Internet a shot in the arm for financing
The rise of Internet financing has eaten into the savings of traditional banking giants. According to official data released on April 15, the savings of four State-owned banks dropped by 1.9 trillion yuan ($305.41 billion) in the first two weeks of April.
The development of the Internet has provided better information for market players. And since the Internet and the financing business both need information to run their systems, they can work in tandem.
Statistics show that in 2013, China’s M2was 103 trillion yuan ($16.58 trillion) against itsGDPof 56 trillion yuan. But small and middle-sized enterprises which accounted for 70 percent of the total jobs in the country could only get less than 20 percent of the total loans issued by financial institutions. This shows that China’s banking system is distorted, with the price of money not representative of its true value. This is where Internet financing can play a vital role, because it can fulfill traditional financing functions as well as create a financial world in which more people can do business.
Since the Internet has been attracting more users and capital by facilitating more and faster transactions, it can help better allocate resources through new modes of peer-to-peer lending and “mass funding”, which have already attracted many investors. Besides, people can easily use the Internet to search for and compare various financial products — some new websites have already been designed to act like a financial supermarket to allow investors to choose their products (or investment vehicles). Internet financing also helps users diversify risks by providing a huge volume of data. An apt example of how a company or individual can minimize (or diversify) risks is Alibaba, whose petty loan lending — based on small businesses’ daily performance — has crossed 170 billion yuan.
Internet financing can also create a newfinancial world. It has already broken the traditional segmentation of space and time, prompting more people to do business.
One of its leading applications is Yu’ebao; its users who have Alipay can gain daily interest on their deposits from a money market fund launched in June last year. Not only is the minimum required investment of just 1 yuan convenient for small investors, but also its annual yield of about 6 percent is much higher than the central bank’s benchmark rate of return of 0.35 percent. No wonder, it has collected more than 500 billion yuan from over 81 million investors.
Internet financing has the added advantage of being low on cost and high in efficiency. Whether it is equity or bond financing, or financial derivatives, the essence of financing is the medium of resource allocation and risk sharing. Traditional financing institutions have high labor costs and asymmetric information because of their technological limits, while the marginal cost of Internet financing is zero which makes it a better medium of financing with more updated data.
Internet financing is also convenient and fast. Third-party and mobile payments are the trends of the times, and the general belief is that with more high technology used to make payments, we can manage our wealth more conveniently.
The development of Internet financing, however, is not aimed against traditional financing institutions, even though it has facilitated changes in and poses a challenge to the traditional market. Internet financing can play a supplementary role to the capital market since the latter is encouraging an increasing number of small parties to join the market.
Having said that, it seems Internet financing is not that useful for transactions between big parties. Nevertheless, it can use its advantages to serve more individual (but small) investors. And by compiling a huge volume of data and developing cloud computing, it could improve the credit system as well.
Informatization can help traditional financial institutions to use Internet financing as a mode of operation. Of course, informatization has to be based on Internet technology and has to be carried out in three main areas.
First, traditional financial services should be made available online. In fact, most banks have already started developing their online-banking and mobile-banking business. For example, only about 40 percent of Bank of China’s traditional financial business is now transacted over the counter.
Second, banks should allow clients to use the Internet without a time limit to transact business. Actually, ChinaMinsheng Bank and Bank of Beijing are already allowing their clients to do so.
Third, banks should catch up with private enterprises in e-commerce. For instance, they should follow the example of China Citic Bank, which is working with Alibaba and Tencent to issue virtual credit cards.
If 2013 was the year when a newera in Internet financing started, 2014 could be the year of revolutionary developments. Internet financing has forced traditional financing institutions to undergo certain changes; now it is expected to transform them. The author has the book, Internet Finance, to his credit.