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A Timely Shift

Tightened regulations on internet finance are driving more Chinese technology firms that expanded into finance back to where they started

By NewsChina Updated Dec.1

On September 15, 360 Finance, a digital consumer finance platform owned by tech firm 360 Group, officially changed its name to 360 Digitech, a move seen as adjusting its long-term strategic focus. Three months earlier, Ant Financial Services Group, an affiliate of Alibaba Group established in 2014 based on Alibaba’s payment platform Alipay, changed its name to Ant Group and emphasized its position as a technology service provider. Since 2018, several leading Chinese tech firms have similarly changed the names of their financial business divisions to highlight their nature as tech service providers enabling financial institutions.  

These adjustments are in line with the growing momentum of financial technology (fintech).  

In August 2019, the People’s Bank of China (PBoC), the country’s central bank, published its first three-year fintech development plan to encourage the role of technology in driving innovation in the financial area to better serve the real economy, cover more people in need of capital, and reduce risks. For internet enterprises, highlighting their technological nature is also a prudent decision, as the Chinese government is tightening regulations on internet finance, a sector many tech companies were enthusiastic to expand into. This implies more uncertainties for the industry.  

Internet finance activities including online payments, online lending and crowdfunding thrived in China in 2014 after they were included in the Government Work Report released during the Two Sessions, the government’s main annual legislative meeting, an official sign of encouragement. A 2015 report by the Chinese Academy of Social Sciences showed that in 2014, transactions via third-party internet payment platforms, the pioneering form of internet finance, reached 8.08 trillion yuan (US$1.2t), a year-on-year increase of 50.3 percent. Online peer-to-peer lending platforms increased by 575 that year. In its heyday, there were over 5,000 peer lenders in the market. The online financial business rapidly expanded to insurance and wealth management, commercial bills and supply chain finance. Regulation lagged behind the rapid expansion, though, and problems emerged in the chaos. To rein in the market, in October 2016, the State Council released a plan to contain risks in internet finance, particularly in fields like third-party payments, online lending and equity crowdfunding. The number of online lenders plummeted as a result to 343 by the end of 2019, 732 fewer than the previous year. By the end of August, only 15 P2P lenders remained in operation, Feng Yan, an official with the China Banking and Insurance Regulatory Commission, said at a news conference in Beijing in September. 

Highlighting technology means more safety and a broader space for future development, experts say. As more internet-based tech firms redefine their roles as tech service providers, “the second half for fintech featuring the spillover of technology from tech companies has arrived,” said Huang Zhen, professor at the Central University of Finance and Economics in Beijing.  

Change in Focus
In September, online marketplace JD.com’s fintech division JD Digits’ application for a listing on China’s new tech board, the sci-tech innovation board (the STAR Market), was accepted by the Shanghai Stock Exchange. This happened more than a year after the company changed its name to JD Finance, the financial arm of JD.com established in 2013, and it made fintech one of its principal businesses. “It will provide one-stop solutions for the digitalization of financial operation in banks, security companies, insurance enterprises and so on,” the company advertises on its website.  

It is a change of focus for the company. As internet finance bloomed around 2013 and 2014, several leading internet-based tech firms including Alibaba, JD.com and Tencent entered the field based on their online payment platforms. Throughout the years, they gained financial licenses (which are increasingly hard to get due to tightened policies) to cover operations in payments, lending, banking and more. In the past years, JD Finance has built major business lines in payments, lending, asset management, insurance and securities.  

But the transition is not so abrupt a decision for the firms that started with technology. 

According to Shen Jianguang, JD.com’s vice president and chief economist, JD Finance stressed technology in 2015 when internet finance was the new wave. “The core of JD Digits is technology. It means to use science and technology to serve enterprises,” Shen said.  

“In internet finance, borrowing and lending are transacted online, and the process relies on risk management mechanisms built from scenarios and data. We found that this experience could reach more people in need [who are not qualified to get a loan from traditional banks otherwise]. This makes the company shift to supplying financial technology gradually,” Shen said. The company has built its data-driven risk management solutions and applied digital technologies like machine learning, artificial intelligence (AI), image recognition and blockchain to improve its capability in risk pricing. By the end of June, it has provided digital solutions to over 600 financial institutions including commercial banks and insurance and securities companies, according to its prospectus released in September. 

Ant Group announced in July that it is planning an IPO on the STAR Market and the Hong Kong Exchange (HKEX), a month after it assumed its new name. It stated in 2017 that it would engage in technology only and assist financial institutions in their business, saying that its financial business was only a trial for technologies that they would provide to customers. Its finance report in 2018 predicted that from 2017 to 2021, its income from technology services would rise to 65 percent while that of financial services would drop to 6 percent from about 11 percent in 2017.  

These changes, from titles to business layout, are not “de-financialization” in the genuine sense, according to Huang. He called it a global trend featuring a two-way fusion of finance and technology that generates a new area of innovation. “If more emphasis is put on finance, then it is internet finance. If more attention is placed on technology, then it is called fintech. But the technology still means to serve finance. It is two sides of the same coin,” Huang said.  

“To provide better technology services, a company must know its customers well and have experience in financial business, so it can win more trust,” Huang said. He added that as the government encourages fintech development, companies with licenses will get more involved in finance instead of walking away.  

For many third-party payment platforms with limited sources of revenue, turning to technology is more of a passive choice. For a long time, these platforms made fat profits from clients’ reserve funds deposited in their bank accounts (before an online transaction was finished) by gaining interest or making investments with the funds. But starting in January 2019, they must deposit all such funds to accounts assigned by the PBoC. Losing this source of revenue, many platforms redefined themselves as financial infrastructure for financial institutions or provided financial services. In the online lending industry, where the clean-up campaign is going on, many operators tried to transform and become fintech service providers as a way out.  

“More and more platforms are downplaying the financial label and advertising themselves as a provider of technology services. Fintech is the new star on the stage,” said Gao Yanping, president of third-party payment company Lakala’s research institute, adding that the industry is expecting new technologies to reach deeper into the financial area and cover a wider group of users. 

“Not only this, but as the consumer-oriented internet becomes saturated while the industrial internet continues to grow rapidly, fintech suppliers will provide more services directly to enterprises,” Gao told NewsChina. 

The 2020 INCLUSION Fintech Conference, the world’s top financial technology event, opened on September 24 in Shanghai. The conference lasted for three days from September 24-26

A financial institution uses virtual reality, artificial intelligence and facial recognition technologies to introduce its services to customers

JD Finance promotes its online financing products to consumers

Competition vs Cooperation
Open banking, a practice in which banks open their financial data such as consumer banking and transactions to third-party financial service providers to seek cooperation, is a critical opportunity for fintech in this phase of development.  

In China, market demand drove the development of open banking, unlike in the UK and the US where it emerged as a regulatory means from the top. With the boom of online shopping around 2003, ICBC (Industrial and Commercial Bank of China) cooperated with Alipay in 2005 on internet banking payments. In 2007, several Chinese banks and Alipay cooperated in exploring ways to provide small loans to sellers on Taobao, the Alibaba-owned e-commerce site. At the end of 2010, Alipay put forward fast payment online (without the need to visit the banking interface). Now, many banks support online payments. It is also common for traditional banks, whether State-owned or private, and fintech platforms to cooperate in offering loans and meeting the financial needs of wider groups as well as exploring better modes of opening. Besides cooperating with fintech platforms, many medium and large banks have established their own technology branches and reinforced technology output.  

A person in charge of cooperating with traditional banks at WeBank, an internet bank started by Tencent, believes that fintech firms could help banking institutions identify customer needs, manage risks, provide better services and improve efficiency.  

The wave of openings means uncertainties, particularly for smaller and city commercial banks, said Xue Hongyan, vice president of Suning Institute of Finance, a research arm of online retailer Suning.com’s financial platform. “Open banking is making financial operations more convenient. But it also makes customers more inclined to choose the few banks that provide the best experience. It will weed out the users of many banks’ products and eliminate more banks,” wrote Xue in an article published in August on his account on Zhihu.com, a Chinese site similar to Quora. A person from JD Digits in charge of cooperation with small- and medium-sized banks told NewsChina that it is hard to predict the outcome of this transition. 

Turning their attention from consumers to enterprises and competing in technology would challenge many players in the field. The fintech development plan published by the PBoC listed specific and high requirements for the use of big data, AI, cloud computing, distributed data and network authentication in aspects from improving financial services to enhancing supervision. Leading tech companies like Baidu, Alibaba, Tencent and JD.com are among the few in China that can provide a complete range of services.  

There are concerns about a new monopoly resulting from the gaps in these companies’ abilities. But Shen said that big and small companies have different advantages: big ones can handle more business areas while smaller ones can specialize. “For example, some enterprises are good at IT services and have accumulated customers with time. Some are good at pattern [for facial] recognition and can recognize a masked face. They could cooperate with other companies and complement each other,” he said.  

He added that the future of fintech will see finance and technology part further and back to what they do best. “Fintech can help financial institutions improve products and services, but it will not change the nature of finance,” Shen noted. 

For companies wanting to get the upper hand in the field, having technology, customers or data will not be enough, Huang said. Unlike the use of internet technology in the first years of development, now the fintech field requires more innovative technologies like blockchain, AI and cloud computing to drive innovation in the financial area, Huang said. “Only companies that master new technologies and specialize in niche markets might gain a foothold.” 

As supervision grows tighter, licenses will become increasingly important, Huang said. In the past, companies without licenses could share a piece of the pie. But no more. He said that, at least in the next few years, companies without a license or that cannot meet certain standards may not operate in the field. “As proof of compliance, licenses could determine a company’s fate,” he said, adding that sustainable financing will also be critical for fintech companies in determining how far they can go.