Money, technology and banking: what lessons can China teach the rest of the world?

Summary

Focus

Technology companies entering the financial services industry have become a global phenomenon over the past decade. Using the rise of two big techs in China as a foundation for analysis, this paper examines the key factors that have driven the development in China and whether such factors are applicable elsewhere.

Contribution

This paper takes a historical approach in examining favourable factors that contributed to the strong growth of big techs in China, and how regulators struck a balance between nurturing financial innovations and keeping emerging stability risks at bay.

Findings

The fight for survival was the key motivation driving the initial expansion to the financial services industry. As economic theory predicts, big techs running network products need a large user base to survive against competition. Providing financial services is an important means to achieve that objective. Accordingly, they can be viewed as "accidental financiers" rather than "aggressive invaders", at least during the initial stage.

Several China-specific factors have played an important role in fostering the rapid growth, including its large population, the availability of low-cost mobile handsets in the country and heavy investment by the government on mobile communication infrastructure. These factors may not be easily replicated elsewhere.  

A balanced-regulatory approach is important. Development in China highlights the importance of striking a balance between regulatory tolerance during the early stage and tough regulations where signs of excessive growth are evident. While traditional activity-based regulations can still serve regulators well in many areas, regulators also need to closely monitor product innovations to rein in fast-emerging risks, including those involving new regulation. In particular, it is natural to see big techs introducing new products to exploit grey areas of existing regulation or other untested premises.

Finally, the prospect of big techs becoming heavily involved in cross-border transfers/payments would require special attention and coordination among home/host central banks.

Abstract

Technology companies entering the financial services industry have become a global phenomenon over the past decade. This trend is most remarkable in China where two large technology firms (BigTechs) have emerged as important market players, especially in payment services. This paper examines the factors driving this development and whether the Chinese experience could be applied elsewhere. Several lessons emerge: first, like any company in a network industry, it is important to build and maintain a large user base and that is the key factor behind BigTechs' expansion into the financial industry. On this basis, these BigTechs can be seen as "accidental financiers" rather than "aggressive invaders". Second, these firms are cautious in offering higher-risk financial services as investment losses could lead to an exodus of customers. Third, Chinese authorities' regulatory tolerance during the early stage has been a key supporting factor and helped fostering innovation benefits. But that was balanced by the implementation of capital and liquidity rules to keep BigTechs from "excessive" growth, mis-selling of financial products and posing systemic risks. Fourth, initial conditions and government support matter. The rapid growth has benefitted from China's large population, the availability of low-cost mobile handsets and heavy investment by the government on mobile communication infrastructure. These may not be easily be replicated elsewhere. Last, BigTechs' overseas expansion may require policy coordination between home and host authorities to keep track of emerging risks.

JEL classification: D85, E41, E42.

Keywords: BigTechs, banking and finance.