Asia Global Institute

In Conversation with Liu Mingkang: On Mobile Internet Finance

Wednesday, September 16, 2015

In Conversation with Liu Mingkang: On Mobile Internet Finance

Liu Mingkang, Asia Global Institute’s first Distinguished Fellow, discusses his recently-released mobile internet banking report.

Q: What made you want to look into the phenomenon that is mobile internet finance in China?

Nowadays, everyone is talking about creative disruptors, and one of these disruptors in the area of finance is mobile internet financing. People today are using mobile devices and instruments to carry out their financial activities, including settling their payments and carrying out P2P (peer-to-peer) lending.

Mobile internet financing is also being used to carry out financial activities such as crowdfunding and purchasing insurance directly instead of going through an agency. I do think that in the future, mobile internet financing will continue to flourish. This phenomenon will reshape the philosophy of financing, and reshape the structure of the traditional banking industry – but in doing so, mobile internet financing will also cause huge challenges to traditional banking.

Q: What did you find through your study?

We undertook the task of carefully observing the risks involved in a huge, evolving industry, and have made five conclusions and discoveries:

  1. Beyond a certain amount, the larger the loan, the larger the non-performing loan size
  2. The leverage ratio of the borrower has a high correlation with their credit service performance – the higher the leverage ratio, the larger the non-performing loan size
  3. The risks involved with NPLs (non-performing loans) increase if the loan is conducted across jurisdictional borders.
  4. Collateral and guarantees don’t matter as much with regard to small- and micro-sized loans. This means that we can shorten the time needed, and simplify procedures involved in credit appraisals. We can then also give applicants quick responses to their loan requests.
  5. We have been able to identify the primary borrowers who use these channels. These are owners of small- or micro-sized enterprises. We found that if lenders extend credit to a person who is running a start-up, or a small enterprise, they are likely to encounter less risk than if the loan is extended to a company itself, because owners want to preserve “face.” They need a good track record to prove their financial standing.

From these conclusions, we have been able to determine that, with certain conditions, there is a need for China to forget about traditional regulations and supervision where mobile internet finance is concerned. We propose that financing companies will need to build up their own strengths in-house, and will need to make full use of industrial associations in order to carry out self-regulation and supervision.

Outside of this, there is also a need for external regulation and supervision – risks need to be monitored. Transparency is very important in this regard. At the same time, companies and persons who engage in mobile internet finance will need to know and implement the basics of running a financial practice – anti-money laundering procedures, anti-terror financing, and cybersecurity. These are important for companies to safeguard and protect the privacy of their customers.

Q: Who stands to benefit the most from this report?

I think this is of benefit particularly to the “new new” practitioners looking to innovate. They need to know that it is critical to set a firm limit on the conduct of their business, in terms of risk protection. It is also of benefit to regulators and supervisors, who can be informed on developments and can respond by taking steps that are right and necessary.

Q: Will regulatory supervision impinge upon the interests of the people that mobile internet financing was meant to help?

Regulation and supervision are not meant to interfere in the spirit of innovation. These regulatory requirements are meant to show companies that there are areas within the financial space where they can excel in, like considering the customer experience, satisfying customer needs at a much faster pace, and conducting credit appraisals more quickly.

We do need inclusive financing, which is a unique strength of mobile internet financing that must be protected. Sustainability of a business is also critical for anyone running an operation within the financial industry. There is a need to ensure that regulatory, monetary, as well as supervisory requirements are in place so that a framework is easily enforced.

Q: Do you see a commonality in the different ways that mobile internet financing has taken root and grown in countries from the African continent to China and India?

I think experiences across borders can be shared and are quite common, because mobile internet financing always seeks to optimize the customer experience by shortening the distance between the customer and the lender. It is meant to cut the time that financial institutions take to offer their services, and it is meant to give these institutions a chance to offer clients bespoke or tailor-made services.

It is a challenge for traditional banking service channels to offer the same value-add that mobile internet companies can offer their clients. These mobile financing companies have a different DNA, a different focus. As long as they offer services that are small, simple and basic, they can do away with traditional regulations and supervision.

But if a company is chasing big money, or if the company changes itself and it seeks out other factors, such as its own interests, heightened profitability, or increasing market share while chasing quick money, then we’d be looking at the development of something more risky. So we do need some regulation and supervision to protect the consumer and investor interests, all the while ensuring that a financial company’s sustainability is growing too.

Q: What is the potential for companies involved in mobile internet financing to become key economic drivers, at least in the medium term?

It is boundless. Traditional banks and financial institutions can take care of the big companies, businesses involving global markets, as well as public finance syndications and project financing. There are many traditional areas and huge businesses that need these big financial institutions.

Many people and companies today may not be qualified to conduct business with these huge banks, yet they need to have access to proper financing and funding. So this is a huge gap which mobile internet finance companies can fill. They also have a market in the young people, the millennials, who don’t bank, even if they are qualified to do so. The only thing these people need are a smartphone. They don’t even need computers – and we expect this trend to continue into the future.

Q: If there is no regulatory framework built around mobile internet finance companies, would we see circumstances to those that triggered the U.S. subprime crisis?

Definitely, you can expect to see a lot of failures in these areas, which will in turn trigger unrest and challenges to social stability. We have a responsibility to financial consumers and financial investors. We hope this paper serves as a tool for companies to draw appropriate boundaries which can then be respected by both consumers and financial institutions. Anyone that operates outside these boundaries must be armed with adequate capital, provisioning, as well as knowledge, skills and other tools that will enable them to go forward.

As long as a company can keep to the basics and practice what they know, they will succeed. China still has many small banks which can even outperform the larger banks. I know of at least three to four community banks in Zhejiang that are thriving, even as they are surrounded by institutions that are in default. Because these small banks know their customers and know their businesses they can be happy with their current performance, and that is the key to success.


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