companies become weak                production. Experience taught us that the rules
responsive to new    nodes for systemic risks? Although they enhance           regulating the ownership of means of production
technologies.        the efficiency of capital flow and allocation,            can determine the rise and fall of entire economic
                     technology companies are also likely to expedite          systems or even entire societies. These questions
                     the shifting of deposits among traditional and            must be addressed very prudently, legalistically
                     internet banks. Should they indeed cause a quick          and jointly by scholars, legal professionals and
                     and massive restructuring of the financial system,        technologists after conducting thorough research
                     they might introduce systematic financial risks.          and drawing on international know-how.
                     Meanwhile, these companies have a large user
                     base, and their products can reach numerous               How can regulation facilitate innovation? China is
                     small customers, thus exposing broader parts              currently striving to build a new type of regulatory
                     of the general public to financial risks. The new         system to address the needs of digital finance.
                     challenges introduced by technological advances           Regulators are adopting a new mindset and
                     require further research and understanding.               frameworks that distinguish between digital finance
                                                                               and traditional offline finance.
                     What is the driving force behind FinTech innovation?
                     There are three categories of innovators: traditional     This overhaul is not surprising as FinTech innovation
                     financial institutions; BigTech companies; and            challenges both the effectiveness of existing
                     small and medium-sized technology firms.                  regulatory models and methods and the set-up
                     Ensuring the further growth of FinTech in China           and structure of regulatory functions and divisions
                     requires all three groups to flourish and remain          of responsibilities. Therefore, it is necessary to
                     committed to innovation. Regulators should                build a new regulatory framework that allows for a
                     continue offering these innovators room to                shift from entity-based regulation to activity-based
                     expand. While operating with the proper licences          regulation. This new model will enable regulators to
                     is important to ensure safe delivery of financial         oversee all of the financial businesses, strengthen
                     services, regulators should not indiscriminately          the consistency of regulation and pilot “sandbox
                     impose limits that might discourage innovation. In        regulation” to increase the interaction between
                     particular, unnecessary barriers must be removed,         regulators and innovators so that regulators can
                     and small and medium-sized technology firms               remain responsive to new technologies.
                     should be encouraged to engage in innovation
                     and the transformation of the financial industry.         FinTech poses challenges to the regulatory
                     There is a worrying trend that the intensifying rivalry   system, but technology-enabled innovation can
                     of traditional financial institutions and BigTech         also enhance regulatory capabilities and provide
                     firms leaves little breathing room for small and          safeguards against financial risks. More work
                     medium-sized innovators. Yet, these smaller               needs to be done to research, develop and employ
                     players are often the prime drivers of innovation.        regulatory technologies (RegTech) that will enable

                                                                               At a Crossroads: The Next Chapter for FinTech in China   17
supervisors to govern technology with technology         Traditional financial regulation was designed to
              and address the remaining challenges arising from        prevent, or at least control, risks. As new risk
              ongoing financial innovation.                            controls are gradually put in place, the future
                                                                       financial regulatory system needs to focus on
                                                                       promoting development and innovation in order
                                                                       to achieve a dynamic balance between inclusive
                                                                       innovation and prudential regulation.

   INDUSTRY   Balancing data use and privacy protection
PERSPECTIVE
              Ensuring that data integration and collaboration         solve this challenge, the emergence of new data
              can be undertaken safely is an important challenge.      encryption computing makes data available but not
              Financial institutions wish to better understand and     visible. Collaborators can engage in joint training
              manage customer life cycles and improve financial        and computing, complete data analysis safely
              inclusion through joint analysis among business          and produce results without disclosing the data
              partners that provide different services to the same     of either party. As we move into a new economic
              customer. Financial regulators are looking to swiftly,   cycle brought about by the COVID-19 pandemic,
              accurately and systematically identify industry-         new opportunities and challenges have appeared in
              and entity-level risks without requiring supervised      inclusive finance, digital-enabled economic growth
              entities to submit all core confidential information.    and risk controls. Companies including Ant Group
              Meanwhile, other stakeholders in the financial           and Guangzhishu Technology are providing industry
              ecosystem are expecting more effective fraud             clients with new technology solutions based on
              detection, liability analysis and joint marketing.       confidential computing and federated learning to
                                                                       help them address these new challenges.
              Stakeholders are interested in collaborating with
              each other, but they fear the potential risks related    Jiachen Sarah Zhang
              to the loss of data copyright or unauthorized use        Founder and Chief Executive Officer,
              of copied data in a conventional partnership. To         Guangzhishu Technology

                                                                       At a Crossroads: The Next Chapter for FinTech in China   18
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