1、The current situation of the development of digital inclusive finance in China: Dual existence of development speed and problems

 

The greatest value of promoting the development of internet finance is to expand financial inclusion. Governments are committed to the establishment of their domestic inclusive financial system. In China, for instance, existing policies in favor of policy banks, small-loan companies and so on have provided great support for SME loans. And now, the great progress and wide applications of Internet technologies also create more possibilities to create costs of lower acquisition costs and simplifying risk pricing.

 

A heated issue that has been widely discussed is why internet finance can advance so quickly in China. I believe there are three main reasons.

 

First, the services for the public and SME are in shortage in traditional financial systems. Second, the progress of digital technology helps alleviate problems caused by asymmetric information. Intelligent Mobile Terminal makes the greatest contributions followed by Big Data Analysis. Last but not the least, relatively loose regulatory frameworks of internet finance have provided more space for its development.

 

The development of digital inclusive finance or internet finance in China is really fast, in view of the indexes developed by the center from which we can draw three meaningful conclusions further.

 

First, internet finance is developing approximately at a rate that is doubling annually since January in 2004. Second, there lies a significant difference in different regions in terms of the level of development of internet finance. Coastal regions enjoy a high level of development, while inland ones lower. And the level of development of a city is inversely proportional to the geographic distance from Hangzhou, which obviously indicates that Hangzhou is indeed the central city of internet finance in China.

 

Third, the development of Internet finance is forced mainly by young generations like people who were born in 1980s and 1990s.

 

Let’s look back on the index made by Peking University. The index was 40 in 2011 but has already been 220 in 2015, indicating the dramatic increase of financial inclusion. And we also find that the gaps of financial inclusion among cities have been narrowed down, which is the result of pursuing effects of the less advanced areas, reflecting the values of inclusive finance.

 

Up till now, the establishment of inclusive financial systems hasn’t been accomplished. In terms of business development and inclusiveness, online payment performs best followed by online loans. Their development benefits from the mobile terminal connecting potential markets and big data analysis enjoying more potentials than manpower surveys.

 

However, there still remain many problems in the establishment of inclusive finance, like the shortage of inclusiveness, high costs of individual financing and so on. In terms of digital technology, it is not precise enough and there is still space for further improvement in the applications in many fields and still worse, some companies that have no data and don’t know how to analyze are also doing businesses about internet finance, despite the fact that digital technology has provided new prospects for the development of inclusive finance. Last but not the least, inclusive finance has brought about high risks from a regulatory perspective. Our country is in the early stage of the establishment of regulatory frameworks of inclusive finance. Some fields haven’t set reasonable thresholds thus leading to constant chaos, while others don’t grant new licenses, which also twists people’s actions.

 

Therefore, there is still space for further improvement and how to solve these problems will be the key point we should focus on in the future.

 

2、Five thoughts on regulations

First, is a unified standard and framework required in terms of the regulations of inclusive finance and traditional finance? The answer is yes. The reason is that the trend of finance is integration and combination, just as traditional finance sections are still doing businesses about Internet finance and the gaps between them will be narrowed gradually. Therefore, we can’t set two different standards or frameworks from the beginning. However, if we unify standards and frameworks, it will lead to another problem that regulation sections do not have enough willingness or resources to implement regulations on inclusive finance just like on traditional finance.

 

Second, is it still appropriate for current sector regulations? The current framework of sector regulations is that the Central Bank takes charge of payment, China Banking Regulation Commission online loans, China Securities Regulation Commission investment, and China Insurance Regulation Commission internet insurance. However, the mixed operation of most internet finance platforms taken into consideration, how will sector regulations cope with this mode?

 

Third, traditional sector regulations may be not suitable for use in internet finance industries, especially when the mode of mixed operation is very common. Functional regulations may have more advantages. Where do the funds go after they are obtained by the platforms? There are still potential problems whether the funds go to payment fields, investment fields, loans fields or insurance fields. Sometimes a typical participant in the market don’t have easy access to the information about where the funds go, which may cause new information asymmetry, despite the fact that digital technology helps alleviate the problem. Therefore, we believe functional regulations are of great importance.

 

Fourth, do we need to set admittance thresholds for internet finance platforms including information intermediaries? We tend to believe that it should be up to the standards as long as its businesses cover financial trades whatever financial intermediaries or information intermediaries, because both of them can cause similar financial risks. For example, investment banks are information intermediaries and their admittance thresholds are even more demanding than the other financial institutions.

 

Last but not the least, how to strike a balance between the support of open information and the security of information. We think these two things are both important. On the one hand, it requires big data for digital inclusive finance, which  indicates the necessity of a relatively open information system. There is really no sense of digital inclusive finance unless an open information system helps attain big data. But on the other hand, we should protect privacy and secure information. How to strike a balance may be an issue that requires joint explorations of the public, agencies and regulation sectors. So far, we are still in need of a nationwide credit information system with broad coverage and high efficiency, which may be a key factor restricting further development of digital inclusive finance.