Closer Look: Gov't Did Well to Free up Net Banking. It Should Do More
(Beijing) – The recent opening of Internet banks marks the beginning of a new chapter for Internet finance, which developed largely outside the scope of current regulations.
Tencent Holdings Ltd.'s move to open Shenzhen Qianhai WeBank and Ant Financial Services Group's founding of Zhejiang Internet Commerce Bank would not have been possible if the regulator had not pushed ahead with reforms to allow private companies to set up banks.
It needs to do more, and so do other financial regulators.
To begin with, Internet banks are governed by regulations designed for privately owned banks, which face a 30 percent limit on the amount of shares the biggest investor can own. Regulators say the ceiling prevents a controlling shareholder from having too much say in how a bank is managed.
Isn't that what we want with an Internet bank? Because it's such an innovative and potentially risky endeavor, we want the majority shareholder to align its interests with the bank's development, and this can only be achieved by permitting it to hold more shares. There is hardly any logic behind capping an investor's holding in an Internet bank at 30 percent because it only discourages the bank from being innovative.
I don't think regulators want to slow the development of Internet banks. Rather, they have simply inherited an old rule without giving it much thought.
One thing needs pointing out: both Alipay and Tenpay, the third-party payment services offered by Ant and Tencent, respectively, have become more than more like a bank and they both have big markets. Alipay has more than 300 million registered users and Tenpay has more than 100 million. The Industrial and Commercial Bank of China – the country's largest bank by assets – has only 180 million online users.
With Alipay and the small loan business Aliloan, Ant has already been offering three of a commercial bank's most essential services: deposit, lending and money transfers. It has marched into the field of wealth management, another important banking sector, with Yu E Bao and the like. Given its huge size, regulators should have started developing tailored rules for its banking operations a long time ago. This would perhaps include requiring it to have a bank license and setting aside reserve capital.
In some senses, Alipay does some things not even a commercial bank can do. In online payments, it has been virtually playing the role of China UnionPay, the only company the central bank permits to clear domestic interbank payments. Even though many of the large banks are under pressure to cease such cooperation with Alipay, there are many rural banks, credit unions and village and township banks eager to fill in the gap. How to regulate this relationship is something the financial regulators have yet to figure out.
Having said this, Ant, which is affiliated with Alibaba Group Holding Ltd., probably never wanted a bank license so soon because it comes all sorts of restrictions that have blocked traditional banks from innovating and upgrading.
Regulators are not blind to this, but there is little they can do under the circumstances. The regulation of financial activities in China is fragmented and regulators lack coordination. Take Ant, for example. Alipay is regulated by the central bank; its small loan and private bank operations are supervised by the banking regulator; and Yu E Bao is watched by the securities regulator. Regulators are concerned with only their field, and there is no supervision over Ant as a whole. This is clear evidence that the current financial regulatory framework has failed to keep up with changing times.
One way to improve regulation is to require Internet companies with banking businesses to spin them off as subsidiaries that can apply for financial licenses. Meanwhile, for the sake of fairness traditional commercial banks should be allowed to do the same and set up subsidiaries that compete on a level playing field with those of Internet companies.
Big data is also important to Internet banks. Both Tencent and Ant pride themselves on their data mining abilities, but this should be separated from their financial business. They could set up a subsidiary just to handle credit data business and sell products to not only themselves but all eligible buyers. This can help ensure the parent company cannot misuse credit information, and it should be written into law.
(Rewritten by Wang Yuqian)
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