Summary:

In recent years, my country's large Internet companies have entered the financial services field, which has promoted significant changes in industries such as payment, credit, credit investigation, and asset management. While fully affirming the advantages and positive effects of large-scale Internet companies in financial services, they should fully and in-depth understand the possible risks, formulate relevant policies and measures in a targeted manner, and continuously strengthen and improve supervision to ensure financial stability and security.

1. The entry of large Internet companies into financial services sector has had a positive impact

In recent years, technology companies such as Alibaba, Tencent, Baidu, and JD.com have grown rapidly and have continued to penetrate and develop into the financial sector. These companies have used the customer data accumulated by their long-term services and the emerging big data processing technology to change my country's financial service ecology to a certain extent, especially actively boosting some small and retail industries. For example, in the field of electronic payment, it has promoted profound changes in my country's payment services. In the second quarter of this year, in my country's electronic payment business, the number of electronic payment transactions by non-bank payment institutions was 3.52 times that of commercial banks. In the area of credit, large Internet companies are actively developing microfinance business to promote the continuous decline of service focus and increase the availability of financial services. The number of users of Ant Microloan "Huabe" exceeds 100 million, of which about 50% are located in cities below the third tier. In the field of credit reporting services, large Internet companies have created credit evaluation and credit reporting services based on online data. For example, Ant Technology has established digital credit records for more than 300 million "white credit accounts" in my country and carried out online real-time risk control. In the field of asset management, large-scale Internet companies have effectively increased user retention with a good online experience, and effectively promoted online asset and wealth management businesses. As of the second quarter of this year, the scale of Tianhong Fund's Yu'ebao reached 1.22 trillion yuan, with a personal holding ratio of 99.99%. The number of Licaitong customers exceeded 150 million, and the amount of managed funds reached 900 billion yuan.

2. Problems and risks brought by large Internet companies entering the financial sector

One is monopoly and unfair competition. First of all, large Internet companies rely on technological advantages to master a large amount of data, supplemented by the external characteristics of Internet technology, and it is easy to form a dominant market position. Large-scale Internet companies engaged in financial business not only strengthened their original business market dominance, but also made it easier for their newly opened financial businesses to obtain data, information and customer resources, and quickly gain a competitive advantage. Secondly, the above-mentioned competitive advantages can enable large Internet companies to over-concentrate their power in resource allocation and gradually strengthen them into market monopoly. Large Internet companies can "burn money" a lot, start by grabbing traffic and customers to occupy the market, and use direct subsidies or cross-subsidies to make themselves a "winner" and then merge with other competitors, resulting in a "winner takes all" situation. Third, large Internet companies may also lead to the failure of traditional measures to maintain fair competition in the market. In the past, the effective way to deal with the excessive concentration of market power was to relax market access, but now once the barriers to entry in a certain field are relaxed and large Internet companies are allowed to enter, they may quickly seize the market and squeeze out competitors.

The second is the blurring of product and business boundaries. Financial services must meet specific qualification requirements, adhere to the principle of licensed operation, and strict access and business supervision and management. If a large Internet company conducts a large number of financial businesses but claims to be a technology company, it will not only evade supervision, but will also be easier to expand disorderly, causing hidden risks, not conducive to fair competition, and not conducive to consumer protection.

In addition, large Internet companies often provide multiple types of financial products and services at the same time. These financial products and service businesses often have clear boundaries under the traditional framework, with "firewalls" between them, and relatively clear regulatory requirements. However, the intervention of large-scale Internet companies and the use of technology have changed the structure, function, and nature of some financial products and services to a considerable extent, resulting in the blurring of the boundaries of these products and services and the confusing nature of these products and services, making it possible for regulatory arbitrage.

The third is the controllability and stability risks of information technology. The use of cutting-edge information technology by large Internet companies often causes difficulties for regulatory agencies to identify, monitor and dispose of risks. First, it is difficult for regulators to identify high-tech "black boxes" and their hidden risks. For example, a blockchain network is usually maintained by multiple nodes. Once a technical problem or service interruption causes transaction failure and economic losses, it is difficult to determine the responsible party. Second, the delay in monitoring will affect the timeliness of risk disposal. Financial data usually faces multiple systems and multiple links to retain, which makes it difficult to track and control data circulation, and it is more difficult to verify data rights and credible destruction. Even if privacy protection laws and regulations are relatively complete, it is still difficult for such activities to be effectively monitored and early warning by regulatory agencies. Disposal is only done after information leakage has led to online fraud and other illegal activities, which will have a serious negative impact on the financial consumer’s property safety. Third, large-scale Internet companies adopt a data-driven, platform-supported, and network-based business model, which increases the difficulty of risk management.

The fourth is the risk of data leakage and infringement. The financial business of large Internet companies means the centralized collection and exposure of various financial and non-financial information of consumers. Large-scale Internet companies not only master consumers’ social, shopping, and web browsing information, but also master their accounts, payments, deposits and withdrawals, financial asset holdings, and transaction information. They can even use facial recognition, health monitoring, and other information. Closely related to its biological information. Once the data is leaked due to improper storage or cyber attacks, a little analysis can obtain accurate portraits of customers, which leads to a large number of customer privacy leaks, which in turn causes major property losses and personal safety risks. At the same time, technologies such as big data and artificial intelligence can easily lead to "algorithm discrimination" and seriously damage the interests of special groups. Compared with traditional discrimination, algorithmic discrimination is more difficult to restrain. Especially when a large Internet company has huge amounts of data and information involving hundreds of millions of consumers. Even from an individual and case-by-case perspective, the source and use of the data have been authorized by consumers. But in general, there may be a "composite fallacy". These data have the nature of public goods as a whole, and their management and use cannot solve their legality problems with the authorization of a single consumer.

The fifth is systemic risk. First, large Internet companies are "too big to fail". ANT FINANCIAL SERVICES GROUP has over 1 billion individual users and over 80 million institutional users. The scale of digital payment transactions is 118 trillion yuan, and its listed market value may set a historical record. Once a risk exposure occurs, it will cause serious risk infection. Secondly, large Internet companies serve a large number of service groups, and their service targets are often long-tailed people who are not covered by traditional financial institutions. Such customers usually lack more professional financial knowledge and investment decision-making ability, and have serious herd mentality. When the market fluctuates greatly or market conditions reverse, group irrational behavior is prone to occur, and long-tail risks may spread rapidly, forming systemic financial risks. Finally, cross-industry and cross-sector financial products in large Internet enterprise groups are intertwined with each other, are highly correlated and procyclical, and their risk concealment and destructiveness will be more serious. Not only that, due to the wide network coverage of large Internet companies, the convergence of business models and algorithms, financial risk contagion will become more rapid, and may rapidly evolve into systemic risks in a very short time.

3. Accelerate the establishment of an effective regulatory framework for large-scale Internet companies in my country

First, strengthen the top-level design and improve the regulatory system. The first is to clarify the principles of supervision and management, establish a sound and effective regulatory framework based on the protection of financial consumers, promote fair competition in the market, improve the efficiency of resource allocation, maintain the healthy development of the financial market, ensure financial stability and safety, and better serve the real economy. The second is to improve relevant technology and business standards. Play the role of relevant functional departments, formulate technical standards and risk rules such as blockchain and big data, play the role of standard rules, testing and certification, and promote the orderly and compliant development of technology and business applications of large Internet companies. The third is to strengthen regulatory coordination, promote the establishment of data and information sharing mechanisms between regulatory agencies, and improve coordination at all levels of regulatory policy formulation and implementation. The fourth is to strengthen industry self-discipline, promote infrastructure construction, statistical monitoring, information disclosure, standard rules, investor protection, etc., and guide practitioners to operate in compliance and prudence. The fifth is to encourage competition and maintain a fair market environment.

Second, strict market access and full implementation of functional supervision. Adhere to the principle of financial license operation, and strictly manage market access. Functional supervision adopts penetrating supervision, according to the characteristics of financial technology business, supervision is carried out according to relevant business categories, to achieve full supervision and avoid supervision gaps. Adhere to the principle of regulatory consistency, that is, under the existing legal framework, as long as they are engaged in the same financial business, they must accept the same supervision to maintain fair competition and prevent regulatory arbitrage. Extend and expand the existing regulatory system through legislation, formulating supplementary rules and other means. Whether it is to incorporate large-scale Internet companies into the existing legal framework and regulatory system, or to improve the corresponding legal and regulatory system as needed, the principle of consistency should be followed and adhered to, and functional supervision should be implemented.

Third, strengthen the protection of consumer rights, and on the basis of balancing the protection of personal information, strengthen data management to prevent data monopoly. On the premise of not affecting national information security and user privacy protection, formulate data standards for the financial technology industry, promote the unification of data standards, and improve the machine readability of data. Strengthen consumer protection and improve supervision rules for the collection, management and use of personal data. Further clarify the legal attributes and property rights boundaries of the huge amount of consumer data held by large Internet companies, ensure fair and reasonable optimization of data production factors, prevent data monopoly and obtain excess profits. While strictly controlling the risk of data abuse, it also takes into account the openness of data and promotes data sharing, including promoting the sharing of desensitized data by financial institutions, and the sharing of government public data and private sector data. In addition, when promoting the construction of related infrastructure, full consideration of big data and its processing requirements, and planning and development as an important infrastructure for the financial industry and financial technology.

Fourth, develop regulatory technology to improve risk identification, prevention and disposal capabilities. Regulatory departments must vigorously develop regulatory technology. Such as the development of artificial intelligence and machine learning to automate the processing of financial data and timely grasp of financial operations. Develop big data and artificial intelligence analysis technology to improve data information processing capabilities and risk identification capabilities. Systematically build a digital supervision system based on Internet technology, especially big data and cloud computing technology, to realize real-time, dynamic supervision and all-round supervision. Perform stress testing and simulation operations, comprehensively improve online risk control, disposal and repair capabilities, and control the spread of network-related financial risks across time, institutions, and regions in real time.

Fifth, strengthen macro-prudential management to prevent systemic risks. Tech giants have entered the field of financial technology and have developed into "big to fail" systemically important Internet giants. The attributes of their financial enterprises should be clarified and they should be included in the regulatory framework of financial holding companies. On the one hand, if the income from financial business operations exceeds a certain percentage, it shall be subject to macro-prudential management in accordance with the relevant rules of financial holding companies, and strict penetrating supervision of all financial businesses shall be conducted. On the other hand, establish a set of micro and macro prudential supervision indicator systems suitable for supervising large Internet giants. On the premise that it is generally consistent with the current corresponding prudential supervision standards for systemically important financial institutions, strengthen other additional regulatory requirements such as technological security for large Internet giants.

Reprinted from "Financial Times"