Whether Traditional Finance will be impacted by Internet Finance in China?

Internet finance has developed faster than people would imagine in China.  While there is no uniform definition of internet finance so far NUCTAD (United Nations Conference on Trade and Development) identified internet finance as involving online brokerage, banking, insurance, and other financial services, delivered through the internet or online.  Although internet finance impacts traditional finance, especially in the amount of deposits, the possibility of internet finance upending traditional finance is not as pertinent as people may think.  We will give a brief introduction of internet finance, with specific focus on the impacts of internet finance to traditional finance in China, noting how the positive impacts may outweigh the negatives. 
 
Background of Internet Finance
 
The Description of Internet Finance
The description of internet finance should emphasize the 'internet' and 'finance'.  Thus, internet finance can be defined as taking full advantage of both internet technology and e-business thinking to be occupied in not only traditional finance business such as financing, investment, payment and settlement, but also new formed financial types through the involvement of internet into financial areas such as the third party payment, peer-to-peer lending, crowd funding, online wealth investment products.
 
The Popular Types of Internet Finance
 
Third Party Payment
The third party acts as intermediary in transactions between contracting parties to prevent e-commerce from deception.  Third party payment plays a crucial role in facilitating successful online transactions.  Alipay is the most famous third party payment platform in China, and it is an affiliate of Alibaba Group.  In 2014, Alipay can be used in international partner merchant websites to pay the money directly. 
 
Peer-to-Peer Lending
Peer-to-peer lending also known as P2P in abbreviation, which lending petty loan to individuals through a P2P platform without the participation of traditional financial intermediaries such as banks.  The same as the borrowers, the lenders could be individuals or private enterprises.  Comparing with traditional bank lending, P2P is "Financial Disintermediation", speedily and easily.  Ren Ren Dai is the representative P2P platform in China.  On its website has calculated that the cumulative turnover of Ren Ren Dai was 11.1 billion yuan by 24 September 2015.
 
Crowd Funding
Crowd funding isa large number of people funding a project orventurewhich they have interested in the idea but creators lack money to practice it.  These creators usually list their ideas in crowd funding platforms in Internet to attract people to fund it.  Varieties of purposes could be a reason for a crowd funding.
 
Online Wealth Investment Products
Online wealth investment products very similar as traditional bank deposits, while the difference here is that people save their money into online virtual accounts and receive more profitable interests.  For example, Yu'E Bao is an online wealth investment product belongs to Alibaba Group as well, and most people who showed interest in online financing products (about 70%) are more prefer Yu'E Bao in China.
 
The impact of internet finance on traditional finance in China
 
It is interesting to know that whether traditional finance would be upended byinternet finance in China.  Shanghai thought it is possible because of the rigid deposit rates control by regulations pushing money into shadow-banking products, which returns 15 times more interests than those conventional deposit accounts at regulated banks did.  Taking Yu'E Bao as an example, it attracted about RMB400 billion ($65 billion) investment in their online accounts from June 2013 to April 2014.  Soon, Baidu and Tencent two of internet giants in China following Alibaba Group's steps to participate in internet finance area.  In January 2014, according to statistics showed that banking deposits reach one trillion yuan. 
 
There is no doubt that the swift and violent development of internet finance has significant impact on traditional finance in China.  However, it is too early to say that internet finance will disrupt traditional finance.  May Yan of Barclays argued that although banks have suffered a compression on deposits, the deposits internet companies absorbed account for total banking deposits is still tiny.  A research of UBS investment bank institutions pointed out that: "even if a tenth of bank deposits flee to online products (a heroic assumption), it might cut the net interest margin at banks by just 0.1%."
 
Additionally, the relationship between the services of internet finance and the services of traditional finance is not completely competitive.  Therefore, It is possible that internet finance and traditional finance going to integration.  Though Yu'E Bao attacked the amount of banking deposit, internet companies and bank exists cooperative and complementary relations at least in the third party payment and P2P areas.  Third party payment based on the cooperation with internet companies and banks.  P2P targets the individual or small scale business which banks are not willing to pay attention to. 
 
Furthermore, internet finance accelerates the reformation and innovation of traditional finance in service and products.  For example, Guangdong Development Bank and E Fund Management joint launched the "Smart Gold Account", which has a higher deposit rates than general bank accounts, and comparable services as Yu'E Bao.  This probably means traditional finance may ameliorate selves in competition with internet finance to develop to a better institution than today's. 
 
Conclusion
 
We conclude that traditional finance is unlikely be upended by internet finance in China.  The reason is internet finance not only a rival but also could be a partner to traditional finance.  Moreover, the impacts of internet finance on traditional finance may be positive to the improvement of traditional finance on its services and products that leading traditional finance more adaptable to a new era.  

Steven Hsu is currently the senior consultant and managing director of Beijing Zhong Yin Law Firm. Prior to joining Zhong Yin in Beijing, Steven was a partner in Baker & McKenzie. In addition to being an attorney, Steven is also responsible for marketing and international operation of the Firm.

Steven’s practice mainly focuses on securities, financing, banking, funds, bankruptcy reorganization, merger & acquisition, VC/PE, international investment, foreign direct investment, enterprise legal risk management, family trust & wealth management, international and foreign-related arbitration, capital markets and general corporate.

Steven can be contacted on +886-2-2377-1858 or by email at steven.hsu@zhongyinlawyer.com.tw