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[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

Date: 2017-07-03
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      The fintech (financial technology) fever of the market has gradually risen since Alibaba and Ant Financial announced their strategic cooperation with China Construction Bank in March 2017 and potential market application and huge space of fintech come into sight. Shortly after that, other three members of BATJ (As of June 27, 2017, Wind Info shows that the market value of Jingdong is RMB 61.1 billion Yuan, similar to that of Baidu (RMB 61.9 billion Yuan). Thus Jingdong was added to the traditional BAT (Baidu, Alibaba, Tencent), making the BATJ (Baidu,  Alibaba, Tencent, Jingdong)) have signed cooperative agreements in respect of further development of fintech field with the three big state-owned banks, ICBC, ABC and BOC, respectively in June. (Table 1) In contents, they are intensive cooperation rather than the previous simple mode of “one provides financial products and the other technology service”, advancing the integration of finance + technology. The financial industry in China is also entering into a new stage featuring “more cooperation than competition” among institutions.

      The four state-owned banks have to seek new performance increase through transformation for that in recent years, the progress of interest rate liberalization has slowed the increase of profits and they are under the pressure of financial deleverage and balance sheet shrinkage of the People's Bank of China. For example, during the early days of Yu’E Bao, its rapid expansion by virtue of high return, law threshold and convenient access results in the large amount of deposits transfer from banks and disintermediation of liabilities service of commercial banks. Currently, the four banks are willing to take the initiative to cooperate with Internet giants mainly because they value the technology achievements and deposits in respects of cloud computing, big data, blockchain and artificial intelligence and expect to build the inclusive, cloud, intelligent and sci-tech finance through cooperation. But for Internet enterprises, the absolute advantage in technology capacity makes them have certain influence power against the four financial giants; cooperation with large banks can not only put the financial sci-tech capacity into practice, but also reduce and shorten the route of financial products to the terminal users, which reduces the costs, improves the efficiency and upgrade the service level.

      In fact, “fintech” appeared in China as early as 2007. The most famous one is ppdai.com, which was on the market as the first unsecured loan network platform in China. The characteristics of ppdai.com is that the procedures of “borrowing” and “lending” which traditionally can only be performed through banks can also be handled on the Internet and it allows P2P personal loan. As the “fintech” then involved Internet-based procedures, it was known as “Internet finance”. Later, the P2P saw an extremely fast growth. According to the annual statistics of P2P published on p2p001.com, the year-on-year growth rates of P2P from 2009 to 2014 are all between 200% and 400% (Figure 1) and the accumulated trading volume as of 2016 even reaches RMB 4.4 trillion Yuan (Figure 2).

      However, the excessive growth of P2P caused the disordered development of the industry and increase of financial risks as relevant regulatory polices failed to catch up with the growth in time. The regulatory policies issued consecutively by relevant functional authorities in 2015 and 2016 helped to cool down the fever of P2P “fintech”. (Figure 2)

       The event of one-to-one cooperative agreements signed between the BATJ and four state-owned big banks can be considered as the second spring of fintech in China, pushing the six major fields of fintech out under the spotlight of capital market. Fintech, a series of technology innovation based on cloud computing, big data, artificial intelligence and blockchain, can be applied to the six major financial fields, that is, payment and settlement, loan and financing, wealth management, retail bank, insurance and settlement of transactions. Therefore, the contents of cooperation between BATJ and four big banks are mainly in the six fields, for example, payment field between Alibaba and China Construction Bank, big data and blockchain between Tencent and Bank of China. Then in what way big data, cloud computing and other technologies impel the expansion of fintech?  

      1. Big data and cloud computing

      Big data and cloud computing are core driving technologies of fintech. Cloud computing can reduce operating costs for financial companies and big data dominates in data collection, integration and application.

      2. Artificial intelligence

      The main application of AI is mainly represented by Robo-advisor, which offers portfolio management based on cloud computing and others parameters. The Wall Street investment bank GoldmanSachs began to deploy the “Kensho”, an AI-driven trading platform, in 2014. Only two traders are left from original 600 traders of its stock and cash trading department in New York in 2000 with the remaining substituted by machines.

      3. Blockchain

      It is featured by distributed ledger without alteration to the data. Potential uses of blockchain is in settlements as it can reduces costs and improve the efficiencies of payment, settlement, transfer and other procedures.

      Fintech has started globally. According to statistics on 01caijing.com, as of May 2016, there are 1362 companies involving fintech in 54 countries, with total financial scale reaching USD 25.8 billion, and the low investment threshold is the main reason for users to choose fintech.

Fintech will have profound effect on finance industry in China, because innovative applications will be derived from it in fields of banks, securities and insurance.

      1. Bank

      The bank system once monopolized the consumer data in China for that banks get data each time after the use of bank card. But as the expansion of fintech, the third-party mobile payment, such as Alipay, has been gradually favored by customers. The popularization of mobile payment will reduce the consumer data mastered by banks, which further influences banks’ analysis on customers’ consumption habits and design of relevant financial products. (Figure 4, Figure 5) In addition, fintech can provide solutions to credit rating, credit extension, post-loan warning, anti-fraud and other situations on the basis of high-dimensional big data and ingenious algorithm. Traditional financial institutions can upgrade financial risk control on the basis of big data and technologies instead of the experience or small data as before.

      2. Securities

      Artificial intelligence can have fast and multi-dimensional analysis of big data, improving the accuracy, and Robo-advisor can be regarded as the shift of standard background service to online service in private banks. Compared with the traditional investment advisor, Robo-advisor has the advantage to simplify procedures, allow financing for all, customize short/medium/long term multi-cycle investment plan, have risk early warning, etc. (Figure 6)

      3. Insurance

      Traditionally, the insurance channels were mainly offline and in the charge of insurance broker. But along with the expansion of mobile terminals and Fintech, online insurance purchase has become more and more popular among customers. It can be showed by comparing Figure 7 and Figure 8 that the growth rate of income from Internet insurance premiums is much faster than that of total income from insurance premiums in China. That means the offline channel of insurance will be gradually substituted by the online channel, which will be the key to future development.

      Concerning functional authorities in China have started certain deployment as they have been aware of the effect of fintech on financial industry. On August 8, 2016, the State Council issued the 13th Five-year Plan on National Scientific and Technological Innovation, having proposed to promote innovation in scientific and technological financial products and services and build national science and technology financial innovation center, improving the technology and financial integration mechanism and increasing the proportion of direct financing so as to create  scientific and technological finance ecology integrating various types of financial tools.

          Premier of the State Council Li Keqiang delivered the 2017 Government Work Report in   March 2017 and pointed out that the development of emerging industries including artificial intelligence should be speeded up. “Artificial intelligence” was first written in national government work report. The premier also proposed to carry out the Made in China (2025), accelerate application of big data, cloud computing and Internet of things, and change the traditional mode of industrial production, management and marketing with new technologies, new formats and new modes. So it is the best opportunity for fintech development.

      The People’s Bank of China also issued the 13th Five-year Development Plan on Information Technology of Financial Industry in China (the “Plan”), explicitly putting forward the guiding ideology, basic principles, development goals, key tasks and safeguard measures for the 13th Five-year information technology work of financial industry. The Plan presents five key tasks in as aspects of “consolidate foundation, strengthen security, support innovation, deepen standard, and enhance governance”. The Plan also clearly puts forward to strengthen the research and application of Fintech and Regtech; steadily improve system architecture and research and application of cloud computing; carry out application innovation of big data technologies; normalize and popularize technological applications of Internet finance; actively promote research of new technology application including blockchain and artificial intelligence. This also caters to the ideas of the Instruction on Promoting the Healthy Development of Internet Finance issued in July 2015. The next step after screening and rectification is bigger aim and direction.

       

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

[Original Research] The Cooperation between BATJ and the Four Big Banks May Start a New Era for FINT

We believe that fintech will lead the future of scientific and technological innovation. The uncontrollable growth of P2P causing industry chaos in the early stage will be improved after the gradual strengthening of supervision. Fintech will usher in a healthy development after the landmark cooperation between BATJ and four big banks. Fintech’s big data, cloud computing, artificial intelligence and blockchain will be the blue ocean for investment. What will finance and technology integration bring? Let us wait and see.

(By Zhejiang TTGG Financial Research Institute; reposted from: WeChat Official Account of TTGG Financial Research Institute)

 

 

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