Technology changes financial landscape

Chinese firms seek to reinvent themselves as 'TechFins'

By Lee Kyung-min

The financial industry is undergoing a major disruption due to technological progress.

Fintech, short for financial technology, has been leading the disruption allowing many players to introduce new, innovative ways of providing financial services.

But major fintech firms are trying to turn into “techfin” powerhouses challenging the traditional banking system by using technology.

China's four fintech giants ― Baidu, Alibaba, Tencent and JD.COM ― are speeding up efforts to redefine themselves as techfin companies, in a clever move to avoid fast-tightening government regulation.

Kwak Sun-ho, a researcher at Korea Institute of Finance (KIF), said the four are increasingly shifting focus from expanding financial services to developing technology to better assist the financial sector. The ultimate goal is “inclusive finance.”

Thus far, they have, with government permission, provided financial services including banking, insurance, payment, loans, fund and asset management and crowdfunding.

Such agile moves are understandable, Kwak said, amid a stern government-led initiative to reduce financial risks over the past year.

In December 2017, the Chinese government adopted “reducing financial risk” as a party platform, officially declaring that monitoring will be strengthened on internet banking and financial holding companies.

Regulations will also be toughened against “shadow banking,” a term referring to lending and other financial activities conducted by unregulated institutions or under unregulated conditions.

“In China, there are no regulations that govern the separation of financial institutions and industrial enterprises, a common restriction found in many advanced countries,” Kwak said.

The lack of such a regulation has helped many large companies expand their scope of business to financial services.

However, major changes will follow given various fallouts concerning peer-to-peer (P2P) transactions observed including embezzlement and fraud, among others, which occur due to absent or lax state regulations.

“China maintains steady growth, but it is well aware that the current unsound policies could and would hurt the country uncontrollably. The government had allowed the firms to flourish to help the underprivileged have greater access to capital, but the side effects outweigh the positive aspects now.”

Fintech vs. techfin

Fintech is a new type of technology and innovation that seeks to compete with traditional financial methods in delivering financial services. Examples include the use of smartphones for mobile banking.

Techfin, by contrast, is a new term coined by Chinese tech visionary Jack Ma in December 2016 during a speech in which he indicated he would be among many “outsiders” leading internet finance.

“There are two big opportunities in the future financial industry. One is online banking, where all the financial institutions go online; the other is internet finance, which is purely led by outsiders,” he said.

Simply speaking, techfin is where a technology firm launches a new, better way to deliver financial products and services.?

However, amid tightened regulation, Ma later said he seeks to become a techfin firm that delivers financial products among many services, distancing himself from the previous definition under which his firm would be unable to avoid strict government scrutiny.

Ant Financial, the fintech affiliate of Alibaba, said in March 2017 that it would only develop technology to improve platforms solely to serve other financial institutions, adding that it does not plan to develop financial services of its own.

As of May 2018, 620 million people use Alibaba Group-provided financial services.

JD.COM, which acquired Paypal, a U.S. online payment system in 2012, said in April 2018 that the firm will transfer its financial service functions to traditional financial institutions.

The e-commerce giant, which mostly focused on loan sales to small- to mid-sized firms through its financial affiliate JD Finance, said it will focus on better developing technology tailored to optimizing financial institutions' business need.

The primary customer base, it added, will be business partners rather than individuals.

A similar stance is expected soon from Tencent, best known for its social media network WeChat, despite a lack of clear announcements on changes in its future business plans.

The firm, which provides a third-party transaction service on a broader platform where asset management and credit loan are also available, earlier indicated that it will strengthen its role as intermediary between financial institutions and their users.

As of May 2018, over 800 million people use the Tencent-provided financial services.

Where does Korea stand?

In Korea, the government is playing a leading role in the ongoing transition by offering various measures to incentivize tech firms to become techfin firms, which the Moon Jae-in administration considers one of the country's future growth engines.

In March, the Financial Services Commission unveiled a set of measures to foster techfin, with the plan to double the number of such firms to 400 from 208 by 2020.

The financial regulator said it would set up legislation to exempt the “innovation-seeking” firms from various regulations for four years. Up to 15 billion won ($13 million) will be injected to bolster the initiative.

“We need to wait and see how the government would change its policy direction in the coming years, but for now, we are focusing more on maximizing synergy effects in joint partnerships with tech firms,” said Jang Hyun-ki, head of the digital strategy division at Shinhan Bank.

While the need is increasingly recognized to strategically partner with tech firms to better adjust to the fast-changing market and faster-growing, diverse consumer needs, proper regulations should be in place to help them set their priorities straight, according to an official from NH Nonghyup Bank.

“Sometimes, tech firms do have a better understanding and insight in pinpointing consumer needs and ways to serve them to their satisfaction, a quality and ability traditional financial institutions tend to lack,” said Kevin Jung, a senior manager of the bank's digital strategy department.