China’s Experience in Digital Financial Inclusion
Financial inclusion is the next step in the evolution of financial systems and has played a key role in the development of China’s finance. Before 1978, China’s macro economy was primarily regulated through fiscal policies, first establishing a modern banking system in 1985 with the creation of the People’s Bank of China — China’s central bank — along with commercial banks. Later, in 1991, the Shanghai Stock Exchange marked the emergence of capital markets in China. And more recently, China has been progressing towards financial inclusion; in 2007, the country established its first micro-loan company pilots, and in 2009, the ChiNext stock market (for growth enterprises) in the A-shares market (RMB-denominated equity shares of China-based companies and trade on either the Shanghai Stock Exchange or Shenzhen Stock Exchange).
On December 31, 2015, the State Council issued the Plan for Promoting the Development of Financial Inclusion (2016–2020), signaling the strategic importance of financial inclusion for China. Within this context, digital financial inclusion — a recent trend and business model in financial inclusion — has also been flourishing in China. Bei Duoguang and Li Yan (2017) define digital financial inclusion as a model of financial inclusion enabled by digital technologies. In China, it has already gone through four development stages, namely start-up, slow development, explosive growth, and then transformation and regulation. Throughout its development, digital financial inclusion has adhered to the G20 High-Level Principles for Digital Financial Inclusion, which were adopted and published at the Summit in Hangzhou in 2016 and aim to optimize inclusive finance services and increase people’s well-being.
There are four main drivers of digital financial inclusion in China: advanced FinTech, optimized infrastructure, stable and inclusive regulation, as well as innovation in business models and products.
Implied in its name is the dependence of digital financial inclusion on digital technologies, such as cloud storage, big data, cloud computing, artificial intelligence (AI), and blockchain. These reshape the traditional concept of financial inclusion services, dramatically enhancing digital capabilities and reducing costs. Specifically, the Internet facilitates data transmission, cloud storage and big data technologies expand data storage, while cloud computing and AI improve data processing and usage. Typically, financial inclusion is unsustainable as a business model, lacking a positive cost-benefit ratio. However, these technologies enable digital financial inclusion by reducing overall costs, transmitting data faster, collecting more types of data, and enriching the economics of micro-finance. This happens both online and offline, so financial institutions continue to see return on investment.
At the same time, the Chinese government is strategically focused on extensive planning for digital technology, which is speeding up updates and transformations in digital inclusive finance. For one, the industry’s development depends on comprehensive infrastructure. To this end, China has established a nationwide payment system that incorporates a variety of stakeholders. This includes licensed financial institutions (such as banks, payment and market infrastructure operators, as well as non-bank payment institutions), outsourced service providers that assist in business expansion or provide technical support, manufacturers of payment instruments or hardware equipment, as well as innovative FinTech companies. Together, they drive financial inclusion.
One of the key digital technologies in this entire process is mobile payment. Today, anywhere you go — rural or urban — in China, you will be able to pay using quick response (QR) codes. A large proportion of this market is dominated by Ant Financial, a digital financial inclusion service provider based in Hangzhou, Zhejiang Province. Its services enable users to complete daily transactions, take out loans, and much more, using only a QR code. In 2020, China recorded 123.22 billion mobile payment transactions amounting to CNY432.16 trillion, a year-on-year growth of 21.48% and 24.50%, respectively. Through integrating databases and credit information at different levels and domains, China has basically built up another major infrastructure — the Individual and Corporate Credit System, which hosts the world’s largest number of individual and institutional users, thus driving financial inclusion from the administrative and market perspectives.
In general, China has a steady regulatory climate, thus smoothly shifting from centralized regulation and services early on to the co-existence of the People’s Bank of China, China Banking and Insurance Regulatory Commission (CBIRC), and China Securities Regulatory Commission (CSRC). Furthermore, China’s regulatory authorities have long encouraged financial research and innovation conducive to inclusive finance. More importantly, the Central Government actively promotes inclusive finance in an effort to reduce financial exclusion. An example of this is the agricultural financial policies issued annually since 2004 in the No. 1 document. These aim to establish a diversified system of rural financial services with lower access thresholds, encourage rural financial institutions to provide more support to farmers, and ultimately reform the rural finance system.
In addition to reshaping financial inclusion, digital technologies also encourage numerous business model innovations, which in turn facilitate financial inclusion. One typical example of innovation is customization. In fact, the biggest difference between digital and traditional finance lies in the transformation of financial services from single static products to dynamic tailored solutions. Essentially, this means that providers design bespoke financial services and products based on customers’ individual requirements.
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“The only constant in life is change”, said Heraclitus. Looking ahead, there are three clear trends in China’s digital financial inclusion.
First, focusing on customer needs is key to digital financial inclusion. Ensuring that everyone has access to financial services requires tailoring services to a diverse group with complex requirements. A single service or product cannot suffice for everyone. To ensure that low-income customers have access, financial products and services need to address their unique needs and requirements.
Second, financial services need to be customizable. Digital financial inclusion emphasizes access to financial services for all and financial institutions are not required to provide full-scale services. Instead, it is more appropriate to determine the specific customer needs and offer tailored professional services. Therefore, the market needs to create space for customized digital financial services.
Third, digital financial inclusion will be closely integrated with other types of services. One example is bike-sharing, which has grown rapidly thanks to and in turn has encouraged the growth of mobile payments. Today, mobile payment has already become popular in transportation and shopping, and will likely penetrate other aspects of daily life very soon.
The discussed practices and trends signal four implications for other countries.
First, focus on developing and applying science and technology at the national strategic level; particularly, there should be a focus on FinTech and digital technologies. These will reduce the cost of digital financial services, enhance service efficiency, improve customer experience, and satisfy emerging customer needs.
Second, it is important to address long-term infrastructure in education, healthcare, transportation, utilities, energy, and communications. These will facilitate financial service outlets, payment services, and credit systems, driving digital inclusive finance.
Third, there needs to exist an inclusive and stable regulatory climate. China’s financial regulators have long required financial institutions to promote financial services and support major economic activities. Although most financial services have targeted large economic activities after 1978, there are still many policy documents encouraging financial institutions to provide services to small and micro enterprises as well as individuals.
Fourth, it is key to continue encouraging business model innovation in financial inclusion. The integration of technology and finance has already given light to many new business models, which create feasible solutions for sustainable digital financial inclusion. Apart from being guided by the government, financial institutions should also pursue this type of innovation in terms of finance systems and governance.
Facing the continuous growth of technologies and innovation, we need to constantly consider the significance of financial inclusion. First of all, financial inclusion is the result of adjustments in the financial system, offering low-income groups access to financial services. Financial inclusion also signals macro economy re-balancing. Inclusive development urges financial institutions to serve the real economy and speed up technological innovation to achieve sustainable macroeconomic development. Last but not least, finance leads to a positive society. The call for financial inclusion is actually an aspiration for growth and development in the financial field amid social transformation. Beyond commercial values, financial inclusion also brings us long-term social benefits and human-centric development.
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This article is based on a publication by the Chinese Academy of Financial Inclusion (CAFI). The content draws on said publication along with Professor Bei Duogaung’s speech during his visit to Huawei, and CAFI’s reports such as China’s Experience in Digital Financial Inclusion, Development Report of Digital Financial Inclusion in China, and The Role of Financial Inclusion in the Belt and Road Initiative.