Main Streams of Internet Finance in China

253 SIM card or pay through a mobile, by making a mobile web payment where the phone provides access to banking applications, e-commerce, and SMS services through the mobile network. The other driver behind the huge growth of online shopping is the continued penetration of Internet connection in China. At the end of 2012, Internet penetration was 42 nationwide, totalling 564 million users. More important, cities like Beijing and Shanghai have penetration rates of about 70. There are 25 provinces in China with penetration rates of less than 50. These provinces are growing their Internet population at double digit. By 2015, it is estimated that Internet penetration in China will reach 55, which most of the growth comes from those less developed provinces of the country. [6] All these require a robust cyber payment and settlement system to ensure successful fund transfer among various parties. 4.2 Peer-to-Peer P2P Lending P2P lending refers to the direct borrowing and lending between individual over the Internet. Owing to the interest rate liberalization is still not fully implemented in China, it induces the raise of P2P lending which somewhat is a response to the discontentment with current fixed deposits rate among the people. According to iResearch, the total amount of lending through P2P platform in China has reached RMB22.86 billion in 2012 with an increase of 271.40 as compared to 2011 [7] . Although the number of P2P lending companies keeps on increasing, quite a number of them exited the market or went bankrupt during the same period. It reflected that with the low barrier entry and without too much regulatory requirements on the sector, there is a high systematic risk in the industry. The interest rate charged by different P2P lenders ranged from 11 to 32, all were higher than commercial banks ’ lending rate [8] . This also implied that P2P credits are subject to higher default risk. It is expected the industry may go through a revamp, those with little capital or poor operation will be knocked out. On the other hand, with the Regulators are going to strengthen the monitoring of the industry, it is anticipated that P2P lending will revert to the normal operation afterwards. 4.3 Selling of Wealth Management Product Another major development in Internet finance is the launch of money market funds by various e-commerce companies. For example, Alibaba has launched Yu ’E Boa in June 2013 which brought a huge impact on China ’s money market sector. Yu’E Boa allows the customers of their payment service to invest the idle balances in a money market fund even at a minimum of one Yuan and can redeem the holdings at any time to pay for their online transactions. The idle balance was invested in the Zenglibao fund which accumulated to 250 billion Yuan in January 2014 and becomes the largest money market fund in China. In response to Alibaba ’s success, other e-commerce giants also paired up with other fund management houses to launch similar funds such as Baifa which launched by Baidu in December 2013 with Harvest Fund Management. [9] The acceptance of small investment amount and the feasibility on fund redemption, together with the higher than commercial bank saving deposit rate have become the major challenge to the traditional banking sector.

5. Problem of Internet Finance in China

The Internet finance has brought a ‘cat-fish’ effect to the China’s financial industry. It brings in competition, forces commercial banks to improve quality and services and facilitate financial innovation. In particular, the current pressure to commercial bank comes from the small amount credit financing provided by non-finance institution to small and medium enterprises, payment 254 and settlement services over third party payment platform and the selling of wealth management products over the cyber space. The existing regulatory requirements on Internet finance in China may not be able to keep abreast with the explosive rate of development in cyber space. Furthermore, the lack of understanding on this new ecosystem by Regulators also hinders the smooth development of the Internet finance. The dramatic development of Internet finance has finally caught the Regulators ’ attention. Let’s imaging that millions of investors have participated in a single money market fund of about billions of Yuan, Regulators have to evaluate the associated risk to investors, ensure its safety and smooth operation of the products. The risk is amplified by the huge number of investors involved with the Internet. The low barrier of entry to the Internet finance, such as the P2P lending sector, can increase the degree of participation by the public. At the same time, it will also increase the risk of default by borrowers, or investors owing to the inadequacy in sources of capital. In April 2014, the People ’s Bank of China the Central Bank, together with the China Banking Regulation Commission CBRC, has drafted a set of guidelines to regulate the Internet finance sector. The CBRC will responsible for regulating P2P lending and the Central Bank will regulate third party payment services over the Internet. On the other hand, Chinese banks ’ resilience to the growth popularity of selling money market fund and the continuous leaking of deposits from the banking sector into the non-financial e- commerce companies has finally sparred with each other. It leads to the drawing capital away from bank accounts and increases the funding costs of commercial banks. In view of the potential risk involved, the Central Bank has suspended payments through code scanning and virtual credit cards in March 2014 before the issuance of the guidelines mentioned before. The four largest commercial banks also cut the existing interface which made with their bank cards to pay through Alipay in the banking system. The Big Four banks also lowered the maximum payment amount allowed per transaction and the total daily payment limit that make with Alipay. However, it is claimed that the largest challenge to the financial reform rests on the market competition brought by the new economic to the existing stakeholders. The protection policy towards the Big Four commercial banks and financial institution, together with the crowd out attitude of the commercial banks towards the e-commerce companies ’ cross-border operations, all have suppressed the further growth of the Internet finance. Furthermore, Regulators and banks have lagged behind Internet companies in terms of user experience, accessibility and customer decoding ability. The existing regulatory frameworks may not be able to cope with the needs of the new industry, which to certain extend has halted financial innovation.

6. Conclusion and Recommendation

The amount of data is increasing at an exponential rate and extracting the nuggets of information that can benefit business is becoming a strategic issue for many e-commerce and Internet companies. Internet finance includes institutions which provide money payment and settlement, P2P lending and offering of wealth management products over the cyber space. The emergence of Internet finance also exposes the issues during the financial reform process in China.