Abstract: The comprehensive information owned by digital platforms contains five features, namely, comprehensive spatial information, comprehensive process information, comprehensive scenario information, comprehensive analytical information and comprehensive value information. Once a traditional industry can utilize such comprehensive information, new economic models will be formed, hence bringing disruptive impact on traditional industries.
The main body for the development of fintech is Industrial Internet financing which aims to resolve the financing difficulty of small- and medium-sized enterprises. Empowered by such comprehensive information, industrial internet finance can combine the data of business operation with financial services and mobilize credit data, thereby addressing the inefficiency in the supply of traditional financial services.
Despite various advantages of digital platforms, digital financial institutions face three challenges: first, insufficient capital; second, high cost of funds and insufficient financing sources; third, shortage of talents. Therefore, the most reasonable development model for techfin in the future should be letting digital platforms and financial institutions make use of their respective advantages while forming a pattern in which each party gains.
Distinguished guests, Dear friends,
It is great honor to participate in the 2020 Bund Summit and to make the keynote speech on the topic - “Digital Economy in the Post-Pandemic Era: New Trends and New Opportunities”.
The comprehensive information owned by digital platforms and which contains five features can generate powerful disruptive impacts. The so-called digital platform is empowered by a set of digital technologies such as big data, mobile network, cloud computing and blockchain etc. The five features of comprehensive information owned by digital platforms are namely comprehensive spatial information, comprehensive process information, comprehensive scenario information, comprehensive analytical information and comprehensive value information. These five aspects of the comprehensive information collectively have five characteristics:
First, being structural. The sets of information collected by digital platforms must contain various structural characteristics of the social and economic system, such as the characteristics of industrial system and operation data of social system. The structural feature of the comprehensive information is a reflection of the concept of “digital twin”, being able to comprehensively depict the characteristics of business operation, industrial ecosystem and social system.
Second, being dynamic. Each set of comprehensive information with the five features contains time record and reflect the status of a subject at one point. The comprehensive information can over time show the development path of the subject and predict its development trend in the future.
Third, contain the characteristics of the basic institutions of the social and economic system. Or in other words, the sets of information gathered from the social and economic system can not only reflect the order of the system itself, but also help build new order for the system.
Fourth, being credit-based. The sets of comprehensive information owned by digital platforms are highly credible once new technologies such as blockchain are broadly applied. Based on new credit system, both financial system and other social and economic systems will be fundamentally changed.
Fifth, the sets of comprehensive information are eco-type information. The information owned by digital platforms exists in certain types of social ecosystem and industrial ecosystem, with various kinds of information being highly interconnected and presented as a whole.
Once a traditional industry can utilize such comprehensive information with the five features, new economic models would be formed, hence bringing disruptive impact on traditional industries. Digital platforms will further form Internet of Things (IoT) network in the era of 5G and there will be more and more comprehensive information with the five features. Once such kind of information is combined with industrial manufacturing, industry 4.0 will be formed; once it is combined with the logistics industry, a smart logistics system will be formed; once it is combined with city management, a smart city will be formed; once it is combined with finance, fintech or techfin will be formed.
The main body for the development of fintech is Industrial Internet financing. Empowered by technologies such as big data, cloud computing, IoT and artificial intelligence, the development of fintech will bring unprecedented historic opportunities. What kind of development path should fintech take to become more science- and law-driven in the future? I think there is a huge potential for industrial internet finance.
Industrial internet finance refers to such a scenario in which institutions provide financial services to industrial ecosystem, particularly small- and medium-sized enterprises with the help of fintech. The customers of industrial internet finance are enterprises while providing digital financial services to production and operation activities is the scenario in which industrial internet finance is applied. As the supply chain is more complicated and much longer, the degree of digitalization is still low at present, and industrial internet finance is still not smart and convenient enough to serve individuals, which should be the next blue ocean for the development of fintech.
The practical significance of industrial Internet finance is to solve the financing problems faced by micro, small, medium-sized enterprises. Financing has always been hard and expensive for such enterprises, which is a problem that not only exists in China, but prevails globally. Banks are not the only party to blame for the cause of this problem, but rather the problem is closely related to features of these enterprises themselves. Such enterprises are usually long-tail clients in the financial industry featuring problems such as insufficient collateral, poor credit qualifications, information asymmetry, and short life cycles. In the process of providing financial services to such enterprises, banks also face difficulties such as high costs in customer acquisition and conducting due diligence, insufficient guarantees, and long and costly risk control process. Industrial Internetfinance, with the rational use of comprehensive information can effectively solve problems of SMEs concerning their isolated information and credit, and enable them to obtain financial services.
Industrial Internet finance has gradually got through all the key nodes and came to a phase of maturity. The underlying logic of finance is credit. Driven by comprehensive information, corporate operating data can be closely integrated with financial services, and information flow can drive credit flow, thereby solving the problem of ineffective financial supply.
Taking the application of artificial intelligence by enterprises as an example, currently there are eight key technologies in this area, namely deep learning, enhanced learning, pattern recognition, machine vision, data search, knowledge engineering, natural language understanding, and brain-like interactive decision-making. With the support of these technologies, the manufacturing industry can achieve self-perception, self-adaptation, self-learning, and self-decision-making, thus realizing the intellectualization of production, supply chain, product innovation, and business operation.
At this stage, a large amount of structured and reliable data can multiply by thousands of times. After being collected, cleaned, and accumulated, the data can be cross validated relying on the tamper proof feature of block chain, thereby realizing digitalization of financial assets and standardization of digital assets. Multi-party funds are matched into various production environments in accordance with the needs of different targets, and financial transactions are productized. Methods such as information integration, cross-validation, asset penetration, and traceability management are used to improve capacities of risk management and financial asset allocation.
That digital platforms and financial institutions can each exhibit their strengths is the most desirable development model for Fintech in the future. In the age of the industrial Internet, the development of any digital platform cannot simply relying on cash burn strategies to expand its market share, nor can it allow customers to pay for nothing and to suffer long-term losses, which is an unsustainable suicidal behavior.
A sound digital platform should be able to obtain benefits through four channels: first, reduced logistic cost of industrial chain and supply chain through the Internet of Things, big data, and artificial intelligence; second, improved efficiency of financial services by using big data, cloud computing, and artificial intelligence; third, reduced financial operation costs and risks by relying on the information transmission of the comprehensive industrial chain, complete process, and full scenario; fourth, optimized resource allocation of digital companies and financial services and resulting dividends.
The above is a summary of the four advantages of digital platforms. However, digital financial institutions also have three weaknesses: namely insufficient capital, limited financing sources and high financing costs, and lack of financial professionals.
In this case, even if a digital platform can have a broad understanding on customers’ credit through scenario information, and may be able to obtain such credit information at a scale of one trillion, two trillion, and three trillion pieces, when it plans to deliver a loan of one trillion yuan, it will have to have at least 100 billion yuan in capital. Concerning this capital gap, it’s not easy for digital financial platforms as they are not like commercial banks that can obtain cheap funds from deposits or central banks that conduct operations in money market with low cost. High-leverage activities conducted by digital financial companies can easily lead to financial risks.
The best choice would be for these digital platforms to transfer the myriads of customer credit and due diligence information that they have obtained via their industrial internet operations to commercial banks. Open data sharing and enhanced cooperation and synergy between the two parties would greatly improve resource allocation.
Just as Eric Jing, Executive Chairman of Ant Financial, mentioned, digital platforms under the group, including Ant Credit Pay, Ant Cash Now and MyBank, may have access to data and information of a huge credit market of 1.5 trillion yuan, but the actual amount of loans that they have extended is only 300 billion yuan. For the rest, or the unmet market demand for over 1 trillion yuan of loans, the Ant Group has chosen to sell or transfer in other ways the related data and information of these borrowers to hundreds of commercial banks across the country. This is exactly an example of the open cooperation between banks and digital platforms, which I commend.
Similarly, financial institutions also boast unique edges that could empower digital platforms should they cooperate:
First, low financing costs. Financial institutions could take in deposits as a source of financing at an interest rate of 1-3%; in comparison, fintech companies will have to pay 7-8% of interests if they raise money by issuing asset-backed securities (ABS) in the security market, while if they borrow from commercial banks, they still bear 5-6% or 6-7% of interests - much higher than that for financial institutions.
Second, independent assessment of borrower credits. To use an analogy here, digital platforms’ ratings of borrower credits are like medical examinations such as X-ray, CT or MRI checks, but these checks cannot replace doctors in giving the final, definite diagnoses. Financial institutions are the doctors, with their strong credit investigation and risk prevention capacities. China Banking and Insurance Regulatory Commission (CBIRC) is very smart. Aware that digital platforms will share their massive credit information of tens of millions of customers with commercial banks when they work together, CBIRC requires that these data shall not be taken by commercial banks as the sole basis when extending loans. If problems arise because of deficiencies with the data, it’s not the digital platforms, but the commercial banks, who shall take the responsibilities. That means banks must have their independent judgements of customer credits as the last line of defense against risks.
Third, large capital bases. Digital platforms will need a capital base of over 10% of its aggregate lending to sustain the business. Generally speaking, only professional financial institutions like banks, trusts and insurance companies have a capital base of such scale and the flexibility to expand it even larger.
Fourth, good social credit. Regulators and the general public alike place greater trusts in and are more used to working with the traditional, licensed financial institutions.
The cooperation between traditional financial institutions and digital platforms will bring the four edges mentioned above into full play. Complementary advantages reinforced and resource allocation improved, this is the best model for the development of both parties.
What is the way ahead for non-banking financial institutions amid the digitalization trend? The most reasonable and promising choice would be for them to closely work with the internet- or IoT-based digital platforms, give full play to their unique advantages, and forge an industrial internet finance platform that is integrated with the supply chains and value chains of the real economy. Meanwhile, digital platforms need to tap into their strengths, develop in-depth understanding of various industries, forge comprehensive datasets, and share them with their partner financial institutions to improve their efficiencies in providing financial services.
The cooperation between digital platforms and financial institutions should be able to generate benefits and win-win outcomes for all related parties. The development of fintech and financial operations based on fintech should both serve the ultimate goal to benefit all related parties: to lower the financing costs of the real economy, including medium-, small- and micro-sized enterprises, and to reduce the costs of credit extension for commercial banks and other financial institutions, etc. The additional benefits and improved efficiencies as a result of the use of technological means should be reasonably shared back with businesses along the supply chain, to financial institutions, and to digital platform operators, so as to attract more profit-driven businesses and production factors of all kinds.
Thank you!
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