Sep 21, 2012 04:51 PM

Could the Future of Banking Be Free of Banks?


(Beijing) – Innovators and reform-minded technocrats have never ceased efforts to improve the way banks operate. This time, some foresee a revolution that means banks are no longer in the picture.

In recent years, cash-hungry small businesses have found an alternative to direct and indirect financing, i.e., borrowing from banks and raising money directly from the capital market.

China Investment Corp. vice president Xie Ping said that in 20 years a third financing model, based on technologies including mobile payments, cloud computing, social networks and search engine techniques, would have matured enough to rival other sources of fund-raising.

The new financing model would boast several advantages, he said. It would make payments more convenient, reduce information asymmetry and "allow borrowers and lenders to make transactions without going through intermediaries, such as banks, securities companies and stock exchanges."

Traditional banking has been challenged by the rise of Internet since Microsoft co-founder Bill Gates famously declared ten years ago that mortar-and-brick banks were dinosaurs in the 21st century. His attempt to acquire them and move banking online fell flat because of resistance from powerful bankers.

However, dozens of peer-to-peer (P2P) financing websites, firms that operate an electronic platform where people who need money and those who want to lend self-match, have flourished in China since 2009 as credit tightened.

Critics say these companies don't have necessary expertise and technologies like banks to assess loan risks. The banking regulator intervened last year, warning that some P2P firms were "evolving into illegal financial institutions attracting loans," as some operators shifted their business offline.

E-commerce conglomerate Alibaba Group is running a financing platform that lends to small entrepreneurs doing business on its website. The company can evaluate borrowers' credit worthiness based on user database records, such as their reputation, transaction amounts and customer reviews. This is what makes Alibaba's small loan business different and superior to other Internet-aided financing platforms, many experts say.

By the end of February, around 103,000 small business owners had obtained loans worth roughly 17 billion yuan through Alibaba's platform. The ratio of non-performing loans was only 0.9 percent, far below the ratios at many large commercial banks.

If Alibaba receives a commercial banking license, Xie said, its small loan business may exceed China Minsheng Bank and China Merchants Bank.

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