Fintech in the ‘new era’ – Sustainable and sound development

In its growth, development, governance and continuing globalisation, the world economy is undergoing profound and multifaceted changes, and faces new risks and uncertainties. However, its upward trend means expectations for the market are gradually picking up. China’s economy is also shifting from a phase of rapid growth to one of high-quality development. After the 19th National Congress of the Communist Party of China (CPC), China has extended supply-side structural reforms and promoted synergetic development between the real economy, technological innovation, modern finance and human resources that have increasingly enhanced its economic innovation and competitiveness.

Principles and policies for fintech development

A new round of technological and industrial revolution is beginning – the digital and shared economies have developed rapidly, accompanied by an explosion of artificial intelligence (AI), big data and cloud computing. Fintech is a deeply integrated combination of finance and technology, and is becoming the focus of global financial innovation and development. In recent years, many countries and international organisations have formulated policies to promote fintech development. Countries such as the UK, Singapore and Australia have begun to implement a regulatory ‘sandbox’ to create an inclusive and innovative regulatory environment for fintech. Before US President Barack Obama’s departure from office in 2017, the US National Economic Council published a white paper entitled Framework for fintech, which clearly set out the administration’s principles and framework policies for innovation in fintech, and aimed to promote its sound and sustainable development.

The International Monetary Fund, the Financial Stability Board, the International Organization for Standardization and other international groups have divined the huge importance of fintech, and set up research groups, working groups and specialist committees. These will undertake deep analysis of the impacts on monetary policy, financial stability and international financial governance, and will play an active role in establishing the international policy framework for fintech. After years of discussion, a global consensus of principles on fintech has been reached. Some principles emphasise the driving force of scientific and technological innovation in fintech, and that while developing consumer protection should be the premise, inclusive finance should be the highlight and risk prevention the core, thus establishing guidelines for countries intending to promote sound fintech development.

International experience in a Chinese context

Fintech is gathering momentum on the global stage, and China has been at the forefront in terms of market size and depth of innovation.

But China must also draw lessons from other countries in their experience of fintech development. Many countries, regions and international organisations have explored fintech more deeply and have acquired successful experience worth studying.

Taking a practical, China-focused stance and taking into account the realities of its market, institutions and regulations will allow China to build a fintech system in line with national characteristics and make unique contributions to the global fintech era. Reform and regulation should reflect local environments, the condition of enterprises and supporting software, including the management, accounting and standard systems. Taking a view divorced from reality will lead to insufficient development. 

Sustainable global fintech – Development value

The healthy and sustainable development of global fintech can be continued in the following ways. First, there is a need to pay attention to the development value, development concept and innovation trends. An old saying in China is ‘when pulling a wagon, we should both lower our heads to take care of the wagon and look up for the road’, emphasising the importance of future directions of development. Finance is a widespread, wealth-oriented industry characterised by high risk and inherent vulnerability. These properties – without a correct development value or concept in place – can result in overexpansion, irrational prosperity and economic crisis. For example, the subprime mortgage crisis that began in 2007–2008 and led to the recession in the US and global financial crisis. Other crises around the globe have been caused by similar mechanisms – deviation and overcomplicated financial innovation. The development of Chinese fintech in a ‘new era’ of Chinese politics and power should never fall into the same trap.

Can fintech improve efficiency and quality in the real economy, and is it conducive to the protection of consumer rights, in such a way that fintech innovation can continue unabated? Excessive, unrealistic innovation outstripping the ability to risk-manage should not be encouraged, and innovations that do not comply with laws and separate themselves from the requirements of the real economy should be identified as ‘fake innovation’.

Technological and institutional innovation

Second, China should emphasise both technological and institutional innovation. Currently, digital technologies such as big data, cloud computing and AI have been applied on an unprecedented scale; fintech has played an active role in enhancing finance efficiency, enlarging service range and promoting inclusive finance. While technological innovation is used to solve problems such as high cost, inefficiency and the mismatch between supply and demand, new challenges – such as the digital divide, excessive technological dependence and multiple risk overlays – may arise. 

Technological innovation is not a cure-all, and fintech cannot rely solely on technological breakthroughs. Importance should be attached to promoting both technological and institutional innovation, adjusting and improving laws, regulations, inspections and standards in a timely manner, and enhancing the integration of technological and institutional innovation, identifying directions, bottom lines and rules for fintech. In this regard, the Chinese government has organised its departments to conduct positive explorations. In July 2015, in accordance with the request made by the State Council of the People’s Republic of China, the People’s Bank of China and 10 central government ministries and industry regulators jointly released the Guidelines for promoting the healthy development of internet finance, clearly setting out the fundamental rules, inspections and divisions of labour in fintech, and have introduced inspection and governance standards for online payment and individual online lending. These measures have made great progress towards legalising and standardising fintech.

Risk management

Third, throughout the history of human civilisation, finding an equilibrium between financial innovation and risk management has been problematic. Financial innovation always takes the lead in the game against regulation. However, regulation should not fall behind too far or too long; the lag should be carefully managed. In the process of fintech development, a balance of innovation and regulation must be maintained, so as to realise the dynamism and virtuous circle of regulation, innovation, re-regulation and re-innovation.

Fintech is gathering momentum on the global stage, and China has been at the forefront in terms of market size and depth of innovation

On the one hand, new tools such as the regulatory sandbox might strengthen China’s fintech supervision position. By applying new tools, China can set up mechanisms for trial and error, fault tolerance and error correction. Under the premise of controllable risk, it can conduct pilot projects and product testing, providing fintech with better future performance. On the other hand, China must ensure that all financial services are under supervision and all services have market access. Prudent supplementary supervision and a long-term regulatory mechanism with full coverage of financial and technological risks should be established. The mechanism should be thorough and able to track transactions from source to the end destination, and connect all links between assets and debt. Regulators must constantly improve their regulatory capabilities and improve their management practices; after all, it is not an easy job for supervision departments to have complete control of fintech innovation – it requires hard work and capability.

Industry self-disciplining

Fourth, industry self-discipline is, theoretically, a typical market-restraint mechanism. Through market-oriented standards and rules, information disclosure and self-policing, opportunistic behaviours by employers that consider only short-term interests can be reduced, and the integrity awareness of market participants can be cultivated to form positive external social capital. At the same time, industry self-discipline is an effective market mechanism for communication. With the development of fintech, the financial services market is becoming increasingly complex and overlapping. Financial industry developments have depended on difficult-to-regulate mixed operations. The complexity and interdependence of the market has caused the government and market to suffer from severe information asymmetry, resulting in onerous management of market expectations. Therefore, through industry self-discipline, standardised, transparent and centralised industry data for the government can establish effective communication and dialogue mechanisms, and reduce the cost of communication between the government and the market.

Wherever administrative regulation and industry self-discipline can be co-ordinated, a mechanism of great significance to the supervision of innovation can be established. In this respect, China has already made inroads: in March 2016, the State Council approved the establishment of a national self-regulatory organisation specialising in fintech, the National Internet Finance Association of China (NIFA). Since then, self-regulatory groups have respected the market rules and served as a bridge between the government and the market. They have also attempted to accelerate the gathering of data statistics, risk monitoring, information disclosure and credit information sharing. In particular, they have focused on the prevention and control of financial risks as well as consumer protections, and unveiled industry standards and self-regulatory rules on information disclosure, contract elements registration and deposit of funds. Progress has also been made in regulating the market order of fintech and promoting its sound development.

Around the globe, fintech is constantly developing and maturing, and many fundamental tasks still need to be explored. NIFA is willing to work together with every country to strengthen communication and co-operation, to learn from each other, and to jointly promote fintech worldwide, in order to serve the global economy and social development.

This article is part of The IFF China Report 2018, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.