Currency, technology and banking: what experience can China bring to other countries?

In the past decade, the entry of technology companies into the financial services industry has become a global phenomenon. This trend is most pronounced in China, where two large technology companies have become important market participants, especially in the field of payment services. This article studies the factors driving this development trend, and whether China’s experience is applicable to other regions, and derives several lessons from it. The Financial Technology Research Institute of Renmin University of China (WeChat ID: ruc_fintech) compiled the core part of the report.


In the past decade, the entry of technology companies into the financial services industry has become a global phenomenon. This trend is most pronounced in China, where two large technology companies (Alibaba and Tencent) have become important market participants, especially in the field of payment services. This article studies the factors driving this development trend, and whether China’s experience is applicable to other regions, and draws the following lessons.

First of all, similar to the situation in the Internet industry, it is very important to establish and maintain a large user base. This is a key factor in the expansion of large technology companies into the financial industry. On this basis, these large technology companies can be regarded by the public as “accidental financiers” rather than “radical invaders.”

Second, because investment losses may lead to loss of customers, these companies are very cautious in providing high-risk financial services.

Third, the loose supervision of the Chinese government in the early stage is an important supporting factor that helps to enhance the effectiveness of innovation. But this loose regulation also has certain limits to prevent large technology companies from being affected by unreasonable growth, illegal sales of financial products, and systemic risks.

Fourth, initial conditions and government support are very important factors. The rapid development of large technology companies has benefited from China’s huge population, the supply of low-cost mobile phones, and the government’s massive investment in mobile communications infrastructure. These conditions and measures may not be easily copied to other regions.

Finally, the overseas business expansion of large technology companies may require policy coordination between the home country and the government of that country to keep track of emerging risks.


Since the beginning of the 21st century, the number of Internet users in China has almost tripled, exceeding 900 million in 2020. With the support of a huge user base, some Chinese companies founded in the 1990s are now among the world’s largest technology companies. Two typical examples are Alibaba Group and Tencent Holdings, which have a market capitalization of approximately US$500 billion (see Figure 1). Initially, the core businesses of these two companies were developed based on the concepts first put forward by developed economies. For example, Alibaba operates an e-commerce platform and Tencent provides instant messaging services. However, since the beginning of the 21st century, their business scope has rapidly and extensively expanded to other areas including financial services. Alibaba’s financial subsidiary, Ant Group, went public in Hong Kong and Shanghai in August 2020 and raised approximately US$30 billion. The company’s potential market value exceeds US$200 billion, which is comparable to the world’s largest financial group.

Currency, technology and banking: what experience can China bring to other countries?

Figure 1 The market value of large technology companies and financial groups

The rapid growth of the financial business of technology companies has posed new challenges to the central bank and regulatory authorities. On the one hand, these emerging technologies can improve the efficiency of the financial system by reducing service costs. They can also increase financial inclusiveness by providing payment and asset management services to a wide range of audiences, and providing credit to small and micro enterprises and individuals who do not have a credit history. But on the other hand, technology companies may pose emerging risks because they are often not “appropriately” regulated and existing financial regulations are outdated for their new products. Therefore, the government must strike a balance between improving the efficiency of financial innovation and maintaining financial stability.

This article studies the factors that influence the expansion of Alibaba and Tencent into the financial industry. The rise of these two companies mainly reflects their ability to make full use of “network externalities.” Considering network externalities, when a user joins, the value of users who choose the company’s products will be positively affected. Therefore, this article first reviews the important concept of network externality and its importance in promoting the entry of these two large technology companies into the financial services industry. They started by providing payment services, and then stepped into other areas, including asset management, microfinance, banking, and insurance.

In addition, when operating their core business and financial business, large technology companies collect and analyze a large amount of diverse data, which enables them to provide financial and non-financial customers with cloud computing and credit scoring information, thereby realizing the currency of data services change. While recording this evolution, this article also focuses on how economic conditions, social conditions, and laws and regulations play a role in supporting business growth and preventing business from causing financial stability risks. Finally, this article summarizes China’s experience that may be useful for other economies.

in conclusion

Since the 1990s, the rapid expansion of Ant Financial and Tencent in the field of financial services is a remarkable phenomenon in China. This has brought many benefits, including improved efficiency of payments and other financial services, and financial inclusion. A series of initial conditions (some of which are unique to China) played an important role in this. First of all, China has a population of 1.4 billion, which provides a huge domestic market for the development of Internet companies. Second, after decades of rapid economic growth, the emergence of a large number of middle-income classes and small and micro enterprises has promoted a strong demand for some previously underdeveloped financial services (such as consumer finance and wealth management). Third, the Chinese government has promoted the widespread application of high-speed mobile payments through the development of modern digital infrastructure and a long-term plan for mobile signals to cover all parts of the country.

In the initial stage of expansion, large technology companies can be regarded as “accidental financiers.” Similar to the situation in the Internet industry, once a company gains a large installed user base, a winner-takes-all trend will be formed. In this sense, Alibaba and Tencent initially expanded from their core business to payment services, with the main purpose of fighting for the right to survive. For the same reason, the two companies are cautious in providing high-risk financial services. Because in the relatively vulnerable stage of the company, the loss of investment may lead to the loss of customers. When newly pioneered financial services are more profitable than their core business, large technology companies may turn into aggressive invaders and compete fiercely with existing financial companies, which will bring to their customers and the financial system risk.

In this context, when there are signs of unreasonable growth, regulators must strike a balance between loose and stringent supervision. Traditional laws and regulations can better serve the regulatory authorities in many cases. For example, strict capital liquidity regulations can curb the growth of MMF to prevent it from posing a major liquidity risk to the entire industry and other industries. Similarly, regulations on leverage restrictions and balance sheet treatment have also inhibited the rapid growth of small loans financed through securitization. But at the same time, regulators also need to pay close attention to the innovation of financial products. In particular, when some companies launch new products, they use certain gray areas of existing regulations to seek higher profits. Some of these activities may require the promulgation of new regulations to prevent emerging risks.

In addition to competition, the cooperation between large technology companies and financial institutions also poses challenges to regulators. The cloud computing services provided by large technology companies to other financial institutions is a typical example. Under normal circumstances, these new services require powerful computing technology and sufficient IT investment. When ordering these services, banks can take advantage of high-performance computing and data collection speed to greatly improve their services to customers. However, the increasing reliance of financial institutions on a few cloud computing providers also brings risks in terms of data security and privacy.

Although large technology companies have brought huge benefits to the Chinese economy by innovating payment services, they have also posed new challenges to regulation. First, large technology companies rely on the floating funds of their large customers in their e-wallets to have market power that can affect the wholesale financing prices of banks. And the huge transactions between large technology companies and many banks that are not under the supervision of the central bank may be seen by criminals as an opportunity for money laundering. Introducing a new clearing system and forcing payment operators to deposit customers’ floating funds in the central bank may alleviate these concerns. But this may not be permitted by the central bank’s charter, and it may also face strong political opposition in other jurisdictions.

Finally, the large-scale participation of large technology companies in the development prospects of cross-border transfer and payment services will require the special attention and joint coordination of central banks of various countries. At present, a common practice in my country is that large technology companies look for corresponding agencies abroad to handle payment and settlement services. In some cases, fintech companies will be responsible for handling currency exchanges, and the regulation of these transactions has become an important issue. If fraud occurs, who will be responsible for solving the problem? In addition, when a large technology company gradually becomes a dominant force in the payment industry in many countries, will this cause widespread concern in the global regulatory community? In particular, as data increasingly becomes a valuable commodity, how can we ensure the security of data when all transactions are settled through relatively closed payment channels?

Source | BIS, Monetary and Economic Department

Author | Michael Chui

Posted by:CoinYuppie,Reprinted with attribution to:
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