The rapid growth of financial technology in China is largely due to two reasons.
The finance sector has not been very efficient, leaving a lot of room for fintech to bring improvement.
Also, regulation of fintech has been rather light, at least until recently.
Fintech funding activities in China are concentrated in a few big companies, including Shanghai Lujiazui International Financial Asset Exchange or Lufax, JD Finance and Webank.
In the US market, by comparison, fintech fund-raising transactions are far greater in numbers, but the size of each deal is smaller.
Fintech is going to change the financial industry in three major ways.
First, it can alter the way risk is assessed and priced.
Second, it can improve the operational efficiency of the financial industry.
Third, it can lower the entry threshold in the financial market.
Let’s look at a few examples.
Goldman Sachs has applied Algo Trading to bond transactions, which so far have been done largely through the over-the-counter market and have been fairly labor-intensive.
The efficiency of bond trading is expected to improve substantially.
Financial transactions involve a lot of regulations and legal elements. Financial institutions thus need to form large teams to handle the operations and clearing process.
Since last year numerous foreign financial institutions have tried to use blockchain technology for credit default swap settlement. This is another example of how fintech can boost efficiency.
Fintech also can be used to create smarter and more cost-efficient investment services.
HTSC (06886.HK), for instance, has acquired AssetMark, one of the leading providers of innovative investment and financial advisors in the United States.
Artificial intelligence is another area that holds lots of promise.
Mainland internet giants are marching aggressively into fintech, leveraging on their massive data base and user base.
Development of standardized financial products such as microfinancing will be their strength.
But they have to overcome a number of hurdles.
While technology is largely a free-wheeling industry, the finance industry operates under a lot of regulation.
Tech firms have to learn how to communicate with the regulators properly.
Risk management is crucial in finance. This is another area where tech firms have a lot to catching up to do.
This article appeared in the Hong Kong Economic Journal on Dec. 14.
Translation by Julie Zhu
[Chinese version 中文版]
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