The author of this article is Dr. Zou Chuanwei, Chief Economist of PlatON, Wanxiang Blockchain. Reprinted from "First Financial".
As a loyal reader and "fan" of Governor Zhou Xiaochuan's book, I first read "Financial Infrastructure, Scientific and Technological Innovation, and Policy Responses-Compilation of Zhou Xiaochuan's Lectures". This book is very instructive for understanding fintech development and regulatory responses, and many of its perspectives are world-class. Although some of the speeches included in the book have been studied, they still have a sense of reading often. In particular, the editor's careful tailoring and compilation of President Zhou's speeches on the same topic at different times not only allowed me to see his consistent position on some important issues, but also allowed me to appreciate the evolution of his thinking. This article talks about some superficial learning experiences from the balance between finance and technology.
As pointed out in the book by Mingzong Yi, the financial industry is essentially an IT industry. Finance and technology are closely linked. In the course of development, finance has continuously absorbed various technological innovations, such as printing, cryptography and anti-counterfeiting technologies, as well as various communication technologies represented by telegrams, telephones and the Internet. As long as a technology can improve the efficiency of capital circulation, risk management and financial resource allocation, it may be absorbed by finance. In fact, finance is the earliest or most important application area for many technologies. With the rise of fintech, technology has gradually moved from the middle and back of finance to the foreground, and its status has become more and more important. Some financial institutions have become more like technology companies in terms of personnel and cost structure. However, we need to see that finance and technology follow different development laws. Grasping the balance between finance and technology is very important for the sustainable and healthy development of financial technology.
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Balance of financial demand and technology supply
Governor Zhou pointed out that as a supplier, technology or Internet companies often need to promote certain technologies, and will try their best to publicize the disruptive effects that these technologies may have, hoping that the financial industry will adopt them. These technology suppliers sometimes occupy innovative "moral highs" that can mobilize public opinion and even political lobbying. In response to this situation, the financial industry must understand technical characteristics and development trends on the one hand, and have a clear understanding of its own technology needs on the other hand. Only in this way, in the face of technological shocks, it will not be "self-disciplined", but can more actively absorb truly valuable technological innovation. And from the actual situation, most technological developments are linear. Financial development also has its own laws. To date, no technological innovation has had a disruptive effect on finance.
The ability of technology should be assessed objectively and objectively, such as the application of AI in finance. Deep learning algorithms that have received much attention in the AI field since 2012 are essentially pattern recognition, suitable for problems with clear boundaries and limited rules. Go has achieved world-renowned success with deep learning, but it faces many challenges in autonomous driving because the latter does not have clear boundaries and the relevant rules are difficult to exhaust. Similarly, AI is suitable for classifying face photos, user preferences, and the probability of default and distress. These are the core issues of face recognition, user portraits, credit evaluation, and insurance pricing, so AI is paying for identity verification, credit There is a good application prospect in approvals and actuarial calculations. But even so, AI credit approval may cause disputes over the fairness of credit. Related models or algorithms should be transparent, subject to public supervision and evaluation, and regulators should be used to supervise and judge whether such applications are appropriate. The application of AI to the securities market is much more difficult. The asset price formed by market transactions aggregates all aspects of information, and its complexity far exceeds the scope of pattern recognition. For example, AI's fundamental analysis is far more difficult than technical analysis; the data analyzed by AI tends to be based on recent data, and earlier data is not retained or not so rich, which easily results in procyclical analysis results. Furthermore, Governor Zhou pointed out profoundly that the Internet and big data should not lead to a return to a centralized planned economy.
The choice of technology is full of uncertainty. Financial practitioners may not be the best technical experts because of their specialization in the field of technology. Governor Zhou pointed out that as long as a competitive optimization mechanism is established to allow fair competition among different technological routes, the technology that is most suitable for financial applications will naturally be selected. In the development of DC / EP (digital currency / electronic payment), the People's Bank of China does not interfere with the technical route chosen by commercial banks in research and development. They can choose either distributed ledger or mobile money or e-wallet payment methods. They are market-driven. The horse racing mechanism in the end depends on which technical route can win, which reflects Governor Zhou's methodology.
Balance of financial functions and technological evolution
No matter how technology evolves, financial functions are relatively stable, and the main changes are financial business models and organizational forms. Today's analysis of financial functions has not surpassed the framework of Bodie and Merton in the mid-1990s: 1. payment and settlement; 2. financing and equity refinement; 3. providing channels for the transfer of economic resources; 4. risk management 5. Information provision; 6. Solving incentive problems. Technology will not change the connotation and management framework of financial risks. The identification, measurement, prevention and disposal methods of market risk, credit risk and liquidity risk are still applicable to fintech. Technological risks are more prominent for fintech, and more research is needed on network security and data protection. In general, we must have confidence in the new financial business models, applications, processes, and products promoted by technological innovation: as long as we use standardized methods, we can penetrate the "technical veil" and analyze them clearly Transfer and the impact of the interests of relevant parties, so as to establish an appropriate regulatory framework based on the concept of functional regulation. In the special rectification of Internet financial risks, the People's Bank of China put special emphasis on “penetrating” supervision methods.
In this regard, three issues must be noted. First, some fintech institutions abused the inclusive financial statements to add legitimacy to their business. Inclusive finance does not mean that financial supervision should be opened up, and should be supervised on the basis of comprehensive reputation. Not only that, inclusive finance's service targets often belong to financially disadvantaged groups. The lack of financial literacy, financial risk identification and ability to bear is the focus of financial consumer protection. Pratt & Whitney also means that once the risks are involved, the spillover impact on society will be greater, and stricter supervision will be needed.
Second, Governor Zhou has repeatedly emphasized that we must pay attention to the real motivation and incentive mechanism of fintech institutions. For example, if a third-party payment institution wants to make a profit by providing high-quality payment services, it should not place its profits on the interest income of customer reserves. The People's Bank of China requires third-party payment institutions to centrally deposit all customer reserve funds with the People's Bank of China and refer to the excess reserves of commercial banks to pay interest. For some fintech institutions that want to do financial business, but do not want to obtain financial licenses and accept corresponding supervision, they must be banned from the source. In view of the possibility of self-reinforcement of financial risks in the transmission, the supervision of fintech innovation should be advanced as far as possible. "Easy start, tolerance of errors, gradual compliance, and pursuit of soundness after making money" cannot be encouraged, let alone waiting for related risks from "small Too Not Worthy "evolved into" too big to ignore "or even" too big to fail ".
Third, irrespective of business entities and technical forms, as long as they are engaged in similar businesses, financial standards and regulatory standards should be consistent to prevent regulatory arbitrage. Fintech institutions and traditional financial institutions should be subject to the same supervision when engaging in the same business, otherwise the fair competition relationship between the two will be distorted.
Balance of financial logic and technical logic
Financial logic emphasizes serving the real economy and security and stability, while technical logic often emphasizes disruption, decentralization and rapid iteration. The two logics are not naturally compatible. However, some technologies have scale advantages, network effects, and competitive strategies promoted by "first mover advantage" and "winner-take-all", which have begun to penetrate into finance. Some fintech institutions, in order to quickly achieve large-scale and seize market share, regardless of cost, do not hesitate to adopt "burning money" and cross-subsidy methods, and some of the subsidy funds come from venture capital or capital markets.
This will cause three distortions in the market. First, the fair competition in the market is distorted, so that institutions without subsidies cannot compete with institutions with subsidies, and licensed institutions under strict supervision cannot compete with fintech institutions that enjoy regulatory tolerance. In particular, it should be noted that when Big tech is involved in financial business, it may cause monopoly and unfair competition because of its advantages in terms of platform, technology, users and data. For example, Big tech has created a capture ecosystem that locks in users, making it difficult for users to switch to competitive platforms; using dominant market power and exclusive terms to suppress or even suppress potential competitors.
Second, distortion of market risk pricing. In the field of China's e-commerce and sharing economy, the leading institutions in the subdivided fields suppress competitors through "price wars" and increase their charging standards after gaining a dominant market position. This is a frequently used strategy and has also caused a lot of controversy. The "price war" strategy also extends to the field of fintech. But unlike e-commerce and the sharing economy, financial "price wars" mean distorted capital prices. For example, in the early stages of the development of Internet finance in China, some institutions used subsidies to increase the yield of Internet wealth management products in order to seize market share. Distorted capital prices will significantly affect the flow of funds and have a great impact on the efficiency of resource allocation and financial risks.
Third, distorting the institutions' own development. Finance is an industry of operational risk. When the risk business is growing rapidly, the internal management and risk control of many fintech institutions cannot keep up. Once the risks are exposed, the impact of financial technology institutions on society will far exceed that of the general real economy institutions. For example, bicycle-sharing companies have closed down after high-speed growth. Although it will cause waste of investment institutions ’funds, bicycle production capacity, and public road resources, as long as user deposits are not misappropriated, it will not be easy to cause financial risks to stakeholders. This shows that technological evolution cannot reduce financial risk management requirements; when technology is rapidly iterating, financial risk management should be strengthened instead.
Balance of public interest and private interest
Governor Zhou has stated many times that private institutions should be allowed to participate in the provision of public infrastructure. The cost of public infrastructure construction is high. If it is provided entirely by the government, it may cause greater public financial pressure, and the introduction of private institutions can share some of the pressure. In many application scenarios, private institutions are better aware of user needs because they are closer to the market and users, helping to improve the quality of public infrastructure. For example, in China's payment and clearing system, the government provides a backbone payment network, banking financial institutions are the main force of payment, and third-party payment institutions mainly provide small, fast and convenient small and micro payment services for the society, and also participate in payment and clearing infrastructure. Construction. For another example, the People's Bank of China stated that on the basis of technical standards and application specifications, the payment path, payment conditions, and commercial applications above should be left to the market as much as possible, which also reflects the idea of public-private cooperation.
Private institutions participating in the provision of public infrastructure should maintain a balance between public and private interests. Public infrastructure is a public utility and cannot be a profit tool for individual institutions. President Zhou emphasized that private institutions and fintech institutions should have a public spirit to participate in public infrastructure, obey public service constraints and norms, achieve efficiency and advancement through competition, and protect privacy. The provision of financial infrastructure by private institutions should also follow the principle of market neutrality, and must not distort or intervene in competition in other fields, otherwise it will easily disrupt the market competition order.
China faced the above problems when it launched the pilot of market-based personal credit reporting agencies. From an economic perspective, as a "conditional public product", the personal credit report should not have a direct commercial competition with the information provider or information user, nor should it interfere with or affect the information provider and the Competition among information users in their respective market segments. Conversely, if the information provider or information user controls the credit reporting agency, it is also difficult to restrict them from misusing credit reporting data, gaining a favorable competitive position, or damaging personal credit reporting rights. For example, suppose an individual credit reporting agency controlled by an e-commerce platform expresses or implies that consumers can improve their credit scores only by spending on their own platform, or encourage young people to spend luxury on borrowing. The more luxury goods they buy , The higher the credit score. Such an individual credit reporting agency will not serve the public interest, but will affect the fairness of the credit reporting and the competition order of the credit reporting market, and even become a "rental" tool to a certain extent. To this end, the People's Bank of China put forward the principle of "independent third parties" and guided the China Internet Finance Association to co-sponsor and set up a bank credit report with eight market institutions.
Recently, the global stablecoin represented by Libra has attracted much attention. How to balance public and private interests is also one of the core issues facing the global stablecoin. The "stability" of the stablecoin comes from its anchored fiat currency, and the stability of the value of the fiat currency is one of the most important public products provided by the central bank to society. When the private sector develops stablecoin, is it possible to over-consume this public product? From a theoretical analysis, I think this possibility exists and there are three possible channels. First, the stable currency was issued in violation of the principle of 100% legal currency reserve. The second is to deviate from the goal of providing payment services through stablecoins, pursue investment returns from fiat currency reserves, and make high-risk, high-yield investments. The third is to carry out deposit and loan activities based on stablecoins, and multi-level expansion of stablecoins (similar to M0 to M2). Under these three channels, once the stablecoin faces a large-scale centralized redemption, there may not be enough liquid assets in its reserve assets to meet the redemption demand, and the stablecoin does not enjoy the support of the central bank's last lender. In extreme cases, it may The phenomenon of "sale on the hot line" of reserve assets and the run of stablecoins have affected financial stability. Therefore, it is necessary to study the impact of stable currency on monetary policy and the transmission mechanism of monetary policy, and the reserve assets of stable currency need to be accurately measured, calculated, and established custody and management rules. Finally, global stablecoins will have a substitutive effect on weak currencies, non-convertible currencies and currencies of developing countries, and will magnify the spillover effects of strong currency monetary policies. Governor Zhou pointed out that it is necessary to speed up the conversion of capital account and make the RMB a part of a strong currency.
I would like to take this short article to record my reading experience, which is unavoidable like watching the leopard in the tube. What I admire the most is that, while Governor Zhou is busy with his official duties, he always has the ability to grasp the cutting-edge international discussions and literature at the first time, and gives "advanced" thinking that has both theoretical depth and rich policy meaning in combination with Chinese practice. . I look forward to continuing to learn true and new knowledge from Governor Zhou's next book.
(This article is the author's personal opinion, and does not represent the position of the unit)