A Regulatory Balancing Act


Digital technologies are revolutionizing access to finance, connecting hundreds of millions of poor people worldwide to formal financial services for the first time. Web-based products and mobile applications allow them to easily and cheaply pay for goods, make transfers, access credit, build savings and buy insurance. But much of the growth in new financial services is outside the traditional banking and insurance sectors and the regulations designed for them, presenting new challenges for regulators over how best to protect consumers and the financial system while allowing innovation to flourish.

In the case of China, the central bank encouraged the growth of digital financial services to fill the gap left by the traditional banking sector. This resulted in the proliferation of experimentation and innovation such as online lending via peer networks, which has grown tenfold in the past two years with the promise of higher returns. But more than a third of the 4,000 peer-to-peer (P2P) platforms launched in China in recent years have collapsed. In February 2016, Chinese authorities arrested 21 executives of the online lending platform Ezubao for allegedly defrauding investors of $7.6 billion. When online lenders that aren’t regulated collapse, it’s ordinary consumers who invested their money in these platforms who suffer the losses.

Hongbin Zheng, a student of finance, knows the risks of investing in P2P platforms. But he worries that some investors don’t know what they’re getting into: “I have some knowledge to handle this. But I think ordinary people… should put only a small proportion of their money in P2P.”


Digital finance may still be small in assets in comparison with the banking industry. But ambitions and reach are huge. And the advent of new technologies and fintech companies that have moved into payments and other financial services is disrupting the traditional banking model. With this new trend, barriers of entry to the financial services sector are lowered and access to formal financial services to ordinary consumers has broadened.

While the Chinese government has welcomed the rapid diversification in financial services, it also wants to better manage the risks. It is taking steps to develop new regulatory framework designed to protect consumers using digital finance. Dr. Liu of the People’s Bank of China says, “Financial innovation of course is a laudable objective, but innovation without supervision is a formula for disaster.”

Today, Alipay, an online payments service similar to PayPal, has 400 million users in China. It has plans within the next few years to serve 2 billion people worldwide. For this reason alone, regulators will need to keep up—and in some cases, catch up—if consumers are to fully benefit from innovation in the financial services space. The challenge and opportunity will lie in striking the right balance between encouraging innovation and successfully nurturing new players, while limiting consumer risks.