252 At the same time, with the help of big data and cloud computing technology, it changes the
existing credit rating and default risk evaluation mechanism. The input for the new credit appraisal system comes from the massive discrete data obtained in scattered markets; it can even
facilitate the resource allocation process according to market supply and demand. Therefore, Internet finance is not only to portray a new market landscape in China, but also to create a
continuous self-improvement and adjustment mechanism for market development.
3. Financial Mobility
Smart connection, a shift from fixed connectivity to mobile driving a proliferation of always- connected smart devices, the Internet is having an evolution too. It is estimated that the
smartphone market grew nearly 50 in 2013 to approach a billion units. While that sounds like a large number, the penetration rate in emerging markets remains low with the installed based in
China alone set to increase to a billion units by 2016. Extrapolating out five years, it is not difficult to image 1.5-2.0 billion smartphones shipping annually. Beyond phones, the tablet
market is estimated to surpass the notebook market in 2014 and ship more than 200 million units.
[4]
The use of mobile devices for financial transactions has substantially increased over the past few years. Mobile payment and mobile financial services have become important to the long term
strategies of banks, financial institutions and mobile network operators. The increase in mobile connectivity will facilitate financial innovation in the industry. This rapidly expansion is
occurring in all geographies. However, the mobile payment is a nascent sector and is believed that it can be a strong force to drive the China economic growth. Variables like smartphone
penetration rate and degree of mobile network coverage will affect the development of the Internet finance in China.
4. Main Streams of Internet Finance in China
Currently, there are three main streams of Internet Finance operations in China. Namely: the online paymentsettlement service, the peer-to-peer lending business and the selling of wealth
management products by e-commerce companies. 4.1 PaymentSettlement Service over the Internet
According to iResearch, the e-commerce market in China reached USD1.3 trillion in 2012, measured by gross market value GMV. It is expected that the market will increase to USD2.5
trillion by 2015. One of the most dominant areas of e-commerce in China is online shopping, which amounting to USD206 billion, 16 of the e-commerce market in 2012. By 2015, it is
expected the online shopping market in China will increase to USD560 billion, about 20 of the total e-commerce market
[5]
. All the above reflects the fact that there is a huge demand for Internet payment and settlement services to support the completion of online transactions.
Internet payment refers to the money settlement and fund clearing for B2B, B2C and C2C transactions between banks and third party payment institutions. The clearing and settlement can
be performed through either the traditional internet banking platform or the newly established third party operated payment platform. On top of the online transactions made through personal
computers, transactions are mainly executed through mobile device either to pay with a mobile at the point of sales terminal, where the phone can be used to pay with a virtual banking card in the
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
