The evolution of China’s FinTech industry has entered a critical third development stage.
Innovation is no longer orchestrated by regulatory agencies and merely implemented by financial institutions (top-down), as it was during the first stage; nor is it driven by technology companies (bottom-up), as it was during the second stage. Current innovation dynamics reflect a complex interplay of collaboration and competition between traditional service providers, big tech firms that have moved into financial services, independent FinTechs and regulators. As these players continue to find their places and roles in the newly emerging business environment, the future make-up and characteristics of China’s financial industry remain to be determined.
The approaches chosen by China’s financial regulators will be decisive in setting the future direction. FinTechs managed to grow faster and influence the interaction between individuals and service providers more deeply in China than in most other jurisdictions. The industry’s success enabled hundreds of millions of individuals who were previously underserved by traditional institutions to access financial products. It also greatly enhanced user experience and operating efficiency and reduced transaction costs. The industry was able to deliver these benefits because Chinese regulators took a “wait and see” attitude during the early stages of its development that allowed innovation outside the traditional regulatory perimeters to blossom, and then adjusted rulebooks only over time in a process of “regulatory catch-up”.
As financial innovation has gained traction and the firms driving it have grown into sizeable players, the
dynamic between innovators and regulators has begun to shift. Regulatory agencies have started to be more proactive in supervising the activities of technology firms after realizing that the size of many technology firms and FinTechs means they could threaten financial stability and peace in society if their innovation efforts and business practices were overly aggressive. But the regulators and policy- makers also understand that overly restrictive regulatory approaches could stifle future innovation and economic growth.
What is needed is a thoughtful approach to innovation and regulation that enables the many benefits FinTechs can provide while controlling – and ideally eliminating – the potential risks. Regulators and the industry face a delicate balancing act and need to consider questions about the use and protection of data, potentially monopolistic practices, and alignment with global methodologies and standards.
Only a collaborative approach among all stakeholders – including smaller, independent FinTechs – will ensure China’s FinTech industry and the country’s financial system continue to prosper, delivering benefits to society at large and leading the world in financial innovation and inclusion efforts
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