Digital Technology Boosts China’s Inclusive Finance Strategy

Digital technology has given Chinese people previously shut out of the banking system access to financial services, and will improve the ability of farmers, small businesses and individuals to get loans and make investments online, Xu Zhong, head of the research bureau at the People’s Bank of China, said Thursday.

But growth of the industry has been accompanied by an increase in illegal financial practices and fraud, and regulators must remain alert to the risks and fight criminal activities, Xu told a conference on digital financial inclusion in Beijing. He also warned financial institutions not to neglect the risks involved in online finance.

With almost 600 million of China’s 1.4 billion population still classified as living in rural areas, the government has stressed the need to develop inclusive finance, an initiative backed by the United Nations that calls for universal access at a reasonable cost to financial services including savings, payments, credit and insurance provided by sound institutions. In December 2015, the State Council issued a five-year plan to promote inclusive finance, including a policy to develop rural micro-credit organizations and provide impoverished rural residents with financial services.

The widespread use of mobile devices in China has helped boost digital finance. The number of mobile phone accounts stood at almost 1.4 billion at the end of June, with 42.7 million new accounts opened in the first six months this year, according to Ministry of Industry and Information Technology data. The number of accounts with faster 4G cellular network technology has reached 888 million.

Big data

The proliferation of companies offering customers the ability to make payments, save money and take out loans via the internet and through mobile devices has transformed the financial services industry. Platforms such as Ant Financial’s Alipay and Tencent’s WePay have allowed people and businesses who can’t physically get to a bank or who are turned away by big lenders to get access to many financial services. By tapping into big data technology, digital finance is also seen as a way to reduce credit risks associated with lending to the poor.

But in spite of the rapid development of digital technology and the online financial services industry, Xu said China is still facing a digital divide, a gap between the “haves” — people who can easily access the internet and are confident using technology — and the “have-nots.” The central bank official urged financial institutions to develop more online financial products that are easier to use for those less tech-savvy clients.

But Xu also warned of the dangers of criminal activity, pointing out that many consumers have been duped by online lenders who absconded with their money.

“While boosting access to financial services and the general development of the entire finance industry, advanced technology can be used by lawbreakers to sell wealth management products with returns that are too good to be true,” he said.

He urged regulators to crack down on illegal practices such as misleading marketing, while at the same time ensuring that regulation doesn’t suppress innovation.

The spread of digital technology and internet use has significantly lowered the costs for financial institutions to attract new customers, Xu said. But the challenges of the business, including liquidity risks and the creditworthiness of borrowers, remain the same. Internet technology may conceal such risks and make them hard to discern so the regulatory system needs to be able to control those dangers, he added.

Xu also stressed the importance of protecting customer data, and said that financial institutions must ensure they follow their legal responsibilities on data security.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)