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The Chinese banking sector has been subjected to various changes. This is what has seen China position itself globally as an innovative player as far as banking is concerned. At the center of this innovation has been financial technology commonly referred to as FinTech. FinTech represents an internet-based banking and investment technology. As the rest of the world is keen on implementing this form of technology in the banking field, China has leapfrogged to be the global leader in this sector especially as a result of the rapid development in the information technology sectors with the use of such companies as Tencent and Alipay. Through the implementation of information technology in the traditional banking system, banks in China have continued to prosper and seek to gain great opportunities for growth. It is crucial to assess China’s banking sector so as to outline the influence that FinTech has had on traditional banking in China.
Justification of the Chosen Topic
The Chinese banking sector is one of the sectors of the economy in China that has been suggested to undergo various changes due to innovation and embracing of technology. Previously, the traditional banking sector offered a myriad of services to its customers in the bank. In the 1980s, for example, the only bank within the banking sector in China was the People’s Bank of China (DBS & EY, 2016). In those times, individuals, private entities, and state institutions did not have much choice as to which bank to do business with. Moving forward, most of the banks were state-owned meaning that the state had a close control over the finances in the country. However, after making some changes within the sector, the new entrants have appeared thus ensuring that the monopoly by state-owned banks was not a reality anymore. This ensured that customers had a choice of where to go for banking services.
Strengths and Weaknesses of a Chinese Banking Sector
The traditional banking system in China had several strengths that saw it provide its services to the public efficiently. At the same time, it also had several weaknesses that led to the disruptive innovation and saw the rise of FinTech within the sector. The first strength is customer segmentation in China. The traditional banking sector had segmented its services thus serving its clients depending on the segment of customers. Segments included those in the agricultural sector that was served by the Agricultural Bank, the rural cooperatives that served individuals in the rural areas, and the urban credit cooperatives that served individuals in the urban areas, among others. The corporate level segment was served by various state-owned banks depending on the needs of the corporate customers in banking services. The Bank of China dealt with all the requirements of foreign exchange, arranging for foreign loans, and providing the letters of credit.
Consequently, one of the weaknesses of the traditional banking system in China was the fact that most of the banks were state-owned. This means that the state-owned financial institutions practically need to provide incentives to create new financial services. As a result, this move has provided opportunities for non-banking information technology companies to enter the market. This ensured that the state-owned banks would stop having the financial control that they had enjoyed over the years and would now have to implement various information technology services such as FinTech.
The Main Threat of the Traditional Banking Industry
Traditional banks have continued to face a continuous problem that has threated to push them out of business. This threat is revealed in the form of non-banking information technology companies that have entered the banking scene with plans and moves to revolutionize the entire sector. These information technology companies are applying what is now known as financial technology within the sector. Financial technology represents a sector that offers several services including financial data analysis on financial software, digitized processes, and various payment platforms. The rise of FinTech investments in China makes the picture complete as $8.8billion was invested in the sector between July 2015 and June 2016 (Saramago, 2016). Some of the biggest players as far as FinTech is concerned include Tencent, Ping, Lufax, Yu’e Bao among others.
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Analysis of the Threat Causes
The threat posed by FinTech to the traditional banking sector has been attributed to several reasons. The first reason is the customer demand for such services. The population in China has unmet financial services by the traditional banks, an issue that has led to the exploitation of the opportunity by FinTech. Over the years, China has continuously experienced a growth in its GDP hence also experiencing a growth in its middle class who have accumulated their spending power in the course of time. Despite this growth in the GDP, the traditional banking sector has remained underdeveloped being unable to meet the financial needs of the population. It is for this reason that the FinTech companies have brought about a disruption in the market.
Moreover, the need for a wide range of the financial services is what sparked the development of various FinTech companies. Various companies within the sector have continued to strive for innovation. With digital technology being integrated into the lives of the majority of people in China and the consumers being comfortable making online and e-commerce payments, the market share for these services has continued to increase. Currently, Alipay by Alibaba is the largest online payment gateway in the country holding about 68.4% of the payment markets while Tencent has 10% of the market share and 20.6% of mobile payments (DBS & EY, 2016). The FinTech sector in China serves several markets. The first market is the payments and e-wallets where various mobile platforms, social media players, and e-commerce sites have taken precedence including Alipay and Tencent. The second market is the consumer finance and supply chain where various e-commerce companies offer loans to individuals or SMEs while using the data of the merchants as leverage. The third market includes the peer-to-peer (P2P) lending platforms that provide loans to individuals, which were not possible in the traditional banking sector. Online funds are another market where funds are integrated into payment platforms in such a way that they can be easily accessed. Various IT companies also engage in online insurance, personal finance management and online brokerage, which are some of the markets that the traditional banking sector was yet to provide to its consumers.
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One of the markets served by Fintech companies is P2P lending. The market has existed in China since 2007 and serves as a source of fixed income for various investors in the retail sector (Mjkim, 2017). The P2P lending model is a platform allowing various individuals to either borrow or lend money without the assistance of any financial institution. This model takes advantage of technology to connect various investors to borrowers in a faster and less expensive way as opposed to traditional financial institutions (Cunningham, 2013). Different companies have taken up the challenge of investing in P2P lending. As of March 2015, China had about 1728 P2P lending platforms, compared to 948 platforms in February 2014 (Rui, 2015). Again, the number of P2P loans that had been made from 2014 to March 2015 was observed to be an increase from RMB 10.54 billion to RMB 48.24 billion (Rui, 2015). This shows that a substantial part of the economy was reliant on P2P loans provided by the various FinTech companies.
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However, due to a limited regulation of the industry, several weaknesses were observed and experienced in this market. The first weakness is the legitimacy of the various platforms. It is evident that there are many platforms in the country offering P2P lending services. Some of these platforms have been proved to offer risky P2P services. Apart from opening accounts with the depository banks, some of the payment institutions open accounts with preparatory banks and transfer the funds to the same payment institution. The information is hidden inside the payment institution and payments are made after the adjustments made to different accounts within the institution. The regulator only observes the changes made to the accounts but does not see the flow of the money hence subjects individuals to risks.
Another weakness is the increase in bad debts. The P2P providers do not have the ability to assess the risk of lending money to a particular individual. The lack of a supervising authority to determine the identity of a borrower and whether they have the ability to service the loan opens up bad debt to the lender (Hsu, 2017).
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Finally, when it comes to peer-to-peer platforms, sustaining the source of capital is also crucial. Continuous accumulation of bad debt on the part of the consumers means that a time will come when the lenders will run out of money to lend to the borrowers.
The traditional banks in China have been overtaken when it comes to the service delivery by the FinTech companies. FinTech companies are non-financial companies that have introduced disruptive innovation into the banking sector. As a result, they are now able to offer various services including online payments, online insurance, and P2P lending platforms among other services. P2P lending platforms connect borrowers and lenders without having to use the assistance of any financial institution. The concept has enabled faster and cheaper access to financing. However, several weaknesses exist in the provision of this service including the service legitimacy, accumulation of bad debt and the sustainability of capital by the lenders.