Since the end of the 20th century, information technology represented by the Internet has shown a momentum of rapid development, and has also brought tremendous changes to people’s production and lifestyles. In the financial field, the combination of Internet technology and financial services has produced what we call Internet finance products and business models. Judging from the current development, Internet finance can be roughly divided into the following four categories: Internetization of traditional financial services, financial services based on Internet platforms, brand-new Internet finance models, and Internetization of financial support.

The first category: Internetization of traditional financial services. Including Internet banking, also called DirectBanking; Internet brokerage, also called Online Discount Brokerage; in addition, there is Internet insurance. The main feature of direct banks is that they have no physical business outlets and rely on the Internet, telephones, and ATMs (automated teller machines) to provide services. Directly operated banks originated in Europe and the United States as a direct result of interest rate marketization and the development of Internet technology. They are currently the most developed in the United States. From the standpoint of independent legal personality, basically no business outlets, and insured by the Federal Deposit Insurance Corporation, there are a total of 16 directly-operated banks in the United States. Although direct banks have developed rapidly, the proportion of US direct banks in both total deposits and total assets in the US banking industry is less than 5%. Generally speaking, they have not had a great impact on the traditional banking industry. However, after more than 20 years of exploration, it should be said that direct banks have begun to show a clear business model and rapid development momentum. Take BOFI, a direct bank listed on NASDAQ as an example. BOFI went public in 2005, and its stock price has hardly changed much before 2010. Since 2010, driven by its performance, its stock price has doubled by 8 times, and it has more than 100 institutional investors. This also shows that the business model of direct banks has begun to be recognized.

The development of online discount brokerages is also represented by the United States, which was born under the background of the combination of the liberalization of US securities trading commissions and the development of Internet technology in the 1970s. Online discount brokers attract customers with extremely low commissions and provide wealth management services to customers on this basis. In the context of mixed operations, many discount brokers in the United States also conduct direct banking business. For example, Charles Schwab and Etrade both have banking licenses and provide direct banking services, but Schwab also has physical business outlets, while Etrade is a relatively pure online discount brokerage. Looking at the situation of more than 20 online discount brokers in the United States, although their respective commission rates, trading tools, research support and customer service are different, the overall characteristics are low commission rates and a diversified income trend. Mainly reflected in the decline in commission income and the rise in asset management income and direct bank income.

Internet insurance mainly refers to direct insurance (DirectInsurance) in the early stage, that is, the business model of selling auto insurance and property insurance products based on the Internet, which has developed to varying degrees in European and American countries. In the United States, the representative of direct insurance is Progressive and Esurance, which was later acquired by Allstate. From the perspective of the development of countries around the world, the current prominent innovative models of Internet insurance include Internet auto insurance innovations based on sensors that detect driving habits and mileage, Internet health insurance innovations based on health data from mobile applications, and social network-based innovations. Internet insurance marketing innovation. On the whole, the business model of Internet insurance seems to be still being explored.

Currently in China, the development of this type of Internet financial model is mainly reflected in online banking, online securities transactions, and online and telephone sales of insurance products. Among them, ZhongAn Insurance is the first Internet insurance company and Qianhai WeBank is the first. Internet private banks have begun to actively explore.

The second category: financial business based on the Internet platform. Internet platforms here include, but are not limited to, e-commerce platforms and Internet third-party payments. This type of Internet finance model is mainly manifested in the sale of financial products on the online platform, as well as small loans for online merchants and consumer finance for individuals based on customer information and big data on the platform. Typical representatives of the former include the early Paypal money market funds and the recent rapid development of Yu’ebao, as well as the online shops opened by many financial institutions on Taobao, and third-party websites and mobile apps that specialize in selling financial products such as funds. Typical representatives of the latter include Ali Xiaodai and Jingdong Baitiao, as well as Kabbage and Zestfinance in the United States. What needs to be pointed out is: Ali Xiaodai and JD Baitiao both conduct business based on the customer information of the website’s own platform, while Kabbage is based entirely on the customer information of the third-party platform and the entire network data to lend to the online merchants, and Zestfinance makes use of large Data is a model of financial business. The company uses machine learning methods and complex statistical methods to analyze big data, and provides loan services specifically for people who cannot enjoy banking services in the United States (Unbanked and Underbanked). It should be said that the development of big data and its application in credit risk models have brought the loan business of banks and non-banks into a stage with higher technical content. No wonder there is a famous comment on the famous Q&A website Quora: The bank of the future is just a technology company with a banking license!

Judging from the current development situation, the above two types of Internet financial models are only supplements to existing financial services, and it is too early to say that it is too early to subvert the tradition. The scale of Internet banking is still small, and Internet brokers only improve the efficiency of customer acquisition and transactions. Alibaba Microcredit and Kabbage are mainly for small and micro enterprises, and Zestfinance is mainly for people who are not covered by traditional finance, and it does business that traditional banks do not do, and it will not soon shake the foundation of traditional finance.

The third category: a brand-new Internet financial model. This mainly refers to P2P network loans and crowdfunding financing. In the United States, the pioneers of P2P network lending are Prosper and LendingClub, which were established in 2006 and 2007, respectively. These two online loan platforms ushered in the era of Internet-based, person-to-person financial transactions. This decentralized micro-lending platform has been widely welcomed by the public once it was launched. After in-depth communication with the US Securities and Exchange Commission, the promissory notes used as a trading vehicle were finally recognized as securities, thus confirming the status of the US Securities and Exchange Commission as the main P2P regulator. In this way, the P2P platform must be registered with the SEC and must carry out strict information disclosure just like issuing stocks. It can be said that registration and information disclosure constitute barriers to entry for the P2P industry in the United States. This entry barrier, together with a complete personal credit system, and complete securities, lending, and consumer protection laws, constitute a troika that guarantees the healthy development of P2P. Both Prosper and LendingClub are currently developing smoothly. Among them, LendingClub’s cumulative total transaction volume has exceeded 6 billion US dollars and has been successfully listed.

In the United States, there are both comprehensive P2P platforms such as Prosper and LendingClub, and there are also so-called vertical P2P platforms such as Sofi, which specialize in serving college students and whose investors are limited to qualified investors. Of course, we have also seen that comprehensive platforms have begun to introduce SMEs on the borrowing side, and more and more institutional investors on the investment side. According to our survey of American Internet finance in the summer of 2014, P2P online lending has not caused a big disturbance in American economic life. Many people, including Wall Street practitioners, have not even heard of LendingClub. This may be Because the United States has formed a multi-level capital market and a highly developed financial service system. With the gradual development of P2P in Europe and the United States and other countries, a prairie fire has been formed in China. At present, nearly 2,000 P2P platforms have been put into operation. This is due to the high level of control in my country’s financial environment and the huge scale of private finance. Not open. At the same time, regulatory agencies are also actively formulating regulations to prevent the occurrence and expansion of risks. However, as a complete personal credit investigation system has not yet been established in China, the services of P2P platforms for personal lending will encounter a big bottleneck, and those oriented to specific P2P platforms with assets and market segments that also limit the qualifications of investors are likely to stand out and become the winners in the initial stage of development.

Crowdfunding in English is Crowdfunding, which refers to a platform for the public to raise funds for products, especially creative products, based on the Internet. The crowdfunding model first appeared in the United States, represented by Kickstarter and Indiegogo. Crowdfunding methods include debt, equity, donations and pre-purchase. Among them, debt financing can be conducted through P2P platforms, and equity financing is rarely conducted due to restrictions on public offerings and the number of people in the US Securities Act. Therefore, in addition to a small amount of donation financing, the current main method of crowdfunding financing is pre-purchase of products. There are hundreds of crowdfunding platforms around the world, most of which are concentrated in European and American countries. Among these crowdfunding platforms, Kickstarter stands out, with a cumulative total of more than $1.5 billion in financing completed.

What about the corresponding supervision of the crowdfunding model? After the 2008 financial crisis, the US government has been working hard to find a way out of the crisis. One of the focuses is to provide a more relaxed environment and conditions for SME financing. Crowdfunding platforms emerged in this context and quickly attracted the attention of Congress and regulators. In April 2012, the Obama administration promulgated the “Startup Business Startups Act” (Jumpstart Our Business Startups Act, referred to as JOBSACT). The third chapter of the bill was formulated specifically for crowdfunding, amending the “Securities Law”, making it possible to raise equity financing to the public through the Internet. Therefore, we can see that the United States has completely adopted the existing laws for P2P supervision, but has formulated new laws for the supervision of crowdfunding. This reflects the principle and flexibility of financial supervision and is worth learning from.

Since the first crowdfunding website appeared in China in 2011, it has grown to dozens of websites, but the overall situation can be said to be tepid, mainly because the operation mode of equity crowdfunding is similar to that of China’s Securities Law. The conflict, and more importantly, is that the high-risk characteristics of start-ups are fundamentally mismatched with the low-level financial education, risk awareness, and risk tolerance of ordinary Chinese investors. Therefore, the way out for equity-based crowdfunding in China It lies in the establishment of a qualified investor system and investor entry barriers. For pre-sale crowdfunding, public acceptance may also require a process, which has something to do with China’s underdeveloped creative industry, imperfect credit system, and inadequate protection of intellectual property rights. Some crowdfunding platforms have begun to launch crowdfunding projects based on the fan economy. This may be a good attempt. At the same time, pre-sale crowdfunding platforms similar to P2P that target clearly defined creative product segments may take the lead in growing up.

Domestic P2P and crowdfunding platforms are not too late. The representative platforms of P2P include Paipaidai founded in 2007 and Renrendai. The representative platforms for crowdfunding include the roll call time established in 2011, Angel Exchange and crowdfunding.com. However, due to the imperfection of the domestic credit system and the failure of timely supervision, P2P platforms have encountered many risks caused by the lack of risk control such as fraud and bankruptcy and poor operations. Therefore, the establishment of a credit system and timely supervision of the system have become a top priority for the development of P2P network loans in China. Unlike P2P, crowdfunding is still in a very early stage of development in China, and the development and supervision of crowdfunding platforms are still being explored. However, it is gratifying that the Securities Association of China issued the “Private Equity” in December 2014. Crowdfunding Financing Management Measures (Trial) (Draft for Solicitation of Comments)”, a gratifying step in Internet financial supervision. But whether it is P2P or crowdfunding, there is still a long way to go before it reaches mature operations in China.

The fourth category: Internetization of financial support. The first three types of Internet finance models are all financial businesses in nature, and they all require supervision. The fourth type of Internet financial model does not belong to financial business. They have the function of providing support for financial business, including but not limited to: financial business and product search, such as Bankrate in the United States and Rong360 in China; family financial services, such as the United States Mint, PersonalCapital, and China’s Wakai.com; financial education services, such as Learnvest and DailyWorth in the United States and Jiacai.com in China; financial social platforms, such as eToro and SeekingAlpha in the United States. Although these online platforms do not provide financial services, they can greatly enhance people’s awareness of financial products and businesses, thereby improving the operational efficiency of the financial system, and they are also an important part of Internet finance.

The Internet has changed the way we understand and transform the world. After changing many fields such as media and commerce, the Internet is also profoundly changing the financial industry. At the time of change, stubbornness and arrogance are both undesirable. Facing the unpredictable future, we should be full of awe. In such a period of change, observation, learning and thinking have become very necessary and very important. Based on this concept, we planned and published the Tsinghua Wudaokou Internet Finance Series. The two research institutions under the Academy, namely the Internet Finance Laboratory and the Sunshine Internet Finance Innovation Research Center are jointly undertaken.

Let us pay attention to and promote the development of Internet finance in China!

Liao Li

Professor, PhD supervisor

Director of Internet Finance Lab, Wudaokou School of Finance, Tsinghua University