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Abstract:The rapid development of the Internet industry leads to the Internet Finance`s emergence.
As a combination of traditional financial industry and the Internet, Internet Finance (IF) encloses: settlement services and payment, lending (microcredit, supply chain financing, peer-to-peer (P2P) lending), and sales of investment products (e.g., funds, insurance). Additionally, data gathered by E-commerce companies are being handled to assess the customer`s credit.
This article intends to present an overview of the IF`s main features, as well as to explore its effects on the conventional transactions of commercial banking industry. Moreover, measures and suggestions for the banks and regulator institutions to deal with the IF would be proposed.
Key words: The Internet Finance (IF), Commercial Banks, Cooperation.
【中图分类号】 TP393.4
Internet technology holds the potential to fundamentally change banks and the banking industry. An extreme view speculates that the Internet will destroy old models of how bank services are developed and delivered.
In recent years, the Internet industry experienced a huge evolution and expanding to the financial sector. More explicitly, internet based technologies, such as mobile payments, social networks, search engines and cloud computation, will induce to a paradigm switch in financial area. For example, Yu Ebao, a money-market fund promoted by Alipay, has made its breakthrough of 400 billion RMB (65 billion dollars), which led the IF to be both a new research interest and a popularly-discussed issue.
1. The IF features
1.1 Low cost
The IF can help capital supply and demand parts to finish information verification, matching, pricing and settlement through the online platforms. So they can get rid of traditional intermediaries, transaction costs and monopoly profits. On one hand, financial agencies can save cost of establishing and running their business branches. On the other hand, the IF reduces information asymmetry. So clients are able to find efficiently their ideal financial products, which was once a time and energy consuming process.
1.2 High Efficiency
Major IF businesses are processed by highly standardized computer procedures. Therefore, clients don`t need to wait and can have a better user experience. Taking Alipay’s microfinance as an example, it has built up the e-commerce clients’ credit database, based on which they built risk analysis and credit investigation models through data mining and analysis. It takes clients only a few seconds from application till getting the loans. Simply because it can process about 10,000 deals per day, which makes it a real “loan factory”.
1.3 High Risks
Firstly, China’s social credit system and related legislations are still to complete. Hence, the violation costs are relatively low, which is prone to intrigue problems such as malicious loan fraud and absconding with money. Secondly China’s cyber security is still a prominent issue, so is the online financial crime. Once hackers attack happens, the functioning of the IF will be hindered and the security of clients’ money and personal information will be jeopardized.
2. The influence of the IF on Commercial Banks
2.1 Reduction of Commercial Banks’ Revenue
The IF`s swift growth has offered investors an alternative investment, especially for Yu Ebao which was launched in June 2013. The annualized return of the latter has reached 6%, 10 times higher than the rate of demand deposit interest rate. This contrast is surely a huge temptation to those who hold large amounts of currency. In consequence, banks` clients are distracted and demand deposits are reduced. Hence, online funds are obviously harming the commercial banks because they are sucking away money. As proof, In January, banking deposits dropped by one trillion RMB.
2.2 Direct impacts on Commercial Banks` intermediary services
Nowadays, intermediary services of commercial banks have been the third major business besides deposit and loan, and a key access to profit. Intermediary services are derived from the payment function of banks. Their main advantages are widely spread branches and high credit. However, they are gradually being replaced by the IF. The online third-party payment constitutes a huge threat to the increase in revenue from the commercial banks.
Apart from the negative influences, the IF also replenishes the commercial banks.
2.3 Reducing Transaction Costs
The optimization of resource allocation is accomplished in commercial banks with high transaction costs. However, this last operates this virtually. For example, in order to make money transfer, what they need is just some networks and less staff, rather than real workplaces and tedious procedures. Thus, the emergence of the IF has lowered the transaction costs.
2.4 Diminishing Information Asymmetry
Another important advantage of commercial banks is that they can provide solutions to the information asymmetry in financing. But the IF is able to achieve that goal too. For one thing, two parties can exchange capital without intermediaries, which diminishes attrition in information transfer. For another, sellers and buyers are allowed to have all kinds of information retrieved, analyzed and sorted through search engines and they can filter out the information that they need. Mutual understanding could be enhanced in this way.
3. Suggestions and solutions for Commercial Banks
3.1. Intensifying cooperation with Internet Technology Enterprises
The Internet Financing casts heavy impact on commercial banks as well as provides valuable experiences and lessons from which they may benefit. First of all, banks should invest more in information technologies, such as developing E-banking, building up E-commerce platforms, in order to extend their business range, so they can hold onto the current clients and attract more. Second, commercial banks should have more cooperation with companies of e-business and third-party payment, to expand their services in payment and settlement.Furthermore, as an increasing number of clients choose online shopping, charging transaction commission could be a channel of expanding bank businesses.
3.2 Innovating financial products’ designing through customer centric
The efficiency of Internet Financing has given brand new user experience and made commercial banks lose plenty of clients. So it has a vital importance for banks to value users experience and create a client-centered business pattern. At the very beginning of product design, it is necessary and essential to integrate information and profiles for all sorts of clients, and get a good master of their consuming habits and investing preferences through data analysis and factual testing. This is the key to break the limits of traditional banking departments and developing more personalized financial products. Then, under the precondition of fair risk control, they can simplify processing procedures and offer quicker and more convenient services by cancelling unnecessary segments.At last, efforts on marketing and promoting should be reinforced.
Conclusion
To conclude, we can say that technology evolution has hugely taken part a major function in enhancing service delivery standards in the financial institution area. One of them is the Internet. It plays an important role in resource distribution and stimulate economic growth.
After thorough analysis on the IF`s features, we have explored its influence on the traditional banking industry.
Based on those influences exert by the IF on the Commercial Banks, we`ve made some suggestions on how to handle this situation. Hopefully these viewpoints could enlighten commercial banks to some extent.
At last, we have faith that IF is able to stimulate economic growth and engender significant social benefits by increasing resource allocation efficiency, promoting financial services` availability and diminishing transaction costs. In addition to that, we also believe, it will become progressively crucial in the future. Certainly, this last may encounter many commercial, technological and regulatory challenges through its development stage. But we should never neglect or minimize its huge potentiality.
References
- Cronin, MJ, (1997), “Banking and Finance on Internet”. NY: Van Nostrand Reinhold.
- Takeshi jingo, (2014), “Internet Finance, growing rapidly in China”, Iakyara vol. 189.
- De Young .R, (2001), “The Financial Performance of Pure Play Internet Banks”, Economic Perspectives, Vol. 25 No. 1.
- Xie, Ping, and Long Yin, (2001). “The Financial Theory and the Financial Governance under Internet Economy”, Journal of Economic Research, no.4.
- Xie Ping and Zou Chuanwei, (2013) “The Theory of Internet Finance”. China Investment Corporation, Beijing, China.
As a combination of traditional financial industry and the Internet, Internet Finance (IF) encloses: settlement services and payment, lending (microcredit, supply chain financing, peer-to-peer (P2P) lending), and sales of investment products (e.g., funds, insurance). Additionally, data gathered by E-commerce companies are being handled to assess the customer`s credit.
This article intends to present an overview of the IF`s main features, as well as to explore its effects on the conventional transactions of commercial banking industry. Moreover, measures and suggestions for the banks and regulator institutions to deal with the IF would be proposed.
Key words: The Internet Finance (IF), Commercial Banks, Cooperation.
【中图分类号】 TP393.4
Internet technology holds the potential to fundamentally change banks and the banking industry. An extreme view speculates that the Internet will destroy old models of how bank services are developed and delivered.
In recent years, the Internet industry experienced a huge evolution and expanding to the financial sector. More explicitly, internet based technologies, such as mobile payments, social networks, search engines and cloud computation, will induce to a paradigm switch in financial area. For example, Yu Ebao, a money-market fund promoted by Alipay, has made its breakthrough of 400 billion RMB (65 billion dollars), which led the IF to be both a new research interest and a popularly-discussed issue.
1. The IF features
1.1 Low cost
The IF can help capital supply and demand parts to finish information verification, matching, pricing and settlement through the online platforms. So they can get rid of traditional intermediaries, transaction costs and monopoly profits. On one hand, financial agencies can save cost of establishing and running their business branches. On the other hand, the IF reduces information asymmetry. So clients are able to find efficiently their ideal financial products, which was once a time and energy consuming process.
1.2 High Efficiency
Major IF businesses are processed by highly standardized computer procedures. Therefore, clients don`t need to wait and can have a better user experience. Taking Alipay’s microfinance as an example, it has built up the e-commerce clients’ credit database, based on which they built risk analysis and credit investigation models through data mining and analysis. It takes clients only a few seconds from application till getting the loans. Simply because it can process about 10,000 deals per day, which makes it a real “loan factory”.
1.3 High Risks
Firstly, China’s social credit system and related legislations are still to complete. Hence, the violation costs are relatively low, which is prone to intrigue problems such as malicious loan fraud and absconding with money. Secondly China’s cyber security is still a prominent issue, so is the online financial crime. Once hackers attack happens, the functioning of the IF will be hindered and the security of clients’ money and personal information will be jeopardized.
2. The influence of the IF on Commercial Banks
2.1 Reduction of Commercial Banks’ Revenue
The IF`s swift growth has offered investors an alternative investment, especially for Yu Ebao which was launched in June 2013. The annualized return of the latter has reached 6%, 10 times higher than the rate of demand deposit interest rate. This contrast is surely a huge temptation to those who hold large amounts of currency. In consequence, banks` clients are distracted and demand deposits are reduced. Hence, online funds are obviously harming the commercial banks because they are sucking away money. As proof, In January, banking deposits dropped by one trillion RMB.
2.2 Direct impacts on Commercial Banks` intermediary services
Nowadays, intermediary services of commercial banks have been the third major business besides deposit and loan, and a key access to profit. Intermediary services are derived from the payment function of banks. Their main advantages are widely spread branches and high credit. However, they are gradually being replaced by the IF. The online third-party payment constitutes a huge threat to the increase in revenue from the commercial banks.
Apart from the negative influences, the IF also replenishes the commercial banks.
2.3 Reducing Transaction Costs
The optimization of resource allocation is accomplished in commercial banks with high transaction costs. However, this last operates this virtually. For example, in order to make money transfer, what they need is just some networks and less staff, rather than real workplaces and tedious procedures. Thus, the emergence of the IF has lowered the transaction costs.
2.4 Diminishing Information Asymmetry
Another important advantage of commercial banks is that they can provide solutions to the information asymmetry in financing. But the IF is able to achieve that goal too. For one thing, two parties can exchange capital without intermediaries, which diminishes attrition in information transfer. For another, sellers and buyers are allowed to have all kinds of information retrieved, analyzed and sorted through search engines and they can filter out the information that they need. Mutual understanding could be enhanced in this way.
3. Suggestions and solutions for Commercial Banks
3.1. Intensifying cooperation with Internet Technology Enterprises
The Internet Financing casts heavy impact on commercial banks as well as provides valuable experiences and lessons from which they may benefit. First of all, banks should invest more in information technologies, such as developing E-banking, building up E-commerce platforms, in order to extend their business range, so they can hold onto the current clients and attract more. Second, commercial banks should have more cooperation with companies of e-business and third-party payment, to expand their services in payment and settlement.Furthermore, as an increasing number of clients choose online shopping, charging transaction commission could be a channel of expanding bank businesses.
3.2 Innovating financial products’ designing through customer centric
The efficiency of Internet Financing has given brand new user experience and made commercial banks lose plenty of clients. So it has a vital importance for banks to value users experience and create a client-centered business pattern. At the very beginning of product design, it is necessary and essential to integrate information and profiles for all sorts of clients, and get a good master of their consuming habits and investing preferences through data analysis and factual testing. This is the key to break the limits of traditional banking departments and developing more personalized financial products. Then, under the precondition of fair risk control, they can simplify processing procedures and offer quicker and more convenient services by cancelling unnecessary segments.At last, efforts on marketing and promoting should be reinforced.
Conclusion
To conclude, we can say that technology evolution has hugely taken part a major function in enhancing service delivery standards in the financial institution area. One of them is the Internet. It plays an important role in resource distribution and stimulate economic growth.
After thorough analysis on the IF`s features, we have explored its influence on the traditional banking industry.
Based on those influences exert by the IF on the Commercial Banks, we`ve made some suggestions on how to handle this situation. Hopefully these viewpoints could enlighten commercial banks to some extent.
At last, we have faith that IF is able to stimulate economic growth and engender significant social benefits by increasing resource allocation efficiency, promoting financial services` availability and diminishing transaction costs. In addition to that, we also believe, it will become progressively crucial in the future. Certainly, this last may encounter many commercial, technological and regulatory challenges through its development stage. But we should never neglect or minimize its huge potentiality.
References
- Cronin, MJ, (1997), “Banking and Finance on Internet”. NY: Van Nostrand Reinhold.
- Takeshi jingo, (2014), “Internet Finance, growing rapidly in China”, Iakyara vol. 189.
- De Young .R, (2001), “The Financial Performance of Pure Play Internet Banks”, Economic Perspectives, Vol. 25 No. 1.
- Xie, Ping, and Long Yin, (2001). “The Financial Theory and the Financial Governance under Internet Economy”, Journal of Economic Research, no.4.
- Xie Ping and Zou Chuanwei, (2013) “The Theory of Internet Finance”. China Investment Corporation, Beijing, China.