Hainan home for Internet-sourced financing

As Hainan province prepares to become a home for Internet-sourced financing operations, analysts Zhang Yanming from China City Construction Holdings and Zheng Jinyu from the China Banking Regulatory Commission, help explain the innovative sector:

People call the year 2013 the first year of Internet finance as many distinctive enterprises emerged in China's online market.

They were like a breeze stroking the country's financial industry, gradually changing the ways people borrow, save and pay for things. The innovations they created make China's financial market more effective, rounded and friendly.

Internet finance has even generated excitement that it will change the established financial system for good.

It is also a boon for business expansion in local markets.

One example is Alibaba's recent move to develop cooperative projects in Hainan province.

The country's top e-commerce portal now plans to build a logistics base, data port, office for entrepreneurs and a Taobao University in cooperation with the Sanya government and a demonstration zone in the province.

On Feb 10, Luo Baoming, Party chief of Hainan province, met with Ma Yun, founder of Alibaba, in Haikou to initiate projects in big data, e-commerce, logistics, creativity and the cultural industry.

"Alibaba will give full support to those projects in Hainan and aims to make it an example for others," Ma said.

Major models

There are several models for Internet finance, including mini-lending, wealth management and third-party payments. Each offers advantages that conventional financial tools are unable to reach.

One example is Alibaba's mini-lending - small loans made by the company to stores on its website marketplace Taobao.

Under the trading platform, transaction data from the stores including sales volumes, transaction velocity, cash flow and first-hand information are available for assessing an enterprise's risk.

Finance is all about pricing risks and information is the basis for pricing.

If the massive transaction information is able to be analyzed for patterns and correlations by big data, the problem of information asymmetry between credit, e-stores, suppliers and mini-lending, will be greatly alleviated.

A benign financial ecosystem on Taobao is achieved because small enterprises crying for liquidity assistance can gain financial support more easily.

At the same time, lenders will enjoy the profits from the extraordinary capacity in fast and accurate risk assessment.

Mini-lending is in sharp contrast to the conventional models of lending by banks.

Bank decisions to offer loans are mostly based on the enterprises' past financial statements.

In contrast, mini-lending is based on dynamic information from real-time transaction data. With the help of big data and cloud computing, mini-lending has an edge in assessing the risks.

In other words, it is the pressure and accurate risk assessment that make mini-lending prosperous.

Another model is peer-to-peer lending to unrelated individuals or "peers" without going through traditional financial intermediaries such as banks or other financial institutions.

P2P helps avoid financial intermediaries, making fund allocation more efficient, economical and swift.

The Yu'E Bao financial product at Alibaba offers a higher annual return than banks can offer.

By the end of 2013, there were more than 43 million users and capital of 185.3 billion yuan ($30.3 billion) on Yu'E Bao.

Offering convenient access and a higher return rate to investors, it is also highly liquid - members can withdraw money freely at a constant interest rate.

The success is partly the result of the "long-tail effect" of selling small volumes of hard-to-find items to customers.

The seller can reap similar benefits to those selling a large volume of popular items to few customers.

In addition to online lending and wealth management, third party payment is also an important innovation.

There are now more than 200 million users of WeChat, Tencent's popular mobile messaging app.

But WeChat is something more than just a communicating tool - it can reshape the way people pay for things.

Being convenient for payment is a bonus brought by mobile information technology.

Positive impact

Innovations in China's Internet finance are vital to strengthening the country's financial system.

Various products have enriched the existing financial tools and opened up more territory for those that could not gain financial support or rarely enjoyed superior financial services.

When conventional financial channels decline the capital demands from small-sized enterprises, mini-loans and P2P lending are helpful alternatives.

But there are both challenges and opportunities ahead for sustainable development.

The first hurdle is how the innovation of Internet finance can reach a higher level.

Despite its advantages in attracting customers and funds, the most representative product of Yu'E Bao, for example, is based on the money market, mutual funds and large contracted deposits with a financial institution.

In essence, it is simply the extension of resource allocation at financial institutions.

Some online wealth management products offer super yields to attract customers that are subsidized by the company's own revenue.

That is not sustainable and Internet corporations should be concerned about how to get core competence in financial resource allocation.

Although some Internet finance corporations are involved in direct finance by facilitating connections between savers and lenders with advanced information technology, the challenge is that the localization of such services departs from its nature.

Whether P2P or crowd-funding, the original innovation is to match fund suppliers with demands directly by using online big data and cloud computing. But China's social credit system is still a work in process, and most Internet funding corporations create their own fund pools, which makes them bank-like operations.

As well, some illegal funding raising or fraudulent operations makes self-discipline and governmental regulation more urgent than ever.

The prosperity of Internet finance partly relies on the reform of finance, such as interest rate liberalization.

It does make the financial system more inclusive and effective by injecting diversity and competition.

The industry should not be satisfied by short-term achievements and profits. It should prepare for the challenges in future development.