NEW YORK, NY – As global leaders debate the role Fintech will play within economies, new research from Columbia Business School spotlights how Fintech in China is helping to end financial repression in the country, a phenomenon that could be replicated in other nations. Through the emergence of Fintech products, Chinese households gravitated away from state-owned banks and toward banking options that offered market-based interest rates, giving millions of Chinese households access to more saving capital for the first time, lifting them out of financial repression. State-level financial repression disadvantages consumers while enriching the government.
The study, Fintech as a Financial Liberator, examines the growth and impact of Yu’ebao, China’s first internet money market fund designed for small dollar investors, allowing users to invest amounts as small as 0.1 yuan and is integrated to the Chinese AAlipay platform. In an analysis of Yu’ebao's financial data, and 145 banks representing more than 70 percent of bank branches in China, Shang-Jin Wei, the N.T. Wang Professor of Chinese Business and Economy at Columbia Business School, together with Greg Buchak of Stanford University Graduate Business School, and Jiayin Hu of Peking University’s National School of Development, finds that as the use of Fintech products increased amongst Chinese households, the use of savings deposits at state-owned banks fell, prompting banks to respond by offering similar money market products of their own. The result was that Chinese households had more access to savings options that pay a market interest rate.
"As Fintech technology continues to rise across the globe, the benefits of Fintech could help solve the problem of financial repression, which hampers economic growth in the developing world," said Professor Wei. "Instead of banks shying away from competition from Fintech companies, banks should embrace the added competition to help improve the returns on household savings amongst customers, which could allow for more economic growth within a country."
Professor Wei and his research partners found that between 2011, two years before Yu’ebao was launched to 2015, two years after Yu’ebao launch, bank deposits as a share of Chinese household savings declined 12 percentage points from 58 percent to 45.6 percent. Yu’ebao rise siphoned deposits away from banks, but these competitive pressures caused the most exposed banks to innovate, rather than suffer losses to their profitability and stability. The authors found that Yu’ebao’s money market accounts circumvented the low-interest rate cap on household deposits offered by state-owned banks. The offer of a higher interest rate created access to more competitive market interest rates for Chinese households for the first time ever. The research showed, through increased deposits into Yu’ebao, the aggregate market share of bank deposits relative to money market accounts declined as household savings flowed into Yu’ebao money market accounts. The ultimate effect appeared to be financial liberalization that benefited households without markedly worse bank performance.
Key Takeaways: Synergies between Fintech savings platforms, mobile payment, and e-commerce are important because it allowed Yu’ebao to rapidly gain market share among consumers already familiar with the service offered on the AAlipay platform. The banks most exposed to competition from the rise of Yu’ebao’s money market accounts did not see compressed net interest margins or reduced profitability. Rather, the most exposed banks responded by launching their own competing money market fund products, further undermining financial repression.
As digital payments and other non-traditional financial services grow worldwide, the Chinese experience—where the rise of Fintech did not destabilize the traditional banking system, but rather spurred competitive innovation—holds important lessons for understanding the efficiency and financial stability consequences of Fintech innovations in other countries.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit gsb.columbia.edu.
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