China: A long journey beckons: after the first year of e-financing era

Last Updated: 5 May 2015
Article by Roy Zhang

Some people believe that the e-financing era started in 2014, nevertheless the 2015 year signifies the arrival of spring for this industry. Indeed, there will be a great growth in the e-financing sphere this year.

After decades of development of the traditional financial industry in China, banking licenses have become increasingly scarce. Meanwhile interest rate liberalization in China is still in its initial stages. Therefore the environment is not conducive to the development of new generations of financial products. Financial regulators tend to impose excessive rules upon the industry as a result of the lack of investor protection as well as the lack of a class actions system. Some say that a registration system should be implemented and that a detailed information disclosure requirement instituted. Even if everything is clearly documented, once a party breaches a contract, how can be the other party achieve a remedy? Under the current regime, a lack of mandatory punitive measures leads to fairly low default cost. Additionally, the disclosure of false information will not necessarily result in severely unfavorable consequences. This is the general background and the reason why financial regulations are becoming increasingly tough.

Inspired by three landmark events

Even though strict financial regulations are enacted, people continue to pursue assets in the marketplace. What cannot be ignored is the huge demand for financial products from individuals and private enterprises, especially for small and medium enterprises as well as micro businesses. Several landmark events occurred last year offering market participants an insight into the demands and changes in the financial market, providing preconditions for the development of e-fi nancing including: a) huge demand in the market and b) financial regulations not necessarily "hindering" e-financing and the demand being satisfied by similar financial services. So what can we learn from those landmark events?

  1. Yu'e Bao

The creation and popularization of Yu'e Bao, an on-line investment fund, is the first landmark event enabling us to appreciate the changing market. Within half a year, it attracted a scale of investment exceeding two hundred billion RMB, which is inconceivable in the past. Nevertheless, another similar financial product would not necessarily make such a hit today. What we can learn from Yu'e Bao is that it appeared in the right place, at the right time and satisfied the market demand at that time.

  1. Virtual credit card

The second landmark event occurred when China CITIC Bank cooperated with Tencent and Alibaba to jointly issue virtual credit cards. This has had a huge impact on the traditional credit card business. Prior to this, UnionPay did plenty of groundwork to build a traditional credit card system, dedicated to achieving the goal of interconnection. We could find unified POS machines installed and utilized with the logo of UnionPay appearing on the counters of many signed up stores. It demonstrated that a high quality business environment had been established.

However, all of a sudden, internet companies are starting to cooperate with many stores in the same way, enabling many users to connect their credit card accounts to the payment system. The public began participating in the development of the fast payment system and discovered that it was an innovative product several years ago. While it has become standard nowadays, the fast payment system made a strong contribution to consumer market development. Although products like "Baitiao"(namely,"IOUs") are not called "virtual credit cards", they share similar functions. If we promote e-financing products and services which perform like credit cards and consumer finance in order to satisfy the financial demands of individual customers, these products are essentially the same. Accordingly they will revolutionize the current credit card system.

  1. Hongbao

Another landmark event is the "Hongbao"("lucky money") phenomenon. Using Hongbaos, people are able to make transactions conveniently via mobile phones, and plenty of business owners are aware of the social finance and social e-commerce being the development trends in the future. Wechat and Alipay provide a social and transaction platform not only for their members and consumers, but also for those who wish to utilize the mobile internet to promote their marketing plans. Numerous users are accustomed to making mobile payments on this platform. So this landmark event will clearly stimulate the development of the e-finance market.

The three events mentioned above deal with products which do not fall within traditional financial regulation covering the introduction of new products and risk management. This is understandable because traditional financiers always comply with established macroeconomic frameworks depending upon the classification of each financial product (such as investment banking, commercial banking and fund businesses). In any event, investors do not find it complicated because they are fully aware of the pay back they want as well as the risks they have to endure. E-financing attracts users, enabling them to make transactions conveniently and to purchase the financial products they want. This is a developing area of the market that we can see from these landmark events.

We can conclude two key points from those products. One concerns the payment system. It is either developed by ourselves individually then connected with other users' accounts, which is difficult for novices, or we can use services provided by UnionPay, Alipay or Wechat, which results in the creation of a public infrastructure. I find the latter one preferable. The second key point is that we should design our own products based on the environment and our strengths. We must figure out where our focus lies. For example, the financial systems of Alibaba are established on Taobao and Tmall, Tencent is based on Wechat and JD (Beijing Jingdong Century Trading Co., Ltd) on JD mall. The same principle applies to every web newcomer who has to decide whether its business is vertical e-commerce services or entertainment and media industry or something else. This involves a great deal of financial complexity, including the following three aspects. The first is the requirement of payment itself, the second being the cost of capital, i.e. transaction made today and payment completed tomorrow. The last aspect is the cost of credit, i.e. which party bears the cost? Financial products can be provided by dealing with a combination of the aspects above, on the other hand if one uses license holders, one can use the "channel services" (such as the channel between banks and trust companies or between banks and security companies) provided by licensed financial institutions. When e-financing products of licensed financial institutions are eventually presented to customers, they may have a complex underlying structure but they are easy to use.

The new market niche of licensed credit investigation services

The People's Bank of China issued eight licenses to authorise third-party credit investigation institutions in 2014. We can now see that these will open up another big market. Users will place more value on their credit records. Additionally all kinds of financial products may be developed based on these records. For example, some companies take advantage of "telemetry" technology to collect operational information about their trucks, including their departure point and destination. They can easily find out where those trucks leave from, how long they will stay, where they will refuel, even incidents of violating traffic regulations or accidents. What can we do with this information? A simple financial calculation can be made with this information to estimate how much a driver can make in a year. Based on this data, companies can decide whether they should lend money to drivers to buy a second truck, whether they should hire someone else to buy a second truck, doubling their business volume and increasing their efficiency. Despite a lapse in judgment sometimes, companies still know exactly how much a person can make in a year, how much they can lend to him and how long it will take him to pay back the loan through his business operation. This is similar some securitization products, where loans are issued based on cash flows.

I wish to share some of my reflections on the industry. First of all, the arrival and growth of the e-financing environment is of great significance. After all, what really matters is whether customers are willing to use your products and whether your products are userfriendly. Secondly, accounts and cash rule. Whoever controls more account information will attract more customers, and thus will have more access to information about transactions and cash. It is easier to deliver targeted advertisements, seal deals or develop new products based on this information because it is real and complete. Last but not least, companies must be innovative. If we look at traditional enterprises or even traditional internet companies, we can see that during their transformation process, what frustrates them the most is how to switch from traditional mechanisms to new ones. This is actually a very complicated process. However, the market has witnessed many successful cases of business transformation over the years and it goes without saying that there will be more in the future. We are exhilarated to see the huge potential for new market development, the dynamism of the e-financing market, and more importantly, people's enthusiasm about mobile and internet payment brought about by "Hongbao" craze.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions