TECH­NOL­OGY HE FENG Soft­ware eats into fi­nance world

New-tech firms play clever game in tak­ing on the old guardian of money

China Daily (Canada) - - BUSINESSVIEWS -

There is a say­ing in Sil­i­con Val­ley that “soft­ware is eat­ing the world”. At­trib­uted to the Cal­i­for­nian en­trepreneur­turnedMarc An­dreessen, it de­scribes a phe­nom­e­non in which tra­di­tional in­dus­tries are in­creas­ingly be­ing taken over by soft­ware and op­er­at­ing online.

“We are in the mid­dle of a dra­matic and broad tech­no­log­i­cal and eco­nomic shift in which soft­ware com­pa­nies are poised to take over large swathes of the econ­omy,” he wrote in The Wall Street Jour­nal two years ago.

Ma­chines have been re­plac­ing hu­man work­ers since the In­dus­trial Rev­o­lu­tion. What’s dif­fer­ent this time is that the re­plac­ing is hap­pen­ing be­yond man­u­fac­tur­ing, in ser­vice in­dus­tries such as ed­u­ca­tion and re­tail. And in­stead of ma­chines, it is soft­ware, of­ten aided by the In­ter­net, that is nudg­ing out hu­mans.

In the past 20 years or so, tech­nol­ogy in­no­va­tion, in­clud­ing de­vel­op­ment tools, net­work tech­nol­ogy and ar­ti­fi­cial in­tel­li­gence, has been so ef­fi­ca­cious that no in­dus­try is im­mune any more.

The lat­est ex­am­ple in this evo­lu­tion is tak­ing place in China, in the fi­nance sec­tor. Fol­low­ing Ali­pay’s en­try into per­sonal fi­nance, other Chi­nese In­ter­net jug­ger­nauts have rushed to in­tro­duce their own fi­nan­cial ser­vices.

The new wealth man­age­ment site of China’s dom­i­nant search en­gine Baidu Inc was so pop­u­lar that its servers had dif­fi­culty ac­com­mo­dat­ing online visi­tors — and it’s no stranger to han­dling heavy In­ter­net traf­fic.

Un­like some of the more con­ser­va­tive and slow-mov­ing in­dus­tries such as ed­u­ca­tion, the world of fi­nance has been rather open to tech­nol­ogy in­no­va­tions.

Ma­chine-con­trolled trad­ing al­go­rithms have long been a ma­jor player on Wall Street, beat­ing hu­man bro­kers with their speed and pre­ci­sion and giv­ing rise to suc­cess­ful “quant funds” such as Re­nais­sance Tech­nolo­gies.

Fi­nan­cial in­sti­tu­tions, with their gen­er­ous bud­gets, ea­gerly seek ev­ery ad­van­tage and are of­ten early adopters of new tech­nol­ogy.

With Ali­pay and Baidu’s lat­est move­ment, the di­rec­tion has been re­versed. In­stead of well-en­dowed fi­nan­cial in­sti­tu­tions adopt­ing the lat­est tech­nol­ogy, it is tech­nol­ogy com­pa­nies, es­pe­cially In­ter­net com­pa­nies, that are mak­ing a foray into fi­nance.

At the mo­ment, the likes of Baidu are mostly stay­ing on the re­tail side of the busi­ness. They are not ped­dling their own fi­nan­cial prod­ucts, but are lever­ag­ing their huge traf­fic and part­ner­ing with tra­di­tional fi­nan­cial in­sti­tu­tions.

Seen in this light, this lat­est de­vel­op­ment might come across as less ground­break­ing than it ini­tially ap­pears. But this is not to say that it does not present a sig­nif­i­cant step. Be­cause it is of­ten the case when the In­ter­net gets in­volved in an in­dus­try, in­evitably more trans­parency and tougher com­pe­ti­tion soon fol­low.

A case in point is the movie rental busi­ness af­ter Net­flix Inc came onto the scene. Net­flix, rid­ing on peo­ple’ adop­tion of the In­ter­net and DVD, fought a head-to-head bat­tle with in­cum­bent player Block­buster LLC for the online movie rental busi­ness. Al­though Block­buster had the brand and a well-fi­nanced team, it even­tu­ally lost out to the up­start.

Af­ter a race to cut rental fees and im­prove ser­vices be­tween the two com­pa­nies, movie view­ers were the ul­ti­mate ben­e­fi­cia­ries.

Lim­ited selec­tions and late fees be­came a thing of the past. Block­buster has gone bust, while Net­flix con­tin­ues apace with its strong tech ex­per­tise and cus­tomer ser­vice cul­ture and now dom­i­nates the new In­ter­net video-on­de­mand mar­ket.

A sim­i­lar sce­nario might not have been far from the minds of In­ter­net com­pany ex­ec­u­tives when they made the de­ci­sion to ex­pand into fi­nance. The first ones to feel the pres­sure will be re­tail banks and re­tail bro­ker­age firms. Like Block­buster, they en­joyed com­fort­able profit lev­els be­cause of their en­trenched off­line pres­ence.

The In­ter­net prom­ises to be a game changer, with no cost to set up re­tail out­lets and vir­tu­ally un­lim­ited ca­pac­ity to serve cus­tomers. In­ter­net com­pa­nies also come with a cul­ture of ex­cel­lent cus­tomer ser­vice and trans­ac­tion speed.

As has hap­pened in in­dus­try af­ter in­dus­try, the en­trance of In­ter­net play­ers will shake up in­cum­bent ones, many of which can­not adapt fast enough and be­come easy pick­ings.

If past ex­am­ples are any in­di­ca­tor, the am­bi­tions of th­ese new play­ers will hardly stop at tak­ing over re­tail. Is it pos­si­ble that af­ter gain­ing an ini­tial foothold in the fi­nan­cial in­dus­try they could ex­pand into the core busi­ness of de­sign­ing their own fi­nan­cial prod­ucts?

That might seem rather re­moved from their cur­rent ex­per­tise, but it’s hap­pened in other fields. Again, take the case of Net­flix, which started out as an online video rental com­pany. It fi­nanced the hit US TV drama se­ries House of Cards, en­ter­ing the turf of orig­i­nal con­tent pro­duc­tion.

Tech­nol­ogy com­pa­nies have a his­tory of gain­ing en­try to well­guarded tra­di­tional in­dus­tries from un­ex­pected di­rec­tions. Who’s to say that Baidu will not, af­ter learn­ing the ropes of its new ven­ture, come up with in­no­va­tive fi­nan­cial prod­ucts of its own?

It prob­a­bly is in a bet­ter po­si­tion to do so, with its ac­cess to vast amounts of data and ad­vanced an­a­lyt­i­cal tools.

In­deed, Baidu might well be on its way to such a fu­ture. In Novem­ber, Baidu Jin­rong (Baidu Fi­nance) de­buted af­ter months of tri­als. This new ser­vice of­fers search fa­cil­i­ties in credit card and loan ser­vices. It’s a nat­u­ral ex­ten­sion of Baidu’s core com­pe­tency, but, at the same time re­veals the In­ter­net com­pany’s am­bi­tion in the fi­nan­cial ser­vices in­dus­try.

Baidu’s CEO Robin Li made it abun­dantly clear in the re­cent quar­terly meet­ing that in­cor­po­rat­ing fi­nan­cial ser­vices into the Baidu prod­uct fam­ily is a key step in its over­all strat­egy.

How things will play out is any­body’s guess. Be­sides mar­ket forces, there is con­sid­er­able reg­u­la­tory un­cer­tainty sur­round­ing this de­vel­op­ment.

The fi­nan­cial ser­vices sec­tor is re­garded as vi­tal to a coun­try’s eco­nomic well-be­ing and is heav­ily scru­ti­nized. Any changes are likely to be in­tro­duced in ten­ta­tive baby steps. But it’s hard to imag­ine such a lu­cra­tive and im­por­tant in­dus­try re­main­ing un­af­fected by the In­ter­net.

At the same time, the In­ter­net com­pa­nies, pres­sured to seek new rev­enue streams, will surely push hard to get in on the ac­tion.

Af­ter some ini­tial ex­per­i­ment­ing, with the au­thor­i­ties keep­ing a close watch, ap­pro­pri­ate reg­u­la­tions will likely be in­tro­duced, en­sur­ing fair play and mar­ket sta­bil­ity, but also prob­a­bly ac­knowl­edg­ing the right­ful places of the new play­ers. In the past, they have proved to be a pos­i­tive force, bring­ing new ideas and re­ju­ve­nat­ing stag­nant mar­kets. The au­thor is an in­de­pen­dent com­men­ta­tor in Bei­jing. Con­tact the writer at feng­writ­ The views do not nec­es­sar­ily re­flect those of China Daily.


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