Conversations on Progress
In places where connectivity is high and smartphones are ubiquitous, experts predict that populations will skip using the SMS-based mobile wallet and jump right to more complex apps, Internet-based services, and channels. This may be the future of high growth in financial inclusion, one in which people rely almost exclusively on technology. China is possibly the leading example.
According to the 2014 Global Findex, a major driver behind the decrease in the world’s unbanked population from 2.5 billion to 2 billion was newly banked customers in China who accounted for more than one-third of the world’s newly banked. Internet finance was one factor behind this surge in new Chinese bank accounts. At the end of 2014, China had 649 million Internet users, representing a 47.9 percent Internet penetration rate. Internet access, including mobile Internet access, has allowed millions of customers to access a growing array of financial services.
Traditionally, China’s banking sector has been dominated by state-owned banks and has catered to large and state-owned corporations. Now, Internet companies are turning the financial services industry on its head. Companies like Alibaba and Tencent aim to offer a full suite of financial services via their web platforms, including savings, credit, insurance, and payment systems, and are well on their way toward achieving this goal. There are about 25 such companies today in China. The explosive growth in Internet finance, coupled with increasing Internet penetration in China, has the potential to reach tens of millions of Chinese consumers, including previously ignored customer segments. It will be interesting to see who ends up participating in and benefiting from these services, and how regulation will respond. These services offer tools for consumers that are more sophisticated as well as more accessible.
Investments stand as one particular product that has improved value for customers. In June 2013, Alipay upgraded its Alipay Wallet with a product called Yu’E Bao, through which customers can invest their account balances directly into a money market fund. This fund is managed by Tian Hong Asset Management, and, impressively, by January 2014 had assets totaling 250 billion yuan, making it China’s largest fund. Following the success of Yu’E Bao, other Chinese Internet companies jumped into the ring. Baidu (China’s top Internet search engine) launched a similar product called Baifa in December 2013 in partnership with Harvest Fund Management, and Tencent launched similar investment products via its WeChat app in January 2014.
While money market funds in China typically require a minimum deposit of 1,000 yuan, the minimum deposit for Alipay’s Yu’E Bao is only 1 yuan, meaning that people with lower incomes are able to invest. Additionally, money market funds typically earn higher interest rates than savings accounts. WeChat is the largest online messaging app in China with more than 270 million active users. The fact that WeChat users can now invest money directly through the app has huge implications for increasing financial access. The Internet finance push in China is only accelerating: in April 2015, Alibaba launched an e-commerce tracking stock index, and plans to open an Internet bank in June 2015. Its rival Tencent already began pilot operations for an Internet bank in January 2015.
If these developments in China are any indication, Internet banking will democratize financial services in a new way, opening the door for cheaper, better, and more inclusive financial sector growth.