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In collaboration with the Shanghai Advanced Institute of Finance (SAIF) At a Crossroads: The Next Chapter for FinTech in China WHITE PAPER MARCH 2021
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
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At a Crossroads: The Next Chapter for FinTech in China 2
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.
At a Crossroads: The Next Chapter for FinTech in China 3
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”.
At a Crossroads: The Next Chapter for FinTech in China 4
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
At a Crossroads: The Next Chapter for FinTech in China 5
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.
At a Crossroads: The Next Chapter for FinTech in China 6
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.
At a Crossroads: The Next Chapter for FinTech in China 7
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
At a Crossroads: The Next Chapter for FinTech in China 8
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 95 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 10development, 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 116 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 12INDUSTRY 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 13CASE 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 147 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 15The 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 167.3 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 17supervisors 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 18You can also read
