I. Theoretical basis of Internet financial innovation
Internet finance is becoming a vastly debated topic with every passing day. Several researchers and industry experts are sharing their views to comprehend different aspects of the technology and it’s impacts. In simple words, Internet finance is the integration of "Internet" and "financial industry." Despite many innovative businesses of Internet finance, relevant research on the topic is still limited. Few studies theoretically analyze integration of finance and Internet. A comprehension of theoretical basis of Internet financial innovation will help us more accurately grasp business connotation of the new technology. Several theories can be used to explain and understand the phenomenon which is generated and directed by the amalgamation of Internet and finance. Such as:
(1) Information Economics Theory: This theory studies the optimal transaction contract in symmetric information, it is also called contract theory or mechanism design theory. Since there are loopholes such as information asymmetry in Internet finance so adverse selection and moral hazard can easily occur.
(2) Financial Intermediary Theory: This theory explains the existing principle of financial intermediation. Since small enterprise’s credit has characteristics of adverse selection and high transaction cost which conflict with the requirement of risk aversion. Financial intermediaries usually do not fully meet the borrowing demand of small enterprises. As a new type of financial intermediary, Internet finance can surpass traditional financial intermediaries and market resource allocation efficiency through network-based methods to greatly reduce transaction costs. On the other hand, it can significantly lower the investment threshold and simplify various financial dealings by enabling full set of possible transactions.
(3) Reputation Theory: Based on big data, Internet finance can quickly figure out individual reputation and status quo. On the basis of which Internet finance such as P2P and crowdfunding flourish.
(4) Long Tail Theory: It is a new theory stating that due to unique characteristics of the Internet, the larger the scale, the more will be overturn and marginal benefit, and there will be more economies of scale.
(5) Advantage Theory: Comparative advantages of traditional financial institutions and Internet financial institutions can maximize the benefits and profits of the entire society.
(6) Transaction Cost Theory: This theory explains the impact of Internet finance on traditional financial transaction. According to the theory there are three aspects of this phenomenon: lowering the transaction cost of the market; reducing the asymmetry of information; and accelerating financial disintermediation.
II．The shock traditional finance has suffered and its response:
The development of Internet finance has created a brand-new revolutionary finance which varies from traditional one. Hence, it is important to understand the impact of Internet finance on traditional finance.
First, Internet virtual sites can remarkably replace physical branches of banks. If analyzed with financial intermediary theory, Internet finance can break through space-time restrictions and its flexibly serves consumers in broad time and space. Especially when mobile terminal of the user is widely connected to the bank's client terminal, reducing the need for physical branches of the bank. It will also lessen the number of employees, which poses a severe challenge to the bank and its staffs.
Second, Internet finance can significantly reduce business costs. European banks measured the estimated cost of banking through different medium and the cost of a business point (physical branch) was USD 1.07, telephone banking cost USD 0.54, ATM counted for USD 0.27, while an internet connection only cost USD 0.10. In general, the virtual cost paid online by banks accounts for 1/16 to 1/6 of that paid through physical branches. These concrete cost reductions fully conform to the transaction cost theory's analysis on Internet finance.
Third, the distribution of big data information will greatly enhance risk control effect of Internet financial services. The Internet generates big data and aggregates a large amount of unstructured data. It can grasp customer consumption habits, accurately predict customer behavior, and become more targeted in Internet finance and business risk control through fact analysis and exploration of customers' transaction information. Using big data, cloud computing, information collection and processing of Internet finance will greatly enhance the effectiveness of financial services in risk management.
Fourth, Internet finance brings the spirit of Internet and inclusive finance to the financial industry. Yu'E Bao is an example which makes the general public's wealth management convenient by bringing tangible benefit at people’s fingertips. While injecting new concept and vitality to inclusive finance, it also brings new competition.
If summarized from the perspective of advantage theory, Internet finance breaks through the limitations of time and space, and greatly reduces costs. With advantages of information distribution and processing such as big data, cloud computing, and the spirit of “openness, equality, collaboration, and sharing”, the disadvantaged groups facing challenges such as remoteness, lack of information, high costs and risks may obtain effective and sustainable financial services from the Internet finance.
Internet finance can only subvert traditional financial enterprises which fail to self-innovate and keep up with the pace of times, but it cannot subvert finance itself. Traditional financial methods still dominate in solving large-scale integrated financial programs and wealth management. Internet finance is only a process in which financial ecological integration has evolved to a higher level, and it is a transitional form of financial transformation. It is more about Internet-based promotion of traditional financial institutions, building an information platform, strengthening user experience, and promoting inclusive finance through the division and refinement of financial industry chain. In the future, as finance and the Internet will be closely interconnected, financial integration, versatility and mass development will become inevitable trends.
Of course, traditional finance should also absorb the spiritual essence from the Internet and inclusive finance to accelerate transformation and upgrading.
First, conventional finance needs to accelerate the cultivation of innovative team spirits with Internet thinking and inclusive finance.
Second, make full use of the advantages of traditional banks' plentiful information, strong capital, wide customers, numerous outlets and complete professional talents. Learn from the Internet to bring new ideas, new models and methods to create more Internet financial products and services.
Third, accelerate the use of Internet big data, information records and processing functions to improve energy efficiency of financial industry services and risk management. For example, it can explore a variety of finance-related information through social network or e-commerce platform, grasp customer consumption habits, and predict customer behavior, so that banks are more targeted in marketing and risk control.
On the one hand, the innovation and change brought by Internet finance have advantages of “low cost, high efficiency, wide coverage and rapid development”. On the other hand, problems such as “high risk and weak supervision” are also salient. In order to promote financial marketization, the problem of blind supervision must be addressed. This requires formulation of relevant laws and regulations as well as maintaining financial innovation vitality while sustaining full supervision.
The construction of a social credit system needs to be improved. The overall credit information environment in U.S. is relatively mature compared to weaker Chinese credit basis. The proportion of enterprises and individuals with credit information is relatively low, which pose challenges to implementation of Internet finance system in China. Therefore, it is necessary to actively create a sound legal environment, improve blacklist system, strengthen risk control mechanism, improve the quality and efficiency of credit information network, and promote the construction of a credit system based on big data. In addition, Internet financial supervision should improve the third-party depository system of funds and upgrade internal control of the Internet enterprises.
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