Finance and Technology: Power to the Peer

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Financial Technology

By Wei Wu, PhD Management, Birmingham Business School

In recent years, the emergence of Financial Technology, or “FinTech,” services and firms has reshaped financial services. It is continuously developing new processes and routines to provide services such as payment, banking, insurance and asset management through applying information communication technologies. FinTech reflects changes in the ways in which such consumers now engage with providers, with new business models and new forms of financial services.

China has witnessed a tremendous upsurge in FinTech firms, which can be attributed to three factors:

  • Central government controls the majority of financial resources.
  • Regional governments do not possess financial arms to boost local economies.
  • FinTech firms enabled circulation of financial resources between financial institutions and regions.

Its rise has important implications for regulation and risk management both for FinTech providers, and also for wider regulatory frameworks across China. Particularly in Guangdong province, China, FinTech firms have become an alternative funding source to mainstream financial service providers. Small and medium-sized enterprises (SMEs) were experiencing difficulties in accessing external finance and this encouraged the development of FinTech finance platforms. Guangdong has become an important region for innovations in FinTech along with California and London.

Peer-to-Peer (P2P) lending platforms, online platforms matching borrowers with lenders, have been considered a standard for FinTech services in Guangdong and China since 2013. In 2015, 1,020 platforms existed across China with this number increasing twofold to 2,595 by 2016. Lending transactions via Chinese P2P platforms reached 982.3 billion yuan (approx. 151 billion U.S. Dollars) in 2015; a 288.6% increase from 2014. Research has shown that one of the three main P2P lending spaces, the Data Driven Web Marketplace, relies on data to provide personalised solutions, with data itself becoming a secondary commodity.

However, FinTech industries have faced challenges from financial authorities and other non-financial sectors. For example, firms were unable to borrow from banks or raise funds from the domestic stock exchange. They were unable to open a custodian accounts in banks. They could not access Credit Bureau Systems, a state-owned agency. They could not even appeal to the courts for dispute resolutions against fraudulent customers. Those institutional disadvantages casted shadows on the FinTech sector in China and hindered the new access to financial services for small firms, and marginalised populations.

The benefits of FinTech and its growth has been remarkable but this can only be sustained with appropriate dialogue and policies to ensure it remains true to its potential. Beyond the characteristics of FinTech services in China, common ground needs to be established between researchers, policymakers and practitioners involved in the field.

Moving forward, it would be advisable for the industry to carefully observe, contemplate and continue pursuing the following:

  • FinTech services are not purely virtual but embedded within local economic ecosystems.
  • Personal Data has become the alternative collateral in the lending practice.
  • FinTech services need to grow inclusively rather than solely in metropolitan areas.
  • The value of FinTech firms should derive from customers rather than from investors.

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