It is important to ensure the right regulatory framework is in place
Recently, my investment-savvy mother asked me a question: What is Internet finance?
That reminded me of the question she asked about 10 years ago: What is Internet shopping? That was when e-shopping was the preserve of a handful of trendy, curiosity-driven youngsters, and skepticism about buying online was widespread.
After making several online purchases with my help, my mother declared that e-shopping would peter out, given shoppers' reluctance to buy goods seen only remotely and the complicated delivery and refund processes.
But things changed rapidly and she has become an avid online shopper in recent years and called taobao.com, China's largest e-tail platform, the world's most convenient marketplace. Her change of attitude came after she mastered online payment skills and learned how to choose trustworthy e-sellers, and after she saw young people like me could buy everything they needed with just a click.
So when I told her Internet finance was basically a combination of the Internet and financial services, she said: "This will be the next big thing."
The power of the Internet is more than evident with China quickly becoming the world's largest Web community.
This time, she is probably right.
Now, as the Internet starts to tread on the turf of the traditional financial industry, no one will ignore its potential.
Alibaba's launch in June of Yu'E Bao, a service allowing users to invest money stored online into a money market fund, marked the landscape-changing marriage between an e-commerce company and a fund management firm. Yu'E Bao and its partner Tian Hong Asset Management have quickly become the largest money market fund in China.
Since then, this Internet-plus-finance mode has been copied by many companies, with two other Internet giants, Tencent and Baidu, jumping on the bandwagon and taking advantage of their brand services such as WeChat.
Baidu launched a platform on Oct 28 to sell fund products that promised annual yields of 8 percent, a handsome return for a small investment.
Traditional fund managers and bankers are feeling the pinch and are eager to seek alliances with Internet companies.
As many as 14 fund companies launched shops at Alibaba's Taobao.com, China's leading online shopping platform, the first Internet company licensed to sell fund products, on Nov 1.
Web giants' ambitions do not stop with fund products. Alibaba, Tencent and Ping An Insurance teamed up to launch Zhong An Online Property Insurance Co, the first online insurance company in China.
Clearly, Internet firms' forays into the financial sector is an irresistible trend that will definitely change the landscape of the sector.
The Internet companies' advantages lie in at least three areas.
The first is their large customer bases. A big headache for fund and insurance companies is to find enough investors, but this is not a question for Internet companies. Theoretically, all China's 600 million Web users are potential investors.
Hundreds of millions of registered users of Alibaba's Taobao platform and Tencent's QQ messaging service naturally become potential investors of any financial product they launch.
With the economies of scale, Internet company-backed products usually do not require an entry threshold on the investment amount, unlike traditional fund managers. This has helped them win even more customers.
The second advantage of Internet companies is their sound credit systems. With third-party payment and e-commerce services, Internet companies have collected complete information on those who use their services. In this field, Internet companies do much better than banks and government departments. This also explains why Alibaba's small-loan services witness a bad loan ratio of 0.78 percent, a far better performance than any Chinese bank.
While traditional fund firms and banks are painstakingly assessing clients' credibility, Internet companies can happily and easily select creditworthy investors from their databases.
One other advantage of Internet companies is cost. Unlike traditional firms, they do not need to set up offices or hire many sales agents to promote products. This is why the management fees for Internet company-backed financial products are lower and offer higher returns.
Some have warned that brick-and-mortar financial service offices may one day disappear, just like newspapers and shopping malls, with the popularity of Internet finance. This prediction may be a bit brave because newspapers still have readers, and shopping malls still have customers despite the impact of online media and e-shops, but it is true that physical financial shops will have to change to survive in an increasingly digital era.
So far, Internet companies have essentially teamed up with traditional financial service providers instead of going it alone. In this partnership, Internet firms provide sales channels and customer databases, while financial firms design and provide products and services.
But this may change, with Alibaba applying to become a major shareholder of its partner Tian Hong Asset Management, pending government approval. If that is given, it will become the first Internet company to enter the upper stream of the fund management market.
Top Chinese policymakers such as Premier Li Keqiang have said Internet finance is a great innovation and have asked authorities to support Internet companies.
Li's favoring Internet finance is in line with his philosophy of deleveraging the economy. In the belief that the problem of China's liquidity lies in its poor flow rather than the amount, Li has urged financial institutions to make full use of existing liquidity that includes large amounts of residents' savings.
What Internet finance does is exactly what Li wants: channeling massive idle money into the loan market so the government does not need to print more banknotes.
It is understandable that he supports Internet giants using their client bases and channels to help social capital flow more freely and efficiently.
Considering the government is mulling over gradually breaking the state monopoly in the financial sector, it is highly likely that privately owned Internet giants will gradually be granted financial licenses.
If that happens, the e-commerce boom that China is experiencing will be repeated in the financial industry.
The other possible positive side of Internet finance is that it may help alleviate the shortage of capital among small and medium-sized enterprises. The advantage of Internet companies such as Alibaba lies in their understanding of, and good business ties with, individuals and SMEs. If these companies are given banking licenses, they are expected to offer more financial services for small business owners such as Taobao's 9 million shops.
But the popularity of Internet finance is not free of risks, and for now it may even go against the premier's desire to reduce financial risks evident in the economy.
Internet finance's convenience, efficiency and low threshold are likely to result in more idle money moving from low-risk financial products such as savings and bonds to higher-risk ones including investment funds, as can be seen from Alibaba's and Baidu's recent financial products. That will probably increase the overall risks in the financial market.
A new trend is that Internet companies are promoting, or offering a platform to sell, fund products. Considering that about 60 percent of China's 2.78 trillion yuan ($460 billion, 335 billion euros) of investment managed by various funds is going to either stocks or property markets, directly or indirectly, more money attracted in these fund products means more investment going to the stock and property markets.
If the money is not going to these two markets, it probably goes to local government projects, another investment darling among fund managers.
But over-investment in stocks, properties and local debts will cause asset bubbles, aggravate China's reliance on investment to propel economic growth, increase structural risks and delay restructuring of the economy.
In this sense, Internet finance may have solved the problem of how money is mobilized, but it cannot solve the problem of where the money should be invested.
This is why the China Securities Regulatory Commission is still a little conservative about Internet companies entering the financial sector. Safeguarding investors' interests and avoiding causing structural risks are the two warning signs the commission is showing Internet companies.
These are indeed minimum standards that must be maintained as Internet finance grows.
The author is a Shanghai-based financial analyst. The views do not necessarily reflect those of China Daily.
