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Li Renjie: People-Oriented Perspective of Internet Finance

(http://www.cnfinance.cn/magzi/2015-09/01-22320_1.html)

Time: 17th Issue, 2015   Source: China Finance magazine

For a dozen years, the rapid development and extensive influence of internet technology have transformed many industries. In 2015 Government Work Report, it stated "...to develop 'internet+' action plan, integrate mobile internet, cloud computing, big data and internet of things to modern manufacturing, and promote the healthy development of e-commerce, industrial internet and internet finance", "internet+" hence becomes a hot topic for investment community and general public. I will express my ideas on "internet+" and internet finance from a people-oriented perspective.

The Development of Human Beings and Virtual Urbanization

People are animals living in groups. In human's historical development process, they have gathering in bigger and bigger groups, and have increasingly close interaction with each other. It appears the progress from hordes, villages, towns, modern cities and metropolitan areas, while the basis is the constant improvement of technology and productivity. Historically, the emergence and advancement of cultivation skills, development and deepening of industrial revolution all promoted urbanization significantly. After the invention of internet, the urbanization process is further facilitated. It not only makes existing cities to be more "intelligent" and "inclusive", but also creates a "virtual city", an all-encompassing and people-oriented city. While steam engine and electricity revolution are about improvement of "physical" productivity, the internet technology revolution is essentially a profound change of how people connect with each other. From Web1.0 to Web2.0 and Web3.0, the internet develops from one way communication to two way interaction and internet of everything, thus creating a rich and complete virtual universe. In this universe, there is no more physical distance, and communication will be limitless in time and space. The information people have is no longer short and lagged, but rather rich and transparent. The human's autonomy, creativity, value and leading role will be increased substantially. In this context, the improvement of living standard and development opportunities from traditional urbanization will be more obvious. For example, in the past, it took collective efforts of many experts and scholars and consumes large resources to compile an encyclopedia, and now Wikipedia can be contributed by any people, thus close to recognized source of knowledge and available to every person free of charge. It is an excellent case demonstrating the internet spirit: open, equal, cooperative and sharing. With the development and wide use of various sensors, including wearable equipments, human being's behavior will be recorded more frequently and accurately, and "virtual person" in the virtual society will be increasingly close to real person in real society. The virtual urbanization in mobile internet times will be less "surreal", and become understandable reality for more people.

Comparing to traditional urbanization, virtual urbanization stemming from technical development of internet has many advantages. For example, traditional urbanization usually requires huge infrastructure construction, and there are boundaries for the expansion of cities, often causing problems like slum, urban crimes and environmental pollution. While virtual urbanization also needs large initial inputs, the marginal costs can be reduced constantly. As a result, from the view of technology and economics, it has no boundaries of expansion, and urban problems can also be avoided. Thus the virtual urbanization should be an important orientation for policy makers.

Within the framework of urbanization, it is easy to understand why internet finance could flourish in our country. The core of finance is the collection, processing, exchange and disclosure of information, which makes it fit for operation on the internet in virtual digit. This is the basic condition for internet finance to become a new type of operation, and also the common conditions of all countries. However we can see that, among major economy worldwide, the internet finance often booms more vigorously in developing countries of lower urbanization level. The reason is that with lower urbanization level, a large number of population are outside the coverage of modern financial institutions and there often are severe financial repression in these countries, which provide vast room for the development of internet finance. Take our country as an example. With relatively low urbanization level in our country and gaps between regions as well as urban and rural areas, the coverage of traditional financial institutions are greatly limited. And severe financial control and underdevelopment of financial market make the public have less financial service than expected. These problems are either very difficult or take a very long time to solve in the traditional urbanization framework. But such huge demands and market blank highlight internet finance and even provide it with "late-mover advantage", a possibility to catch up with the world in the finance area. Seen from the results, internet finance not only expands the coverage and client group of finance, improves the benefits to finance consumers, but also prompts the finance revolution. It thus facilitates the progress of both the traditional and virtual urbanization.

The Development Trend of Internet Finance and Value of Human Beings

At present, there are two competing and mutual-facilitating modes of internet finance, i.e. "finance + internet" and "internet + finance". The main body of "finance + internet" is traditional financial institutions, and the major characteristics are off-line service going online and electronization of service process, thus achieving the aim of saving costs and controlling process. Although some effects have been made, but here internet is more considered as a tool, and the thinking, management and business mode of financial service have not been transformed fundamentally. The main players of "internet + finance" are those internet companies expanding to financial service. By using mobile internet, cloud computing and big data, they are exploring the transformation of financial service mode and even business mode. In the times of PC, internet finance is dominated by "finance + internet". Entering the times of mobile internet, based on more abundant data and faster computing, internet companies have made great breakthrough, and could engage in long-tail market such as small- and mini-sized enterprises and retail market in a wider and deeper way. In the long run, with the development of virtual urbanization and popularization of various sensors, data and information on internet will be more rich, and the virtual and real world will be close day after day, and "data person" online will be increasingly identical to "real person" offline. The two modes of internet finance will arrive at the same end by different means, enter an era with data driving finance, thus enabling revolutionary change in financial service.

At the same time, internet finance will also form a pattern of "platformization" plus "professionalization". Regarding structure, platform will be the main carrier and channel of financial service in internet times, which is determined by the decreasing of marginal costs realized by internet. Certainly, platforms are also diversified, including comprehensive and entry platforms like Wechat, and also various professional and vertical platforms, thus creating a connected, complementary and co-existing status, similar to the co-existing of metropolitan and small towns. Regarding service form, in the times of internet, professional financial service still has significant value, rather than becomes decentralized and disintermediated as deemed by some extreme views. Because the essence of financial service is the controlling and management of risks, analyses and screening of financial data, which still needs professional institutions and professionals to analyze, screen, compare and apply. It is impossible to expect "everyone become an expert". Without the support of professional capabilities, data are probably only "rubbish" and "noise", leading to incontrollable risk and finance disasters. In another words, more information, less trust. At present, a lot of "platform" emerges like mushroom after rains, but many of such platforms have no professional capabilities and doomed to be eliminated.

Following the above two trends, the function and value of human beings will improve remarkably. Along the development of internet finance, the transfer costs between different financial service have reduced, hence the loyalty of clients also lowered, and the change of technical and business mode are more frequent and hard to predict, causing original platform being easily shocked. For traditional financial institutions, the barrier function of location, physical channel and financial license are clearly downgraded. In total, the function of "things" is decreased, while the value of "human beings" is amplified. Therefore, no matter its financial service platform or traditional financial institutions, it's a core task to attract, motivate and retain talents for the existing of a platform or organization. Against such background, financial institutions have to change their mind by abandoning the ideas of talents affiliated to capital and business operator and embracing the ideas of capital and business operator should seek talents. And they should pay attention to improve the quality instead of quantity of talents, and make efforts to build entrepreneur and experts based team. Moreover, the system and mechanism related to talents also have to be adjusted. For example, traditional financial institutions should change its over-rigorous industrial-like management approach, and adapt to innovative model of iterating improvement in the times of internet, break the hierarchical type of organization and promote flexible organization. They can even rebuild organization with enough authorization outside existing system, to authorize frontline staff with more power to allocate resources and respond development rapidly. In addition, financial institutions can break the practices of setting salaries according to administrative levels and egalitarianism, to realize "more pay for more work, more pay for better work". Furthermore, financial institutions may also try partnership, stock ownership incentive and other initiatives, so its key talents can share benefits, ambitions and responsibilities with the enterprises.

Financial Regulation and Management of Human Beings in Times of Internet

In the times of Internet, financial regulation is still indispensable, and even more important. Financial regulation should attach importance to both encouragement of innovation and regulation management. On the one hand, by realizing the significance of innovation in internet finance, including advancement of service efficiency, improvement of consumer's experiences, exploration and breakthrough of financial revolution, the financial regulator should adopt a moderately easy attitude towards financial regulation. On the other hand, it must be realized that, like management of real cities, the "virtual cities" on the Internet and internet finance also needs to be managed and regulated, and cannot be left indulgently. Certainly, the regulation in the times of internet must keep up with the times, and distinguish from the old style of regulation. Firstly, the regulation idea should change from market access to behaviors. In the past, financial regulation usually starts from access, sets certain standards and thresholds, and goes to administration approval. To some degree, the internet finance today is voluntarily formed, and creates an established fact by engaging into financial area in various of cunning ways. In such a context, while the regulator may respect the "reasonability of surviving", it should also require new comer to obey "game rules", restrain their behaviors and protect consumers' rights; and for financial institutions, the emphasis of regulation should also be put back, so the regulation environment can be fairer. Secondly, change from regulation by institutions to regulation by functions. In the past, it is generally accepted that regulation by institutes can concentrate on the crucial points of financial service. However, with a more complex financial type of operation, simple regulation by institutes is easily leading to regulatory gap or repeat regulation. For example, some internet companies have diversified financial businesses which may be regulated by CBRC, CIRC and CSRC respectively, but not by a specific body comprehensively. For this, only regulation by functions may deliver the results of regulation. Third, regarding indicators, change from standard regulation focused on risks, capitals and liquidity to emphasize on stability of platform, security of technology, accuracy and completeness of disclosure. It is because those old indicators are not useful for various new financial service platforms. For example, platform is light assets, thus capital adequacy ratio is not applicable here; and business of platform are basically off balance sheet, and liquidity is not a problem for them, thus liquidity indicator is not applicable too. At the same time, the stability of technology is quite important for platform. In the past few months, some financial service platform and institutions faced downtime, interruption of service and other problems, indicating immature technology. These problems deserve more attention from regulators.

The shift of financial regulation may take a long time. In the process, the emphasis on regulation of "human beings" will be helpful to seize the key and solve problem in a timely method. Suggestion: First, Strength the effectiveness of financial regulation system. By various kinds of innovation and de facto mixed operation, internet finance contributes to the fuzzyness of regulatory boundaries. The coordination mechanism of "Central bank and CBRC, CIRC and CSRC" should be strengthen, which would basically ensure roughly same regulation for similar business conducted by different kind of organizations, and more fair requirement and restraint for similar behaviors of different individuals. Second, use individual behaviors as the grab of regulation. In general, the position and influence of individuals, comparing to organizations, are increasing in the times of internet, so should corresponding responsibilities and restraints. On the one hand, "responsibility of sellers" should be emphasized, and financial service provider should be asked to perform its duty on investor education, investor classification, review of marketability and disclosures. On the other hand, "responsibility of buyers" should also be emphasized, as they have enhanced ability in identifying and preventing risks with increased information, autonomy and options. They should bear certain risks within its responsibilities, and cannot always blame banks or platforms when encountering risks. Furthermore, by using modern technology and information communication channels, the potential destructiveness of individuals can be enormous, even creating "systematic" risks in the near future. Therefore, some measures in media management could also be adopted, such as set up specialized "check point" for communication of financial information, eliminate false financial information timely, and hold individuals who create and disseminate false information deliberately accountable. Third, improve regulation and analyses tools. The regulators should widely use modern technologies like big data and cloud computing, manage individuals in an accurate and micro way, sink regulation gravity and improve the initiative of regulations. Forth, improve the effect of "rule of law". As a new type of operation, internet finance is full of innovations. The existing laws and regulations cannot accommodate to the changes in practices, and longer legislative cycle in our country makes laws and regulations more lagged behind. In such case, we may choose to learn from Anglo-American law, promote the establishment of new game rules by certain precedents and cases, and improve the level of law enforcement.

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