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Prudential Regulation of the Banking-Like Business of Fintech Companies in China

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Commercial Banking in Transition

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Abstract

This article discusses the impact of FinTech companies engaged in banking-like business on the financial market. The operating model of FinTech company’s banking-like business is usually that Internet companies engage in activities like payment, wealth management, making loans through their financial services companies. These financial service companies rely on the strong technical support of Internet technology groups, the group’s large and stable customer base, and complete business chain. FinTech has positive impact on the financial market but also brings potential prudential risks. Because these FinTech giants, while engaged in banking-like businesses and already systemically important, are not as tightly regulated as commercial banks. This article focuses on China’s FinTech market, and discusses how to prevent the systemic risks brought by FinTech companies’ banking-like business from the perspective of prudential regulation. To find effective solutions, this paper will analyze the operation models of FinTech companies’ banking-like business and its potential risks. This paper suggests that the prudential supervision of FinTech’s banking-like businesses can be improved in terms of regulatory sandboxes, authorisation and exit mechanisms, liquidity risk, regulatory arbitrage, and RegTech.

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Notes

  1. 1.

    See T. Vasiljeva and K. Lukanova, Commercial Banks and FINTECH Companies in the Digital Transformation: Challenges for the Future, 2016, 11 Journal of Business Management, 25.

  2. 2.

    See Y. Wang, S. Xiuping and Q. Zhang, Can Fintech Improve the Efficiency of Commercial Banks?—An Analysis Based on Big Data, 2021, 55 Research in International Business and Finance, 101338.

  3. 3.

    Ibid., n1.

  4. 4.

    Ibid.

  5. 5.

    See G. B. Navaretti and others, ‘Fintech and Banking. Friends or Foes?’, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  6. 6.

    See A. Admati and M. Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It: With a New Preface by the Authors, Princeton University Press, 2014.

  7. 7.

    ‘Under the new pattern, how to change the focus of commercial banks’ FinTech applications? (新格局下, 商业银行金融科技应用着力点如何转变, translated)’, available at http://bank.hexun.com/2021-05-11/203578127.html (accessed 26 August 2022).

  8. 8.

    See Y. Wang, S. Xiuping and Q. Zhang, Can Fintech Improve the Efficiency of Commercial Banks?—An Analysis Based on Big Data, 2021, 55 Research in International Business and Finance, 101338.

  9. 9.

    See E. Bouri, B. Lucey and D. Roubau, The Volatility Surprise of Leading Cryptocurrencies: Transitory and Permanent Linkages, 2020, 33 Finance Research Letters, 101188.

  10. 10.

    Ibid.

  11. 11.

    See Y. Wang, S. Xiuping and Q. Zhang, Can Fintech Improve the Efficiency of Commercial Banks?—An Analysis Based on Big Data, 2021, 55 Research in International Business and Finance, 101338.

  12. 12.

    See A. Boot and others, Fintech: What’s Old, What’s New? 2021, 53 Journal of Financial Stability, 100836.

  13. 13.

    The “catfish effect” means that the arrival of a strong competitor (catfish) forces other weaker participants (sardines) to improve themselves. For example, new FinTech products are the catfish, and banks’ traditional products are the sardines. New FinTech products force traditional bank to innovate and avoid losing customers in the competition. See Zhu, Yueteng, and Jiajun Lu, FinTech and Bank Intermediation–Evidence From the Deposit Market in China, 2021, Available at SSRN 4030108.

  14. 14.

    See S. Nie and Y. Liu, Research on the Transformation of Traditional Commercial Banks in the Background of Science and Technology Finance_Based on the Influence of Third-Party Payment (科技金融背景下传统商业银行转型问题研究_基于第三方支付的影响, translated), 2021, 4 Northern Economy and Trade, 82.

  15. 15.

    See T. Vasiljeva and K. Lukanova, Commercial Banks and FINTECH Companies in the Digital Transformation: Challenges for the Future, 2016, 11 Journal of Business Management, 25.

  16. 16.

    ‘Analysis of the current situation and trend of the construction of financial technology system in commercial banks (商业银行金融科技体系构建的现状与趋势分析, translated)’, available at https://baijiahao.baidu.com/s?id=1649005653662205033&wfr=spider&for=pc (accessed 26 August 2022).

  17. 17.

    L. Jiao, ‘Fintech for the big six banks in 2022 (2022 年六大银行的金融科技, translated)’, available at https://www.sohu.com/a/572746112_411876 (accessed 22 October 2022).

  18. 18.

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  19. 19.

    ‘How FinTech affects banks: Into the ABC Data Center’, available at https://baijiahao.baidu.com/s?id=1627894664180340429&wfr=spider&for=pc (accessed 29 June 2022).

  20. 20.

    ‘Technological innovation promotes the transformation and upgrading of agricultural inclusive financial services’, available at http://www.abchina.com/cn/special/jrkjz/jrcx/201705/t20170515_1069209.htm (accessed 29 June 2022).

  21. 21.

    ‘Under the new pattern, how to change the focus of commercial banks, FinTech applications? (新格局下, 商业银行金融科技应用着力点如何转变, translated)’, available at http://bank.hexun.com/2021-05-11/203578127.html (accessed 26 August 2022).

  22. 22.

    See M. Cheng and Y. Qu, Does Bank FinTech Reduce Credit Risk? Evidence from China, 2020, 63 Pacific-Basin Finance Journal, 101398.

  23. 23.

    Ibid.

  24. 24.

    See S. Nie and Y. Liu, Research on the Transformation of Traditional Commercial Banks in the Background of Science and Technology Finance_Based on the Influence of Third-Party Payment (科技金融背景下传统商业银行转型问题研究_基于第三方支付的影响, translated), 2021, 4 Northern Economy and Trade, 82.

  25. 25.

    Ibid.

  26. 26.

    See A. Boot and others, Fintech: What’s Old, What’s New?, 2021, 53 Journal of Financial Stability, 100836.

  27. 27.

    See B. Van Roosebeke and R. Defina, Five Emerging Issues in Deposit Insurance, 2021. Available at SSRN 3919974.

  28. 28.

    Third-party payment refers to an online payment model in which an independent institution with certain strength and reputation guarantees facilitates transactions between both parties through the Internet. Y. Wang, Research on the Development of Third-Party Payment Based on the Background of Internet Finance——Taking WeChat Tenpay as an Example (基于互联网金融背景下第三方支付的发展研究——以微信财付通为例, translated), 2019, 31 Times Finance, 62.

  29. 29.

    See S. Nie and Y. Liu, Research on the Transformation of Traditional Commercial Banks in the Background of Science and Technology Finance_Based on the Influence of Third-Party Payment (科技金融背景下传统商业银行转型问题研究_基于第三方支付的影响, translated), 2021, 4 Northern Economy and Trade, 82.

  30. 30.

    Ibid.

  31. 31.

    See T. Vasiljeva and K. Lukanova, Commercial Banks and FINTECH Companies in the Digital Transformation: Challenges for the Future, 2016, 11 Journal of Business Management, 25.

  32. 32.

    See B. Van Roosebeke and R. Defina, Five Emerging Issues in Deposit Insurance, 2021. Available at SSRN 3919974.

  33. 33.

    Zsee hu, Yueteng, and J. Lu, FinTech and Bank Intermediation–Evidence from the Deposit Market in China, 2021. Available at SSRN 4030108.

  34. 34.

    Internet bank has two meanings, one is the online service system provided by traditional banks, such as online banking and mobile banking of physical commercial banks; the other is pure online banking established based on the Internet and FinTech. In this article, Internet bank refers to the latter meaning.

  35. 35.

    See K-C. Chen, Implications of Fintech Developments for Traditional Banks, 2020, 10 International Journal of Economics and Financial Issues, 227. China’s banking system is dominated by four big state-owned banks (including Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China), some joint-stock commercial banks, and numerous regional banks. Internet banking entered the banking industry in 2014.

  36. 36.

    Ibid.

  37. 37.

    See F. Bickenbach and others, Adjustment After the Crisis: Will the Financial Sector Shrink and Entrepreneurship Boom?, Kiel Policy Brief, 2009.

  38. 38.

    See M. Cheng and Y. Qu, Does Bank FinTech Reduce Credit Risk? Evidence from China, 2020, 63 Pacific-Basin Finance Journal, 101398.

  39. 39.

    The Economist, “The Age of the Appacus: FinTech in China” (25 February 2017), 65.

  40. 40.

    ‘iResearch: Alipay and Tenpay’s 2019Q3 Market Share Reached 94%’, available at https://baijiahao.baidu.com/s?id=1656342003872731698&wfr=spider&for=pc (accessed 26 August 2022).

  41. 41.

    See L. Lu, Decoding Alipay: Mobile Payments, a Cashless Society and Regulatory Challenges, 2018, Butterworths Journal of International Banking and Financial Law, 40.

  42. 42.

    See Zhu, Yueteng, and J. Lu, FinTech and Bank Intermediation–Evidence from the Deposit Market in China, 2021. Available at SSRN 4030108.

  43. 43.

    See L. Lu, How a Little Ant Challenges Giant Banks? The Rise of Ant Financial (Alipay)’s FinTech Empire and Relevant Regulatory Concerns, 2018, International Company and Commercial Law Review, Sweet & Maxwell, available at https://papers.ssrn.com/abstract=3052318 (accessed 22 July 2022); L. Lu, Decoding Alipay: Mobile Payments, a Cashless Society and Regulatory Challenges, 2018, Butterworths Journal of International Banking and Financial Law, 40.

  44. 44.

    See R. M. Stulz, FinTech, BigTech, and the Future of Banks, 2019, 31 Journal of Applied Corporate Finance, 86.

  45. 45.

    See F. Kong, Reflections on the Supervision of FinTech Enterprises_Taking Ant Financial as an Example (对金融科技企业监管的思考_以蚂蚁金服为例, translated), 2020, 12 Shanxi Cai Shui, 35.

  46. 46.

    See L. Lu, How a Little Ant Challenges Giant Banks? The Rise of Ant Financial (Alipay)’s FinTech Empire and Relevant Regulatory Concerns, 2018, International Company and Commercial Law Review, Sweet & Maxwell, available at https://papers.ssrn.com/abstract=3052318 (accessed 22 July 2022).

  47. 47.

    See Zhu, Yueteng, and J. Lu, FinTech and Bank Intermediation–Evidence from the Deposit Market in China, 2021. Available at SSRN 4030108.

  48. 48.

    See Y. Zhou, A Comparative Study of Major Third-Party Mobile Payment Platforms in China (中国主要第三方移动支付平台的比较研究, translated), 2017, 20 Shangchang, 49.

  49. 49.

    See Y. Wang, Research on the Development of Third-Party Payment Based on the Background of Internet Finance——Taking WeChat Tenpay as an Example (基于互联网金融背景下第三方支付的发展研究——以微信财付通为例, translated), 2019, 31 Times Finance, 62.

  50. 50.

    Tenpay, Available at https://posts.tenpay.com/posts/16db756f630c6a7f12c4392f1532be31.html (accessed 26 August 2022).

  51. 51.

    See Y. Wang, Research on the Development of Third-Party Payment Based on the Background of Internet Finance——Taking WeChat Tenpay as an Example (基于互联网金融背景下第三方支付的发展研究——以微信财付通为例, translated), 2019, 31 Times Finance, 62.

  52. 52.

    See L. Jiao, Research on the Profit Model of My Country’s Third-Party Payment Platform——Taking Tenpay as an Example (我国第三方支付平台盈利模式研究——以财付通为例, translated), 2019.

  53. 53.

    Webank, available at https://www.webank.com/#/about (accessed 26 August 2022).

  54. 54.

    JD Financial, available at https://jrhelp.jd.com/ (accessed 26 August 2022).

  55. 55.

    Duxiaoman Financial, available at https://www.duxiaoman.com/ (accessed 26 August 2022).

  56. 56.

    ‘Bank of Nanjing: Completed the equity acquisition of Suning Consumer Finance Co., Ltd.’, available at https://baijiahao.baidu.com/s?id=1742583666444488352&wfr=spider&for=pc (accessed 26 August 2022).

  57. 57.

    See S. Nie and Y. Liu, Research on the Transformation of Traditional Commercial Banks in the Background of Science and Technology Finance_Based on the Influence of Third-Party Payment (科技金融背景下传统商业银行转型问题研究_基于第三方支付的影响, translated), 2021, 4 Northern Economy and Trade, 82.

  58. 58.

    ‘Looking at the future development of China’s commercial banks from the perspective of financial technology’, available at https://baijiahao.baidu.com/s?id=1631475084026528136&wfr=spider&for=pc (accessed 26 August 2022).

  59. 59.

    See A. Boot and others, ‘Fintech: What’s Old, What’s New?’ 2021, 53 Journal of Financial Stability, 100836.

  60. 60.

    Ibid.

  61. 61.

    See C. C. Lee and others, Does Fintech Innovation Improve Bank Efficiency? Evidence from China’s Banking Industry, 2021, 74 International Review of Economics & Finance, 468.

  62. 62.

    See S. Nie and Y. Liu, Research on the Transformation of Traditional Commercial Banks in the Background of Science and Technology Finance_Based on the Influence of Third-Party Payment (科技金融背景下传统商业银行转型问题研究_基于第三方支付的影响, translated), 2021, 4 Northern Economy and Trade, 82.

  63. 63.

    See B. Van Roosebeke and R. Defina, Five Emerging Issues in Deposit Insurance, 2021. Available at SSRN 3919974.

  64. 64.

    See L. Lu, Decoding Alipay: Mobile Payments, a Cashless Society and Regulatory Challenges, 2018, Butterworths Journal of International Banking and Financial Law, 40.

  65. 65.

    See K-C. Chen, Implications of Fintech Developments for Traditional Banks, 2020, 10 International Journal of Economics and Financial Issues, 227.

  66. 66.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  67. 67.

    See L. Lu, Decoding Alipay: Mobile Payments, a Cashless Society and Regulatory Challenges, 2018, Butterworths Journal of International Banking and Financial Law, 40.

  68. 68.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  69. 69.

    See F. Restoy, Regulating Fintech: What Is Going on, and Where Are the Challenges?, 2019, Bank for International Settlements, 1.

  70. 70.

    See Adebayo, S. Oyetoyan and Ajiboye Wale Thomas, Impact of Regulation of Financial Technology (FinTech) Services on The Performance of Deposit Money Banks in Nigeria.

  71. 71.

    See F. Restoy, Regulating Fintech: What Is Going on, and Where Are the Challenges?, 2019, Bank for International Settlements, 1.

  72. 72.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  73. 73.

    See F. Restoy, Regulating Fintech: What Is Going on, and Where Are the Challenges?, 2019, Bank for International Settlements, 1.

  74. 74.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  75. 75.

    See L. Lu, How a little ant challenges giant banks? The rise of Ant Financial (Alipay)'s FinTech empire and relevant regulatory concerns, 2018, International Company and Commercial Law Review, Sweet & Maxwell, available at https://papers.ssrn.com/abstract=3052318 (accessed 22 July 2022).

  76. 76.

    See B. Van Roosebeke and R. Defina, Five Emerging Issues in Deposit Insurance, 2021. Available at SSRN 3919974.

  77. 77.

    See F. Restoy, Regulating Fintech: What Is Going on, and Where Are the Challenges?, 2019, Bank for International Settlements, 1.

  78. 78.

    See C. Taylor, ‘Prudential Regulatory and Supervisory Practices for Fintech: Payments, Credit and Deposits’, available at https://policycommons.net/artifacts/1265971/prudential-regulatory-and-supervisory-practices-for-fintech/1843204/ (accessed 22 July 2022).

  79. 79.

    See M. Cheng and Y. Qu, Does Bank FinTech Reduce Credit Risk? Evidence from China, 2020, 63 Pacific-Basin Finance Journal, 101398.

  80. 80.

    China Daily, Transformation Under the Supervision of Alipay and Tenpay: Emphasis on “Technology” and Light on “Finance” (支付宝和财付通们监管下的转型: 重 “科技” 轻 “金融”, translated), 2019, 28 China Daily, 5.

  81. 81.

    See L. Jiao, Research on the Profit Model of My Country’s Third-Party Payment Platform——Taking Tenpay as an Example (我国第三方支付平台盈利模式研究——以财付通为例, translated), 2019.

  82. 82.

    ‘Interim Measures for the Administration of Online Micro-Loan Business (Draft for Comment)’, available at http://www.gov.cn/xinwen/2020-11/03/content_5556884.htm (accessed 5 September 2022).

  83. 83.

    See M. Cheng and Y. Qu, Does Bank FinTech Reduce Credit Risk? Evidence from China, 2020, 63 Pacific-Basin Finance Journal, 101398.

  84. 84.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  85. 85.

    See L. Lu, How a Little Ant Challenges Giant Banks? The Rise of Ant Financial (Alipay)’s FinTech Empire and Relevant Regulatory Concerns, 2018, International Company and Commercial Law Review, Sweet & Maxwell, available at https://papers.ssrn.com/abstract=3052318 (accessed 22 July 2022).

  86. 86.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  87. 87.

    See H. Huang, FinTech’s Extraterritorial Governance Experience and Its Enlightenment to My Country (金融科技域外治理经验及对我国的启示, tranlated), 2021, 40 Enterprise Economy, 153.

  88. 88.

    See L. Lu, How a Little Ant Challenges Giant Banks? The Rise of Ant Financial (Alipay)’s FinTech Empire and Relevant Regulatory Concerns, 2018, International Company and Commercial Law Review, Sweet & Maxwell, available at https://papers.ssrn.com/abstract=3052318 (accessed 22 July 2022).

  89. 89.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  90. 90.

    See F. Restoy, Regulating Fintech: What Is Going on, and Where Are the Challenges?, 2019, Bank for International Settlements, 1.

  91. 91.

    See D. W. Arner, J. Barberis and R. P. Buckey, FinTech, RegTech, and the Reconceptualization of Financial Regulation, 2017, 37 Northwestern Journal of International Law & Business, 371.

  92. 92.

    Ibid.

  93. 93.

    See G. B. Navaretti and others, Fintech and Banking. Friends or Foes?, available at https://papers.ssrn.com/abstract=3099337 (accessed 22 July 2022).

  94. 94.

    See I. Anagnostopoulos, Fintech and Regtech: Impact on Regulators and Banks, 2018, 100 Journal of Economics and Business, 7.

  95. 95.

    Ibid.

  96. 96.

    See H. Huang, FinTech’s Extraterritorial Governance Experience and Its Enlightenment to My Country (金融科技域外治理经验及对我国的启示, tranlated), 2021, 40 Enterprise Economy, 153.

  97. 97.

    See B. Van Roosebeke and R. Defina, Five Emerging Issues in Deposit Insurance, 2021. Available at SSRN 3919974.

  98. 98.

    See C. Taylor, ‘Prudential Regulatory and Supervisory Practices for Fintech: Payments, Credit and Deposits’, available at https://policycommons.net/artifacts/1265971/prudential-regulatory-and-supervisory-practices-for-fintech/1843204/ (accessed 22 July 2022).

  99. 99.

    See S. Zeranski and I. E. Sancak, Prudential Supervisory Disclosure (PSD) with Supervisory Technology (SupTech): Lessons from a FinTech Crisis, 2021, 18 International Journal of Disclosure and Governance, 315.

  100. 100.

    See D. W. Arner, J. Barberis and R. P. Buckey, FinTech, RegTech, and the Reconceptualization of Financial Regulation, 2017, 37 Northwestern Journal of International Law & Business, 371.

  101. 101.

    See F. Restoy, Regulating Fintech: What Is Going on, and Where Are the Challenges?, 2019, Bank for International Settlements, 1.

  102. 102.

    See H. Huang, FinTech’s Extraterritorial Governance Experience and Its Enlightenment to My Country (金融科技域外治理经验及对我国的启示, tranlated), 2021, 40 Enterprise Economy, 153.

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  1. Renmin University of China, Beijing, China

    Yangguang Xu

  2. Centre for Commercial Law Studies, Queen Mary University of London, London, UK

    Zhirou Li

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  1. University of Luxembourg, Luxembourg, Luxembourg

    Marco Bodellini

  2. Dipartimento di Studi Aziendali e Giuridici, University of Siena, Siena, Italy

    Gabriella Gimigliano

  3. School of Law, University of Warwick, Coventry, UK

    Dalvinder Singh

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Xu, Y., Li, Z. (2024). Prudential Regulation of the Banking-Like Business of Fintech Companies in China. In: Bodellini, M., Gimigliano, G., Singh, D. (eds) Commercial Banking in Transition. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-45289-5_18

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