Abstract: The rise of platform economy has increased the scale and efficiency of economic activities and improved user experience; it has also reduced the costs, risks and contacts incurred. It has empowered inclusive finance with disruptive influence on the financial system, but at the same time is even more subject to information asymmetry. Regulators should improve digital platform regulation in order to improve the quality and sustainability of platform economy, while promoting the development of online payment, credit and investment and CBDCs all of which could further enable financial inclusiveness and play a critical role driving future growth of the Chinese economy.
I. DIGITAL PLATFORMS AND "THREE INCREASES & THREE DECREASES"
We could examine inclusive finance and platform economy from different points of view. There is the issue of how the platform economy could help break bottlenecks in financial development; there is also the issue of how finance can play a bigger role prospering the platform economy.
The second is easier to answer. Platform economy itself is the result of new ideas implemented; innovation, management and technologies are all inevitable to this process, and finance has played a critical role boosting innovation. Over the past 20 years, finance has been providing supports in various forms that have been critical to the growth of platforms. It has been indispensable to fostering new business models. According to Nobel laureate John R. Hicks, industrial revolution has to wait for financial revolution. That shows a good idea cannot be implemented or grow into an influential business or a new industry without the support from necessary financial instruments.
The first question is harder to answer. First, what exactly is platform economy? By definition, platform economy as a new business model should have the following features: first, it is built upon online infrastructures such as the “cloud”, the “network”, and the “terminals”; second, it leverages digital technologies including artificial intelligence (AI) and big data analysis. The cloud, the network and the terminals combine to form the network system: the cloud provides storage and calculation capacities; the network, or the Internet system, connects the previously dispersed participants; and the terminals are mobile terminals the most commonly seen of which is smartphones. The internet system where users are connected via clouds, networks and terminals is the foundation for platform economy which has very strong computing power that could get many specific jobs done with AI and big data analysis. This is the technological feature of the platform economy.
Platforms are mainly engaged in three types of businesses: 1) matchmaking, typically e-commerce, takeout ordering and online car-hailing platforms; 2) content sharing, typically Toutiao and Douyin; 3) procedure management, i.e. those that help users improve procedure management efficiency. Platform economy is essentially an innovative business model based on digital technologies.
In what ways are these platforms innovative? Many of the traditional economies share some of the properties of the platform economy, having the functions of matchmaking, content sharing or even procedure management as well. However, digital technologies have broken through many of the limitations on traditional platforms with unprecedented scales, contents and influence. Today, leading platforms such as Taobao, JD, WeChat, Meituan and Didi have totally transformed our way of life and production.
Digital technologies have several unique features. First, economies of scale, the good thing about which is that the bigger ones are more efficient as well. In contrast, traditional economies such as department stores or farmers’ markets usually have an optimal scale. Despite the benefits of expansion, once they reach a certain scale, their efficiency will start to decline with diminishing marginal utility. But platforms have broken through that bottleneck, creating the long-tail effect which means that once a platform is established, the marginal cost incurred with every additional user is basically zero. In fact, while building a platform could be very costly, once it is established, the cost incurred does not change much as users increase, with almost zero marginal cost. WeChat, Alipay and other leading platforms have over a billion daily active users which is beyond imagination for traditional economies of any kind.
Second, economies of scope, which means that crossover could be very easy for an established platform. Alibaba started as an e-commerce platform, but its digital finance business turned out very successful; WeChat, a social networking software, also provide e-commerce and financial services. In fact, once a platform is established and has accumulated a pool of users and data, it could cross over to other fields at low costs. In other words, economies of scope make cross-field competition easier.
Third, the network effect, meaning that a network with more users has higher values.
Fourth, the bilateral market, or, as a matter of fact, the multilateral market where there are multiple participants including sellers, buyers and service providers, among others. When one of them expands, it benefits the others. For example, when there are more buyers on an e-commerce platform, this platform creates more value for sellers. It’s the same the other way around: when there are more merchants on a platform, it is more valuable for consumers.
The above features are also seen in traditional economies, but digital technologies have made platforms so large like never before, serving hundreds of millions, if not billions of customers at the same time without incurring much higher costs. This is just unimaginable with traditional platforms.
Platforms change economic activities in an all-round manner. It changes our way of life and production. It’s beyond imagination that one day we will not be using any of these digital platforms—they have just become an indispensable part of our lives.
How will digital platforms change the financial industry, to be specific? I would summarize it as “three increases and three decreases”:
“Three increases” means the increase in scale, efficiency and user experience. The increase in scale is self-evident; efficiency is higher because platforms serve a huge number of customers with lower marginal costs; user experience is elevated because digital platforms provide many customized services that become increasingly friendly and popular as technology advances. No one would use mobile payment if it functions poorly. User experience improvement is closely associated with digital technologies. In the early days, many of the online events did not go well, and the same would be true with online payment or other internet-based activities if communication technology remains in the 2G era. It’s technological advances that are empowering user experience.
“Three decreases” mean the decrease in cost, risk and contact. Platforms accumulate myriads of user data which is very helpful in identifying and resolving risks.
Based on these transformations, digital platforms could even reshape the rules and patterns of economic activities. The “three increases/decreases” have made users increasingly reliant on platforms which have become an integral part of the economy.
China gained access to the Internet in 1994. A year later, the first Chinese internet company, Yinghaiwei, was founded. Sohu was established in 1996, after which almost every year has witnessed the birth of new internet service providers such as Netease, Baidu, Alibaba, Tencent and Sina. If we look at it today, Chinese platforms had almost the same trajectory of development as their global peers, and they have never lagged far behind. However, digital economy changes fast. The industrial landscape is reshuffled almost every year. The first platform Yinghaiwei failed very soon, and many others were struggling amid ups and downs. Despite the difficulties, several of the earliest platforms have managed to survive or even emerge among the best both at home and abroad. In this sense, platform economy in China is pretty successful.
A popular view is that the global platform economy will be one divided by the United States, China, and others. Among all unicorn platforms worldwide in 2020, 288 were from the United States, taking up the biggest share, followed by China which had over 120; ranking in the 3rd and 4th place were the United Kingdom and India, whose numbers were much lower at around 20. From this point of view, the global platform economy is dominated by the world’s biggest developed economy, the United States, and the biggest developing economy, China. For China, that’s something remarkable.
Several factors have enabled this remarkable achievement.
First, the advances of digital technology. Digital technology development is a shared opportunity for all countries, but China has been doing especially well which is perhaps owed to its past investment in infrastructures. Without wide access to the internet and communication technologies, digital economy boom would hardly be possible. Of course, China is less internet- or smartphone-penetrated compared with developed economies, but it runs ahead among developing countries.
Second, market-based reforms. Most of the Chinese digital platforms are private, many started from scratch led by a group of young entrepreneurs. But some of them have managed to make a name at home and abroad within just a couple of years. In addition to technological advances, a more important enabling factor has been a sound market environment where starting new businesses is possible. This is a typical “Chinese dream” come true. Young people have not only ideas, but also the ability and pragmatism to implement these ideas.
Third, a huge population. A market of a fair size is an important premise for innovation, especially for the platform economy an important feature of which is the economies of scale. Innovation and rollout of new products would be easier in bigger markets, and it’s easier to achieve the economies of scale.
Fourth, a relatively independent market. The Chinese market has yet to fully integrate into the global market, which creates more time and space for domestic platforms to grow without having to face the huge pressure from global competitors from the very start.
Fifth, inadequate privacy protection. China does not provide strong protection for privacies; empowered by big data, many of the platforms are engaged in illicit collection and analysis of user data. On the bright side, this has created greater space for innovation with products and business models; but on the dark side, this has also led to rampant privacy infringement and improper behaviors undermining consumer interests. Generally speaking, the digital economy boom in China is a good story, but there’s no deny that it involves many problems left unsolved even today. This is also why over the past year or so, regulators have introduced strong policies to improve platform regulation. As policymakers have stressed, the purpose of regulation is not to decay the platforms, but to promote their healthy development. Chinese President Xi Jinping has also noted that platforms should be properly managed and constrained for them to develop better. That could indicate a broad space for improvement for the platform economy in China.
In summary, platform economy in China is still gaining momentum. It has become one of the largest in the world, playing a major role reshaping people’s way of life and production and enabling innovation. However, it will have to weather through a period of adjustment going forward. The purpose of platform regulation is to make it better, more orderly, more robust, and more sustainable, so that it can play a bigger part driving the sustainable growth of the Chinese economy.
II. BIGGEST ROADBLOCK TO FINANCIAL DEVELOPMENT: INFORMATION ASYMMETRY
Finance, in essence, is the circulation of capital between those with excess of it and those in need of it, in order to meet the demand for funds of the latter, and achieve win-win results.
In terms of the mode of transaction, financial transactions could be divided into direct financing and indirect financing. Direct financing means that the borrower obtains money directly from the lender, such as by purchasing bonds or shares. Under this mode, funds directly enter the account of the borrower before flowing to specific items. Typical of indirect financing is commercial banking and insurance, where lenders give their money to banks without knowing who will borrow it eventually. While the financial institutions play a part meeting businesses’ financing demands, there is no direct association between borrowers and lenders. Even if a borrower defaults on its debts, it will not influence the deposits or income of the lender, because there is the financial intermediary in between to bear the risks.
The ultimate goal of finance is win-win. For borrowers, they borrow because they want returns, whether by doing business or by making investments. The reason why “the industrial revolution has to wait for the financial revolution” is because without financial support, the steam engine technology will not gain any investment which is necessary for it to be applied so that it can boost the development of the textile, railway or shipping industry. In other words, without finance, technology will not be able to materialize into industrial development, not to mention returns. This is the first role that finance plays.
The benefit for the lenders are also evident. A thousand bucks in hand is a thousand bucks, but if you put it in banks, use it to buy government bonds or do other types of relatively safe investments, it would generate returns, no matter how moderate they may be—yet better than if you put it under your pillow. Use it to make riskier investment, and you could get higher returns. Thus, finance benefit both the borrower and the lender.
Finance is a very important invention in human history. Without finance, the modern economic system can hardly sustain. Before finance or money appeared, we had the self-sufficient, small-scale farming economy where people consumed what they produced. The only transaction back then was barter, at a high cost, because one had to find a counterparty for the transaction and the two sides had to agree on the pricing. That’s why we seldom had any transaction before money was invented. But that doesn’t mean transaction was a result of the invention of money; instead, it was because people wanted to trade that they invented money.
The biggest contribution of money to economic development is that it made the economies of scale and division of labor possible by lowering the cost of transaction. Money has three basic functions: it serves as the medium of exchange, the measure of value, and the tool for investment. With these functions, it plays a big role driving economic activities. It prices goods to be traded, which lowers the cost of transaction and makes it easier; it is also a storage of value of goods produced so that economic activities become easier to organize as well.
Without finance and the benefits it brings, economic activities would never have become so vibrant as it is today. But it could also incur a host of problems. For example, financial crises batter the economy, best represented by the subprime crisis which started in the United States in 2008 before evolving into a global systemic catastrophe. Such major crises could deal negative blows to economic growth, especially over the long run.
Why have we had financial crises? What gave rise to financial risks? A key reason is information asymmetry in financial transactions. Put simply, information asymmetry is the fact that parties of a transaction do not know each other well. In the ideal case, borrowers need money to invest; lenders provide them with the money they need, and the borrowers pay back after they make money. That way, both sides benefit. However, this is based on the assumption that borrowers invest the money borrowed in real business activities and do pay back after they reap returns. Things could be different in the real world, though. Many of the borrowers fail to make money or even end up at loss. The problem behind is information asymmetry, since the lenders do not know whether borrowers can really make money.
Information asymmetry in finance usually involves two aspects: adverse selection and moral hazards. The first is pre-transaction information asymmetry, when one chooses an improper counterparty without much knowledge of him or her, such as when you lend your money to someone you don’t know well just because he or she has promised a high level of return on investments. The second is post-transaction information asymmetry, when the borrower does not use the money borrowed on the business he/she has promised, or refuses to pay back the money owed, which is also because the lender lacks knowledge of the borrower.
Information asymmetry is a very common problem in financial transactions, and the core of resolving the problem lies in risk control. If risks are not properly managed, defaults or investment failures may occur. Because of the existence of information asymmetry, investors and financial market participants can be very moody and changeable with their expectations. As a result, a small incident often causes a series of problems. For example, in a market economy, when a depositor wishes to withdraw some money, s/he is told by the bank that the latter lacks money at the moment and that s/he can only get the money tomorrow. This is a very normal thing in itself, because most of the bank's funds are used for lending, and there won’t be much cash left. With 100 yuan deposit, a bank that is in normal operation generally lends 90 yuan, and holds the remaining 10 yuan as cash. If the depositor wants to withdraw 15 yuan, naturally s/he will fail to get the money, a phenomenon that is easily misunderstood as "the bank is short of money". When this spreads among depositors, it is very likely to cause a bank run. This is one of the major reasons for the early banking crisis.
The occurrence of a bank run is related to information asymmetry. Banks lend money to enterprises with good returns. However, there are times when people are not able to withdraw money from banks as loans normally have a term. What's more, the failure of one bank often triggers a chain reaction, causing worries of depositors over other banks, too, which consequently leads to a bank run. Therefore, if the problem of information asymmetry is not treated properly, it is likely to cause a series of financial risks and even financial crises.
Many institutional arrangements of financial markets and financial institutions are designed for the purpose of resolving the problem of information asymmetry. For example, banks can represent a large number of small capital owners and depositors to carry out professional work to research the qualifications of borrowing companies, project reliability, and expected return on investment, etc. In essence, what banks do is to help depositors reduce information asymmetry. Investment banks and rating agencies in the market regularly release research reports to help investors understand products, which does the same thing as banks. Many regulatory requirements, such as information disclosure, are also aimed at the same purpose.
In summary, finance is a very important invention, which has played a huge role in economic development and improved the efficiency of economic operation. But with information asymmetry, risks will always be there. In financial transactions, if one doesn’t have enough knowledge about his/her counterparty, his/her money can go to waste. When one person’s money is lost, it can shake the confidence of many others, causing problems to the entire system. Once different kinds of crises occur simultaneously, such as banking crises, currency crises, debt crises, a systemic financial crisis may break out. The so-called systemic financial crisis refers to a situation where the entire financial system cannot function normally and cannot provide effective financing for the real economy. Once the financial system fails, the economy is bound to fall into recession and all kinds of social problems will arise as a consequence.
Financial institutions, market organizations, and regulatory departments have all worked to reduce information asymmetry. But problem-solving needs different approaches when it comes to different targets. Specifically, the financial market has the rule about 20% and 80%, which means that if a financial institution can serve the richest 20% of households, or the most profitable 20% of companies, it can grasp 80% of the market share. The wealthy group and profitable companies usually engage in financial businesses of large scales. Therefore, for financial institutions, this is the service model that enables them to obtain the highest return with the lowest cost. As for the remaining 80% of small and medium-sized enterprises and households, they are basically low-income groups and only occupy 20% of the financial market share. The cost of serving such customers is high, while the return is low. This is why developing inclusive finance remains a challenge around the world.
Despite the difficulties of reducing information asymmetry, it is relatively easy to get information about a large company or a wealthy person because they have greater assets and more data and information available. On the contrary, it is very difficult to provide financial services for scattered, small-scale, and geographically-difficult-to-find small and medium-sized enterprises, low-income households and rural economic entities. Specifically, there are two difficulties, respectively customer acquisition and risk control.
First, the difficulty of acquiring customers lies in finding such customers. The number of small and micro enterprises and self-employed individuals in China exceeds 100 million. How to find these 100 million users and understand their financial needs is very difficult. Traditionally, financial institutions set up branches all over the country to reach potential users. Therefore, the traditional view holds that financial institutions with more branches and employees have stronger service capabilities. When one is closer to the customer, it can cover more users. But it is not easy for banks to open branches across the country. Even in densely populated areas, it is still difficult to find potential clients, or the cost is too high, and it is very likely that the costs outweigh benefits in the end.
Second, risk control is difficult, which means recovering the funds after they are lent is difficult. In the first place, it is difficult to find potential customers in large scales, and then it is even more difficult to ensure that funds can be safely recovered after they are invested in a project. This requires that institutions must do a good job in investment analysis and credit risk analysis, have full knowledge about the project to be invested and the possibility of repayment. For small and medium-sized enterprises and rural economic entities, they are small in scale and usually have a short history of existence, but they are very large in number, scattered geographically, and highly uncertain. The average lifespan of micro, small and medium-sized enterprises in China is 5 years, which means that 20% of them go bankruptcy each year. Providing financial services for SMEs in this situation puts forward high requirements for credit risk analysis, which is hard to be achieved by traditional methods.
The first traditional approach is to analyze past financial data, including the balance sheet, the profit and loss statement and cash flow statement. In the current economic situation, cash flow is the decisive factor for a company’s sound operation. Generally speaking, companies default or go bankrupt because of insolvency, that is, balance sheets problems. Cash flow risk is also an important factor in times of economic turmoil. A bank run is a typical example of cash flow risk. The balance sheet of the bank may have no problem at all. It lends out 90 yuan of the 100 yuan deposit, and can recover 90 yuan and charge interest rates of a few percent of the loan after a year. This is a profitable transaction. But if a bank run occurs when the loan has not yet been repaid, the bank will go bankrupt because it runs out of cash. In real life, many companies also face cash flow risks. Some companies default not because they are insolvent, but because of insufficient cash flow to pay their debts on time, which can cause a series of problems. Therefore, the general practice of banks’ credit risk assessment is to look at financial data.
The second option is mortgage lending. Most of the micro, small and medium-sized enterprises have a relatively short operating time, and have no financial data or the data available is not standardized. Therefore, mortgage loans become a good option for them to borrow from banks by pledging their real estate. The advantage of this approach is that once a company defaults, banks can recover loans and reduce risks through asset disposal.
The third approach is relationship lending. For micro, small and medium-sized enterprises that have neither financial data nor mortgage assets, the loan officer from banks can track the enterprise in a long-term and all-round way, so as to collect soft information and understand the behavior of the borrower and the status of the enterprise. If the lender does not have hard information such as financial data, it can also use soft information such as the borrower’s personal character and business status to help make loan decisions. Past experience shows that relationship loans have a good performance boasting lower non-performing rate and default rate. But the problem is that it's not easy to get a complete picture of an entrepreneur or a business. For example, the loan officer needs to know personal characters of the entrepreneur, whether s/he is filial to his/her parents, whether s/he stole things from classmates during childhood, and whether s/he keeps his/her word with friends as an adult, etc. Getting such information can be rather costly in expense and time, but the coverage is limited. Because of these constraints, financial inclusion is still a problem facing the world.
Since 2005, the United Nations has called on all countries to develop inclusive finance, and advocates that everyone has the right to obtain sound financial services. If micro, small and medium-sized enterprises, low-income families, and rural economic entities cannot obtain the financial services they need, it means there are problems in economic development. Therefore, 2005 was proclaimed as the International Year of Microcredit by the United Nations to encourage countries to increase support for financial inclusion. China has also implemented many measures, including the establishment of about 10,000 microfinance companies, and 8000 of them are still in operation. The regulatory authorities have also called on financial institutions to step up support for inclusive finance, and many large financial institutions have set up inclusive finance departments. However, it is still a serious challenge to fundamentally overcome the two difficulties of customer acquisition and risk management.
III. PLATFORM ECONOMY IN SUPPORT OF INCLUSIVE FINANCE
Inclusive finance in China has made huge progress during the 13th Five-Year Plan period, mainly reflected in the area of digital finance, which is to apply digital technology to develop inclusive finance. However, digital finance and digital technology was not mentioned in the 13th Five-Year Plan, so in a way we can say that digital finance has brought unexpected and unprecedented breakthrough to inclusive finance.
Why do we say financial inclusion has grown increasingly important to China's economy? On the one hand, China's economic growth has been very successful in the past several decades, with an average annual GDP growth of over 9%. However, imbalance of development among different regions is prominent. Some regions have witnessed rapid development, some rather slow; some institutions can provide quality service, while others cannot. In addition, there are also problems in areas such as regional disparities, income distribution, and services for micro, small and medium-sized enterprises. In the new era of development, common prosperity has become a very important goal, and as a result inclusive finance has gained more weight. In the future, China will pay more attention to the living conditions and business conditions of the recipients of inclusive finance, which is also an inevitable requirement for China's economy as it ushers in a new stage.
Today, China's economy has moved from extensive growth to high-quality growth, and innovation will play a more crucial role in economic development. In the past, China featured factor-input growth, but now innovation-driven growth. The sustainable development of China's economy in the future must rely on innovation. Micro, small and medium-sized enterprises are the main driving force of innovation and account for a high proportion of innovations in the country. This is why financial inclusion, especially financial services for micro, small, medium-sized enterprises, is of profound significance. In the past, the role of financial inclusion was to promote social equity, but today, a more important function is to promote sustainable economic growth. According to the data, private enterprises account for as high as 70% in innovations in the country, state-owned enterprises 5%, and foreign-funded enterprises 25%. Micro, small and medium-sized enterprises are a very important part among private enterprises, and their role in innovation cannot be underestimated. And many large enterprises used to be start-ups in the early stage, and they are the main force of innovation. Therefore, supporting micro, small and medium-sized enterprises and developing inclusive finance are to contribute to the long-term and sustainable growth of China's economy.
Why has China's financial inclusion gone through leap-forward development from 2016 to 2020? The key lies in the application of digital technology. China’s digital finance originated from the launch of Alipay in 2004. Taobao started business in 2003, but there were problems with making payments. How to resolve trust issues with counterparties who are geographically different and have never met? For example, should the seller ship first or the buyer pay first? Because of the lack of trust between the two parties, buyers are worried that they will not receive the goods if they pay first, and sellers are worried that they will not receive payment if they ship first. Later, Taobao rolled out a function of secured transaction. The seller will deliver the goods after the buyer pays. But it will only get the money from the platform when the buyer confirms receipt of the goods. This intermediary business model has its own problems because of the necessity of bank reconciliation. Secured transactions place high demands on banks’ capacity as transaction volumes rise. Each payment may only be a few yuan, but the number of transactions is large, so mistakes can easily arise. In the end, banks don’t want to do such business. Therefore, in 2004, Alipay developed its own payment system with reference to the eBay model in the United States. In the early days, it could be only used with desktops, and it was not until 2010 that mobile payments were launched. In 2014, Ali launched Yu’ebao to expand its business into the field of digital finance. At the same time, WeChat Pay has also become active, with a series of financial activities being launched one after another.
I often use digital finance to refer to the application of digital technology in financial businesses. Digital finance is different from concepts such as Internet finance and financial technology. It covers both technology companies using digital technology to provide financial services, and traditional financial institutions using digital technology to improve their financial services. Both the new technology companies and traditional financial institutions are counted. Generally speaking, Internet finance and financial technology are more focused on technology companies, with little emphasis on traditional financial institutions. This may be because traditional financial institutions were not very active in the application of digital technology in the early days. The concept of digital finance emphasizes that both technology companies and financial institutions can apply digital technology to provide financial business, and the two may even merge with each other in the future. Technology companies need licenses to engage in financial business, so they eventually become financial institutions while traditional financial institutions also need to become technology companies in order to provide digital financial services.
In recent years, digital finance has thrived both at home and abroad. However, China differs from other countries in points of focus concerning the development of digital finance. Foreign countries pay more attention to concepts such as blockchain, distributed accounts, and Metaverse. In terms of specific business, foreign countries are more concerned with cryptocurrency, central bank digital currency, cross-border payment among other fields. Digital finance in China gives more emphasis to mobile payment (such as WeChat Pay and Alipay), online investment (such as Yu’ebao) and big technology credit (such as MYbank, WeBank and XWBank, etc.). In addition, the digital yuan that the central bank plans to launch is also a hot spot. By comparison, it can be seen that China’s digital financial products and businesses are mostly concentrated in inclusive finance, while foreign countries attach more importance to clearing and settlement, cross-border payment, accounts and other fields. Such differences are because each country is looking at one’s own pain points and trying to solve the problem.
It is true that inclusive finance in China is rather underdeveloped, and financial services are insufficient, especially services for micro, small and medium-sized enterprises, low-income families and rural economic entities. Apart from deposits, they have very little access to financial services. Therefore, digital financial products have become very popular in the market since launched. The Digital Financial Revolution in China, a product of a joint research project between economists at the Institute of Digital Finance at Peking University and at the Brookings Institution, describes how China is in the lead in transforming finance for the digital age. There is a chapter about changes in China's mobile payments describing what have happened in China, what the key points are, and what they mean. The book points out that such a revolution may not be particularly necessary for the United States, because personal payment services in the US are already very mature, and the use of credit cards and debit cards is convenient. In this case, creating a mobile payment tool will not create much value to Americans. But things are different in China. Before the emergence of mobile payment applications, most Chinese people lacked payment channels and most people made payments with cash only. There were very few places in China that allowed the use of credit cards, so credit cards have never become a very convenient payment tool. The strong market need is the reason why mobile payment is so highly welcomed in the Chinese market.
The rapid development of mobile payment is also fueled by digital technology that enables high service quality at the beginning of its launch, allowing platforms to achieve economies of scale and long-tail effects. Very few payment tools can have over one billion daily active customers like WeChat Pay and Alipay unprecedentedly do. In addition to platform technology, WeChat and Alipay made other technological improvements. For example, in 2010, Alipay processed 300 transactions per second, but it was far from enough for the mobile payment tools used by people all over the country. Now Alipay processes more than 500,000 transactions per second – a technological advancement that makes payments more convenient. It then introduced QR code payment in 2017 which is now used by almost every merchant along the streets. The data of self-employed merchants who received payments through QR codes were used to analyze the impact of the 2020 pandemic on China’s economy. It is therefore fair to say that mobile payment has become an indispensable part of people’s daily life. Digital technology completes the construction of platforms, and the acceleration of data processing improves the user experience.
Digital finance also makes outstanding progress in big technology credit. Lending to small, medium and micro enterprises used to be difficult in acquiring customers and controlling risks, but big tech credit builds on two pillars for the two problems.
One pillar is the platform that acquires customers with the long-tail effect and sticks one billion users on it. In addition to WeChat and Alipay, Douyin, Meituan, JD.com, and other large platforms also have a very large number of users, or potential customers, which is hard to acquire for traditional financial institutions. The solution to the customer acquisition problem is revolutionary: big tech credit will analyze customers within the threshold, evaluate their qualifications, and then find ways to convert them into credit customers. Today, financial services are available for anyone with a smartphone and a mobile signal on any piece of land in China.
By searching, socializing, watching short videos, ordering takeaways, or shopping online, the bulk of customers leaves digital footprints on platforms, which accrue and become “big data”. Big data is so powerful in monitoring borrowers’ behaviors and transactions and their comments on enterprises in real-time, all of which are critical pieces of information, while traditional banks usually evaluate enterprises based on their quarterly financial data.
The other pillar is credit risk assessment, similar to soft information acquisition in "relationship lending". Big data generally predict two aspects: the user’s repayment ability, or whether things can be done after borrowing; and the user’s repayment willingness, or whether the borrower is willing to repay the loans after things are done. The Institute of Digital Finance of Peking University has cooperated with the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) on related topics, using unconventional data, such as social networking, online shopping, takeaways, car-hailing, to predict the possibility of default.
Simply put, it is feasible to assess credit risk through big data. Two typical new Internet banks, MYBank and WeBank, both making lending decisions by assessing credit risks through big data, have their average non-performing rate lower than similar loans from traditional banks that mainly lend to large customers and whose small customers have higher non-performing rates. The benefits of big data risk control are: 1) limiting non-performing rates and proving the effectiveness of decision-making; 2) promoting financial inclusion by delivering banking services to small and micro enterprises and individuals. Except for providing services for small customers that are rejected by traditional banks, big data risk control can also record the lending data into the central bank's credit system. That is to say, the borrowers of WeBank and MYBank are no longer "blank credit users" (people with no credit history) for traditional banks and may obtain various services provided by banks.
To sum up, big tech credit can help platforms to acquire customers, accumulate data, and assess credit risks through big data analysis, which fully shows that the platform economy has changed the financial system in a revolutionary fashion. China's big tech credit is leading in the world, and, according to the BIS, the scale of the Chinese market ranks first in the world. Platform companies have created many inclusive loan products. One of the most effective methods is small-scale, short-term loans that are unattainable in traditional banks. Of course, this is not to encourage traditional banks to follow this model, because their service targets are different. The service target of big tech credit is a very important subject of inclusive finance and crucial to China's economic development.
IV. SUMMARY
To summarize this article into three arguments:
First, a platform economy refers to the economic activities in which platforms operate via digital technology. It brings changes in the "three ups and three downs". It is revolutionary. It brings many benefits. China is managing its digital platforms to eliminate irregular and disorderly behaviors; the regulation essentially serves to achieve better, innovative, and orderly development of the platform economy.
Second, finance is an important and indispensable sector in economic development. If handled improperly, there will be very serious consequences. Information asymmetry is the biggest problem in financial development, which can easily lead to systemic risks. Therefore, reducing information asymmetry for higher reliability of transactions is another important function of the financial system in addition to channeling funds. It is particularly difficult in the financial transactions of the objects of inclusive financial services because they are scattered and small in scale.
Third, platforms and digital technologies resolve many challenges to the financial system, especially the issue of financial inclusion. Mobile payment, online investment, big tech credit, and future central bank digital currency are hot areas with good development, and they all have outstanding inclusiveness. With the support of platforms and digital technologies, there will be more new development areas, such as digital wealth management, financial intelligent investment advisory platforms, as well as industrial chain, the Internet of Things, and supply chain finance. In conclusion, digital finance has achieved a lot in solving financial problems with the help of digital and platform technologies, and there is still a long way to go.
This is a speech made by the author at an event organized by CITIC Group. It is published on CF40’s WeChat blog on May 29, translated by CF40, and has not been subject to the review of the author himself.
