China is the leading country in the use of innovations derived from Financial Technology, known as FinTech. Some of the advances observed in that nation could be replicated in other countries with significant favorable effects.
The support of technology in financial development has a long history. Global milestones in this area include the use of the telegraph and the transatlantic cable for intercontinental transactions, the first electronic transfer system of the U.S. Federal Reserve Bank, the credit card, ATMs and Internet banking, among others.
Although FinTech is part of this sequence of improvements, the potential scope of its changes represents a drastic break in the way of operating. It is a transformation of the financial system as a whole, with activities as diverse as cryptocurrencies, digital payments, alternative lending methods such as crowdfunding platforms, credit scoring, investments, insurance and automated advice.
The FinTech revolution has been led by startups, whose orientation has been, in principle, technological. These firms have sought to compete by offering more agile, efficient and lower-cost services, which are within reach, generally through mobile devices.
This movement has been made possible by several factors, two of which stand out
- The first is technological advances and available infrastructure, including the widespread use of the Internet, smartphones, blockchain, high-speed computing, cryptographic progress and machine learning.
- The second has to do with the dissatisfaction of large layers of society with the products offered by traditional institutions, characterized by high costs and cumbersome procedures. Moreover, in some countries, a high proportion of the population does not have access to financial services.
The pace of FinTech has been disruptive and has led financial institutions to begin a process of adaptation by investing in new technologies and partnering with technology companies. The benefits of this transformation can be enormous, in the form of increased competition and incentives for modernization. This can result in better and more accessible financial services for growing segments of the population, including, of course, those underserved by traditional intermediaries.
China is by far the largest FinTech market in the world, measured by both the value of transactions and the number of users of these services. There are several reasons for the wide acceptance of financial innovations in China, the most important of which is the lack of attention to the population and small and medium-sized enterprises by the banking system.
In China, large banks are state-owned and oriented to serve state-owned corporations. These institutions generate few incentives for savings, with controlled and low interest rates, while financing opportunities for households and businesses are limited and expensive.
Hence, the physical infrastructure of banks is small, which contrasts with a powerful telecommunications infrastructure and very high smartphone penetration. The success of FinTech in China lies in the fact that it responds to real needs of the population. Usage is driven, among others, by new e-commerce and internet conglomerates that offer multiple and diverse services, from payments, loans and investment funds to cab booking, travel reservations and social networking, in a comprehensive manner via cell phones.
Of particular importance for small and medium-sized companies have been the financing platforms. The spread of FinTech developments has been facilitated by initially lax regulation to enable their development. With the emergence of fraud problems, especially on lending sites, the authorities have adopted stricter prevention measures.
The development of FinTech in China suggests the high potential benefits that similar developments could have in other countries. The clearest parallel is the significant fraction of the population underserved by financial institutions.