Toward Universal Financial Inclusion in China Models, Challenges, and Global Lessons February 2018 Toward Universal Financial Inclusion in China Models, Challenges, and Global Lessons © 2018 International Bank for Reconstruction and Development / The World Bank and the People’s Bank of China The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent, or those of the People’s Bank of China. The World Bank and the People’s Bank of China do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank or the People’s Bank of China concerning the legal status of any territory or the endorsement or acceptance of such boundaries. RIGHTS AND PERMISSIONS The material in this work is subject to copyright. 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CONTENTS Acknowledgments vi Acronyms and Abbreviations vii CHAPTER 1: INTRODUCTION 1 1.1 Purpose of the Report 2 1.2 Internet Finance, Digital Finance, and Fintech 2 1.3 Content and Structure of the Report 2 CHAPTER 2: KEY ELEMENTS OF FINANCIAL INCLUSION 5 2.1 Accessibility 5 2.2 Diverse and Appropriate Products 7 2.3 Commercial Viability and Sustainability 9 2.4 Safety and Responsibility 10 CHAPTER 3: BENCHMARKING CHINA’S FINANCIAL INCLUSION PROGRESS 13 3.1 Physical and Remote Access Points 14 3.2 Accounts and Payment Instruments for Individuals 14 3.3 Saving and Borrowing for Individuals 17 3.4 Insurance for Individuals 19 3.5 Access to Finance for Firms 20 CHAPTER 4: CHINA’S FINANCIAL INCLUSION EXPERIENCE 25 4.1 The Role of Traditional Financial Service Providers in Financial Inclusion 26 4.1.1 Improving Accessibility by Expanding the Physical Reach of Service Outlets 26 4.1.2 Enhancing the Ease and Efficiency of Payments in Rural Areas 31 4.1.3 Increase in Ownership and Use of Bank Accounts and Debit Cards 32 4.1.4 Innovations in Financial Products to Enhance Access, Use, and Quality 33 4.1.5 Reforming RCCs to Better Serve Sannong 35 4.1.6 Innovations in the Insurance Industry to Contribute to Financial Inclusion 37 4.2 The Role of “New-Type” Rural Financial Service Providers in Financial Inclusion 39 4.2.1 Village and Township Banks 39 4.2.2 Microcredit Companies 40   iii iv   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons 4.2.3 Rural Mutual Credit Cooperatives 41 4.2.4 Contributions 42 4.2.5 Remaining Challenges 42 4.3 Development and Regulation of Fintech 43 4.3.1 Nonbank Digital Payment Providers 43 4.3.2 Peer-to-Peer Lending 45 4.3.3 Internet-Based Microlending 48 4.3.4 Internet Banks 49 4.3.5 Internet-Based Insurance 51 4.3.6 Internet-Based Fund Management 52 4.3.7 Internet Equity-Based Crowdfunding 53 4.3.8 Contributions of Digital Finance and Fintech Companies to Financial Inclusion and Remaining Challenges 54 4.4 The Role of the Chinese Government in Promoting Financial Inclusion 56 4.4.1 Policy and Regulatory Environment for Financial Inclusion 56 4.4.2 Financial Infrastructure 60 4.4.3 Digitization of Government-to-Person Transfers 61 4.4.4 Role of Policy Banks and the China Development Bank 62 4.4.5 Financial Consumer Protection and Financial Capability 62 CHAPTER 5: REMAINING FINANCIAL INCLUSION CHALLENGES IN CHINA AND THE WAY FORWARD 69 5.1 Achieving an Evolved and Widely Accepted Conceptualization of Financial Inclusion 69 5.2 Recalibrating the Role of Government 70 5.3 Evolving Business Models and Practices to Achieve Commercial Sustainability 71 5.4 Managing Risks Associated with Digital Finance 71 5.5 Strengthening New-Type Rural Financial Service Providers 72 5.6 Improving the Financial Capability of Consumers 73 CHAPTER 6: GLOBAL LESSONS AND IMPLICATIONS FOR POLICYMAKERS 75 6.1 Reaching the Last Mile 75 6.2 Investing in Financial Infrastructure 76 6.3 Leveraging Online Networks 78 6.4 Enabling Market Entry and Innovation 78 6.5 Innovating with Policy Pilots 80 6.6 Protecting Consumers 80 References 83 BOXES, TABLES AND FIGURES Box 2.1 Global Definitions of Financial Inclusion 6 Box 2.2 Store-of-Value Transaction Accounts 9 Box 4.1 Postal Savings Bank of China: Agent-Based Service Points Help Reach the “Last Mile” 28 Box 4.2 Agricultural Bank of China: Developing Innovative Products and Services to Serve Sannong 35 Box 4.3 Industrial and Commercial Bank of China’s Approach to Digital Finance 36 Box 4.4 MicroCred Nanchong: A Microcredit Company Committed to Serving Smaller Customers 41 Box 4.5 Tiered Account System for Nonbank Digital Payment Providers 46 Box 4.6 Special Campaign to Address the Risks of Internet Finance 48 Box 4.7 Tiered Account System for Banks 50 Box 4.8 Guidelines on Promoting Sound Development of Internet Finance 56 Box 4.9 China’s Plan for Advancing the Development of Financial Inclusion (2016–2020) 57 Box 4.10 Integrated Movables Financing Registration System 61 Box 4.11 PBOC Report on China Financial Consumers’ Capability Survey, 2017 65 Box 6.1 The G20 High-Level Principles for Digital Financial Inclusion 77 Key Elements of Financial Inclusion   v Table 3.1 Benchmarking Comparison Groups 13 Table 3.2 Obstacles to Account Ownership 17 Table 4.1 Overview of Select Financial Service Providers in China 26 Table 4.2 ATMs and POS Terminals 27 Table 4.3 Community Sub-Branches and Small and Micro Sub-Branches of Commercial Banks 27 Table 4.4 Number of Bank Accounts and Debit Cards, by Institutional Category and over Time 33 Table 4.5 Performance of the RCC System over Time 37 Table 4.6 Comparison of Baseline Information of New-Type Rural Financial Service Providers 40 Table 4.7 Industry Development of Nonbank Digital Payment Providers 44 Table 4.8 Overview of Key Nonbank Digital Payment Products 44 Table 4.9 Overview of Key P2P Lending Platforms 45 Table 4.10 Industry Development of P2P Lending 47 Table 4.11 Overview of Internet Banks 49 Table 4.12 Key Products of Internet-Based Fund Management 53 Figure 3.1 Physical Access Points 14 Figure 3.2 Remote Access Points 15 Figure 3.3 Ownership of Store-of-Value Transaction Accounts over Time 15 Figure 3.4 Ownership of Store-of-Value Transaction Accounts across Selected Countries 15 Figure 3.5 Ownership of Store-of-Value Transaction Accounts Compared with GNI per Capita 16 Figure 3.6 Store-of-Value Transaction Accounts in China, by Individual Characteristics 16 Figure 3.7 Making Digital Payments 17 Figure 3.8 Digital Payments Use Cases 18 Figure 3.9 Saving 19 Figure 3.10 Borrowing 19 Figure 3.11 Account Ownership among Firms 20 Figure 3.12 Access to Finance for Firms 21 Figure 3.13 Reasons for Not Applying for a Loan or Line of Credit 21 Figure 3.14 Credit-Constrained Status of Chinese Firms 22 Figure 3.15 Access to Finance as Biggest Obstacle 22 Figure 3.16 Use of Banks to Finance Investment 23 Figure 4.1 Locations of Agent-Based Service Points 29 Figure 4.2 Transactions via Agent-Based Service Points 29 ACKNOWLEDGMENTS Toward Universal Financial Inclusion in China: Models, tance. We also acknowledge editorial and translation Challenges, and Global Lessons was jointly written by assistance from Lei Zhou (PBOC) and Fei Chen (PBOC). staff of the People’s Bank of China (PBOC) and the World The team benefited from the overall guidance of Bank Group (WBG) Finance, Competitiveness & Innova- Wenjian Yu (PBOC), Tianqi Sun (State Administration of tion Global Practice. Foreign Exchange), Shaogang Ma (PBOC), Douglas Pearce The primary drafting team comprised Dangwei Bai (WBG), James Seward (WBG), Irina Astrakhan (WBG), and (PBOC), Rundong Jiang (PBOC), Tiandu Wang (PBOC), Nancy Chen (WBG). Jennifer Chien (WBG), and Douglas Randall (WBG). The The team is grateful to the WBG peer reviewers of the PBOC initially drafted chapters 1, 4, and 5, and the WBG report—Douglas Pearce, Hoon Soh, Jinchang Lai, Harish initially drafted chapters 2, 3, and 6. The entire drafting Natarajan, Fiona Stewart, Serap Gonulal, Fangfang team has extensively discussed and jointly revised all con- Jiang—as well as Eric Duflos (UN Secretary-General’s Spe- tent in the report. cial Advocate for Inclusive Finance for Development) for Additional drafting support and inputs were provided their valuable comments. We also gratefully acknowledge by Xiaoxiao Li (PBOC), Zhiyong Fan (PBOC), Sihui Feng the support and review from the China Banking Regula- (PBOC), and Yi Yan (WBG). Tian Wang (PBOC) and Jian tory Commission (CBRC), China Insurance Regulatory Chen (WBG) provided administrative support. Sheldon Commission (CIRC), Ministry of Finance (MoF), and the Lippman and Tora Estep provided editorial assistance, relevant departments of PBOC. and Naylor Design, Inc. provided design and layout assis- vi ACRONYMS AND ABBREVIATIONS 1RMB = US$0.151 ABC Agricultural Bank of China ICT information and communication technology AFI Alliance for Financial Inclusion IFC International Finance Corporation AML/CFT anti-money laundering/combating financing of FAS Financial Access Survey (IMF) terrorism IT information technology ATM automated teller machine IMF International Monetary Fund CADB China Agricultural Development Bank JD Jingdong CAR capital adequacy ratio LTD loan-to-deposit CBRC China Banking Regulatory Commission MCC microcredit company CCB city commercial bank MIC middle-income country CCB China Construction Bank MNO mobile network operator CCRC Credit Reference Center of PBOC MoF Ministry of Finance CDB China Development Bank MSE micro and small enterprise CDD customer due diligence MSME micro, small, and medium enterprise CIRC China Insurance Regulatory Commission NEEQ National Equities Exchange and Quotations CHFS China Household Finance Survey NFC near field communication CNAPS China National Advanced Payment System NIFA National Internet Finance Association CPMI Committee on Payments and Market Infrastructures NPL nonperforming loan CRS cash recycling system Other L-MIC Other large middle-income countries CSRC China Securities Regulatory Commission P2P peer-to-peer CUP China UnionPay PAFI Payment Aspects of Financial Inclusion EAP L-MIC East Asian and Pacific large middle-income countries PBOC People’s Bank of China EximBank Export-Import Bank of China POS point of sale FATF Financial Action Task Force PSBC Postal Savings Bank of China FCPB Financial Consumer Protection Bureau of PBOC RCOPB rural cooperative banks FIP Plan for Advancing the Development of Financial RCOMB rural commercial banks Inclusion (2016–2020) RCC rural credit cooperative GNI gross national income RMB renminbi (Chinese currency) G2P government-to-person RMCC rural mutual credit cooperative GPFI Global Partnership for Financial Inclusion SAC Securities Association of China HIC high-income country SACCO savings and credit cooperative HLP G-20 High-Level Principles for Digital Financial SME small and medium enterprise Inclusion US$ U.S. dollar IBPS Internet Banking Payment System VTB village and township bank ICBC Industrial and Commercial Bank of China WBG World Bank Group 1 Conversions to US$ are indicative only and included to assist global readers.   vii 1 INTRODUCTION The conceptualization and practice of financial inclusion ensure that existing models are sustainable and repre- in China has undergone a significant transformation in sent a market-oriented approach, with the government recent years. From the reforms of rural credit coopera- playing an appropriate enabling role. Risks associated tives (RCCs) and policy banks, to the pursuit of agent with new technology-driven providers and products banking models, to the emergence and scaling of fintech must be better understood and effectively managed and companies, a diverse range of providers, products, and balanced with encouraging innovations in product policy approaches has characterized the recent evolution design and delivery that advance financial inclusion. Fur- of financial inclusion in China. And indeed, significant ther improvements to financial infrastructure are also progress has been made. China’s accomplishments required to keep pace with industry developments and include the development of a robust financial infrastruc- enable the expansion of digital finance to underserved ture that has reduced information asymmetries between areas of the country. lenders and borrowers and enabled the safe and effi- The current market and policy context represents a cient transfer of money among individuals, firms, and the unique and potentially transformational period for finan- government. China has also established one of the larg- cial inclusion in China. On the market side, China’s fin- est agent networks in the world, thereby extending the tech industry continues to grow and develop, and reach of the formal financial sector into previously under- traditional providers are also actively pursuing digitally- served rural areas. Consumers have responded with high enabled business models. On the policy side, the Chi- demand for new financial products and services, which nese government’s current focus on developing an are increasingly offered via digitally-enabled business inclusive financial sector is without precedent in the models. China’s rate of account ownership—a basic met- country’s history. One recent marker of this strong focus ric of financial inclusion—is on par with that of other is the Plan for Advancing the Development of Financial G-20 countries. Inclusion (2016–2020), which outlines an ambitious Yet China still faces many challenges to achieving sus- agenda for improving the availability, uptake, and quality tainable and long-term financial inclusion. A modern of financial products and services in China, with a clear conceptualization of financial inclusion must be more emphasis on expanding and deepening financial inclu- fully adopted and agreed upon by all relevant stakehold- sion for historically unserved and underserved popula- ers, in particular local government authorities, many of tion segments, including micro and small enterprises whom have not evolved past focusing on the provision (MSEs), rural residents, low-income urban groups, the of subsidized credit. Further efforts are required to poor, the disabled, and the elderly.   1 2   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons 1.1 PURPOSE OF THE REPORT sions in July 2015 (“Guidelines”) states that “Internet finance” is a new financial business model that both tradi- China is not alone in prioritizing and pursuing financial tional financial service providers and Internet-based firms inclusion. Globally, significant progress has been made in have adopted to provide financing, payment, investment, broadening the scope and ambition of financial inclusion, and intermediary information services by leveraging the and many countries have achieved remarkable results. A Internet and information and communication technolo- supporting factor in this development is the role of inter- gies (ICT).2 The Guidelines also states that “deeper inte- national organizations and forums, including the Global gration of the internet and finance would be a major trend Partnership for Financial Inclusion (GPFI), the Alliance for and would have more profound impacts on financial prod- Financial Inclusion (AFI), and the World Bank Group ucts, operations, organizations and services.” (WBG). These organizations and forums allow countries— The terms “digital finance,” “Internet finance,” and and other global stakeholders—to share best practices “fintech” are used interchangeably in China. Given this and models; discuss common challenges; and, where fea- report’s global audience, the authors have chosen to use sible, propel progress through coordinated action. One the term “digital finance” to refer to the broader con- lesson from these activities is that each financial inclusion cept of applying digital technologies in the delivery of “success story” is a product of a unique combination of financial services that either traditional financial service factors within a given country. The groundbreaking providers or new entrants can leverage. For the purposes uptake of mobile money in Kenya, the spread of banking of this report, the term “fintech companies” refers spe- correspondents across Brazil and Colombia, and the cifically to those new entrants whose core business establishment of niche banks in India and Mexico are model is based on innovative digital finance. Digital examples of pioneering approaches that reflect the par- finance therefore encompasses both the application ticular historical, cultural, political, and financial contexts of digital technologies by traditional providers (for exam- of those countries. Yet these diverse approaches all seek ple, agent-based models, payments infrastructure, to address common structural challenges: high transac- online platforms, and the use of big data, which are dis- tion costs of serving customers with small and irregular cussed in section 4.1) and fintech companies, which are incomes or reaching consumers in rural and remote areas discussed in section 4.3. Section 4.3.8 and chapters 5 via traditional methods; informational asymmetries that and 6 discuss the overall contribution and challenges of prevent reliable and efficient assessments of creditwor- digital finance. thiness; and limited competition and innovation within the market, to name just a few. These are challenges that all countries must address to successfully increase finan- CONTENT AND STRUCTURE OF THE 1.3  cial inclusion. REPORT Thus, the goal of this report—written jointly by the People’s Bank of China (PBOC) and the WBG—is to The rest of the report is structured as follows. Chapter 2 showcase China’s approach to financial inclusion over establishes the conceptual foundations of financial inclu- the past 15 years, highlight remaining challenges, and sion used throughout the report. The chapter defines and distill globally relevant lessons. The report builds on the explores the critical elements of financial inclusion: acces- tradition of peer learning now established among coun- sibility, diverse and appropriate products, commercial via- tries with a shared interest in expanding financial inclu- bility and sustainability, and safety and responsibility. sion. The hope is that the report will assist countries in Chapter 3 provides a quantitative benchmarking developing and refining their own pathways toward sus- analysis of China’s current state of financial inclusion as tainable and long-term financial inclusion. compared with peer countries. Chapter 4 summarizes China’s financial inclusion expe- rience over the past fifteen years. The chapter is not meant NTERNET FINANCE, DIGITAL FINANCE, 1.2 I to be comprehensive, but rather focuses on key develop- AND FINTECH ments, particularly those that may be of relevance or inter- est to other countries. The chapter is roughly organized by The opportunities for and challenges of leveraging tech- categories of financial service providers—(1) traditional nology to enable financial inclusion are cross-cutting providers (e.g., banks, rural credit cooperatives, and insur- themes throughout this report. The Guidelines on Promot- ance providers), (2) “new-type” providers (e.g., village and ing Sound Development of Internet Finance jointly issued township banks and microcredit companies), and (3) fin- by PBOC and nine other Chinese ministries and commis- tech companies (e.g., nonbank digital payment providers, Introduction  3 Internet-based lenders, and Internet banks)—and explores Chapter 5 discusses the major challenges remaining the role of each type of provider in contributing to finan- in China to achieving sustainable financial inclusion over cial inclusion. This chapter also discusses the role of the the long term. Chinese government in promoting the development of Finally, chapter 6 discusses globally relevant lessons financial inclusion. from China’s financial inclusion experience. . NOTE PBOC and nine other ministries and commissions (2015). 2.  2 KEY ELEMENTS OF FINANCIAL INCLUSION The concept of financial inclusion has advanced consider- 3) Commercial viability and sustainability, and ably over the past few decades. From its initial beginnings 4) Responsibility and safety. in the product- and institution-specific microcredit and The following sections explore these four key compo- microfinance movements, financial inclusion is now viewed nents in greater detail, describing their main elements, as a broader national and global policy objective—one significance to financial inclusion, common obstacles, that is multifaceted and encompasses a range of products and strategies to address such obstacles. While these and consumer segments, financial service providers, deliv- four components are segmented into separate subsec- ery channels, government actors, and stakeholders. For tions, clear linkages exist among them, which are noted the purposes of this report, financial inclusion is defined as: and discussed. The uptake and usage of a range of appropriate finan- cial products and services by individuals and micro and small enterprises (MSEs), provided in a manner that is 2.1 ACCESSIBILITY accessible and safe to the consumer and sustainable for the provider. Consumers’ ability to conveniently access financial prod- This definition represents a holistic conceptualization of ucts and services is a key driver of financial inclusion. financial inclusion. It is broader than some alternative defi- Accessibility means that a consumer has sufficient physical nitions, which have been limited to certain financial prod- proximity to access points—including branches, agents, ucts or consumer segments. However, it shares many automated teller machines (ATMs), and other outlets or common elements with definitions offered by other devices—to enable him or her to easily select and use a national and global stakeholders, including the definition range of financial products and services. Remote access outlined in China’s Plan for Advancing the Development of channels like mobile phones and computers are also Financial Inclusion (2016–2020) (FIP) (see box 2.1). The FIP increasingly relevant to the uptake and usage of financial highlights MSEs, farmers, urban low-income groups, products. Lack of physical accessibility generates signifi- impoverished groups, the disabled, and the elderly as par- cant transaction costs for underserved consumers (e.g., ticularly underserved segments. direct costs for transportation, indirect costs for lost time) This chapter defines and summarizes the key compo- that can limit the overall value proposition of financial nents of financial inclusion in order to serve as a framework products as tools to meet daily financial needs. Indeed, for the subsequent discussion of China’s progress and consumers place considerable value in accessibility when challenges in this area. To achieve this aim, this chapter choosing whether and how to participate in the formal expands on four key elements that are embedded in the financial system. According to the 2013 China Household aforementioned definition of financial inclusion: Finance Survey (CHFS), 45 percent of households with an account report that they chose their financial service pro- 1) Accessibility, vider mainly because of its “convenient location,” the 2) Diverse and appropriate products,   5 6   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons BOX 2.1 Global Definitions of Financial Inclusion Different stakeholders have defined financial inclu- provided with quality (i.e. convenient, affordable, sion in different ways. China’s Plan for Advancing suitable, provided with dignity and client protection.” the Development of Financial Inclusion (2016–2020) In addition, financial services are provided through a begins by noting that “Financial inclusion means pro- diverse and competitive marketplace, with “a range viding financial service for all social strata and groups of providers, robust financial infrastructure and clear with appropriate and valid financial services, at afford- regulatory framework.” able cost, based on the principle of opportunity The Global Partnership for Financial Inclusion (GPFI) equality and commercial sustainability. Small and describes financial inclusion as “a state in which all micro businesses, peasants, urban low-income working age adults, including those currently groups, impoverished groups, the disabled, the aged excluded by the financial system, have effective and other special groups are the focus of the financial access to the following financial services provided inclusion in China.” by formal institutions: credit, savings (defined The World Bank’s Global Financial Development broadly to include current accounts), payments, and Report 2014 includes a basic and straightforward insurance.” “Effective access” is further defined as definition of financial inclusion as “the share of indi- “convenient and responsible service delivery, at a viduals and firms that use financial services.” cost affordable to the customer and sustainable for the provider, with the result that financially excluded The Center for Financial Inclusion provides a multidi- and underserved customers can access and use for- mensional vision of financial inclusion, describing mal financial services.” financial inclusion as “access to a full suite of financial services, to everyone who can use financial services, Source: CFI (2011); GPFI (2011); World Bank (2014). most commonly cited rationale.3 Limited accessibility Yet even with a more diverse set of providers, branch results in low uptake and use of formal financial products economics remain a major constraint in most economies. and services. Research indicates that improving the acces- Achieving financial inclusion therefore requires extending sibility of financial services increases consumer use and physical access beyond brick-and-mortar branches. The the many follow-on benefits of financial inclusion, includ- combination of technology, new business models, and ing increases in income, productive investment, and evolving regulatory approaches has allowed further prog- employment.4 ress in bringing financial services even closer to the door- In many countries, the financial sector has developed step of the everyday consumer at relatively low costs to around the economics of branch networks. Until recently, providers. ATMs were the first widespread nonbranch consumers’ choices for accessing financial products were access point and are now more ubiquitous than brick-and- limited to interactions at brick-and-mortar branches of mortar branches in 130 economies, including in China, financial service providers. However, the cost of building where there are more than four times as many ATMs as and operating brick-and-mortar branches often vastly branches.5 A broad range of innovative approaches, from outweighs the revenue gained by serving certain con- banking by boat, motorbike, or van (e.g., China, Indone- sumer segments. Thus unsurprisingly, some segments— sia, and Maldives) to mobile ATMs (e.g., Vietnam) to pay- disproportionately rural and poor consumers, often with ment kiosks (e.g., India and the Russian Federation), have small and irregular income streams—were systematically also been successfully used to increase accessibility for unserved or underserved. consumers without investing in building and operating Specialized financial service providers that focus full-scale branches. explicitly on these underserved segments—such as village Agent-based models are a more recent widespread and township banks (VTBs) in China or savings and credit development, and a key component of China’s financial cooperatives (SACCOs) in Rwanda—have achieved mean- inclusion success story. In such models, small convenience ingful progress in improving the financial sector’s reach for stores, post offices, large retailers, or other outlets serve rural and low-income consumers in many countries. Such as third-party agents on behalf of traditional or mobile providers typically have lower-cost, simpler operations financial service providers. Point-of-sale (POS) terminals than mainstream commercial banks. and/or mobile devices are most often used to enable Key Elements of Financial Inclusion   7 these agents’ operations. The prevalence of these models tions or account openings. Practical limitations on agents’ is driven by financial service providers’ desire to leverage capacity, and legal restrictions such as those related to cus- existing retail infrastructure (particularly infrastructure that tomer due diligence requirements, impede the extent to reaches into rural and remote areas), reduce transaction which agent-based models can fully match the offerings of costs, reach new consumer segments, and benefit from a physical bank branch. payment-oriented businesses.6 Retail agents representing Beyond physical access points operated by financial financial service providers outpace brick-and-mortar service providers, personal devices like mobile phones and branches in several major economies, including Brazil, computers increasingly provide a further avenue for con- China, India, and Peru.7 sumers to select and use financial products. These per- Despite these new approaches to increase accessibility, sonal digital devices can facilitate product uptake for progress remains uneven. Although new access channels consumers with existing relationships with financial service are less expensive for providers than full-service branches, providers (i.e., linking an existing account to a third-party such channels are still not inexpensive in absolute terms, payment platform) and provide a platform for convenient and the cost-benefit calculus that historically posed an product usage (i.e., sending or receiving money), hence obstacle to financial inclusion is still relevant. For example, increasing consumer access. However, in most circum- the costs of establishing ATMs and POS-enabled agents stances personal digital devices cannot fully replace the remain nontrivial, and in many cases the revenue stream need for face-to-face interactions with financial service from low-value transactions may be insufficient to justify providers, in particular for consumers who are entering the up-front investment and operational costs. As a result, formal financial system for the first time. Digital products inequality in physical access to financial services remains a often still require initial physical interaction with the pro- central characteristic across many economies. Globally, vider for identification or documentation purposes. For over 20 percent of adults without an account report dis- example, in China, most customers of CreditEase (a peer- tance as a major obstacle to account ownership, according to-peer [P2P] lender) still submit their appraisal documents to the 2014 Global Findex. This means at least 440 million in person. adults worldwide are excluded from the financial system due to poor accessibility.8 In addition, not all provider types or access channels 2.2 DIVERSE AND APPROPRIATE PRODUCTS can be considered equal from the consumer perspective. The convenience, product offerings, functionality, and Achieving financial inclusion requires a range of financial quality of operations of each type of access point create products and services that are appropriately designed meaningful differences across types. In most countries, and fit the needs of consumers, particularly the unserved commercial bank branches still provide the most compre- and underserved. Appropriate design of financial prod- hensive set of financial products and services. Specialized ucts requires identifying the needs of particular customer financial service providers targeting rural and poor con- segments and selecting product features that could meet sumer segments are critical for expanding physical access, those needs at a reasonable cost. Various aspects must be but in some cases offer a more limited set of products, are considered regarding the appropriateness, or quality, of not be fully integrated into key financial infrastructure sys- financial products. As defined by the Center for Financial tems (e.g., payments infrastructure and credit bureaus), Inclusion, “quality” includes affordability, convenience, and face regulatory and supervisory obstacles. For exam- product fit, safety, dignity of treatment, and client protec- ple, microcredit companies (MCCs) in China are credit-only tion.9 Other definitions include suitability, transparency, institutions with limited geographic scope (i.e., operations and client value. These elements are often interrelated or are typically limited to within a single county’s boundaries), overlapping. limited funding options, and inconsistent regulation and How does quality product design affect financial inclu- supervision across provinces and counties, which in some sion? The appropriateness of products can drive uptake cases results in high entry barriers and operating costs. and usage and increase entry by the unserved and under- These issues suggest that ultimately a diverse set of access served into the formal financial sector. Conversely, poorly points is necessary to provide a comprehensive degree of suited products will neither have significant uptake nor accessibility to consumers. long-term usage, or they may actually harm low-income The legal and regulatory framework and operational consumers. The World Bank’s Global Financial Develop- business models can determine the degree to which ment Report 2014 notes that recent studies show that agents of financial service providers can match the basic product design features can affect both the extent and the functions of brick-and-mortar branches. While agents in impact of use by individuals. Insufficient attention to prod- Brazil and Peru can provide a broad range of services, uct design is cited as a driver of limited uptake and usage agents in China currently perform limited cash-in transac- of transaction accounts.10 8   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons Often, conventional financial products and services are tions, and language and literacy difficulties can all pose not well suited to the needs of low-income consumers, real barriers to consumers seeking to obtain and use who may require simplified, low-cost products without financial products and services. unnecessary features. One example of a simplified, low- Affordability is also a critical component of the quality cost product is a basic bank account, which is typically a of financial products and services for the purposes of current account with no or low monthly fees and minimum financial inclusion. The importance of product cost to a balance requirements and the basic functionalities of a cur- low-income consumer is self-evident. However, the more rent account, often with limitations on the number of practical perspective to consider may be the value propo- monthly transactions allowed and without additional fea- sition for providers more broadly, which is necessary for tures such as overdraft facilities. Microcredit focused on the provision of financial products and services to be sus- microenterprise lending is another traditional example of tainable over the long term. Section 2.3 discusses this product design tailored to low-income consumers, as concept further. microcredit is designed to provide small amounts of credit The overall range and diversity of available products is over short cycles using collateral substitutes (e.g., reputa- another important component of financial inclusion. tional collateral, group guarantees), which is more suitable Research such as financial diaries reveals that the needs of for informal and small microentrepreneurs. Digital finance low-income households are diverse and complex. They unlocks the potential for even greater tailoring and cus- need access to the same basic financial products and ser- tomization of products and services to fit individual con- vices as all others, not just a single product such as credit sumer needs, based partly on the ability to use advanced or payment services, to effectively manage risk, store data analytics on existing and potential customers to money safely, conduct daily transactions, and meet credit design products appropriately. needs. The concept of financial inclusion does not mean Appropriate product design must also account for the that consumers require products in all these categories at behavioral biases that affect all consumers of financial ser- all times, but rather that they need access to various finan- vices. Present bias often influences financial decision mak- cial products and services that they can select from and ing, leading consumers to prioritize present consumption use when necessary. over saving for the future. Understanding and adapting to A further explained in box 2.2, basic payments and behavioral biases can be incorporated into product design store-of-value instruments are valuable to most adults to for financial inclusion purposes. Examples of product facilitate common activities such as conducting economic designs that incorporate insights into behavioral biases transactions, sending and receiving money, and storing include commitment accounts for savings products and value. As low-income individuals are particularly vulnera- accounts with automatic savings reminders. ble to financial shocks, which can have severe long-term Obtaining a deeper understanding of the unique char- consequences, insurance products are also necessary acteristics and needs of the unserved and underserved (e.g., life insurance, health insurance, funeral insurance, can also enhance appropriate product design. Although property insurance, agricultural insurance, etc.). A safe gaining detailed knowledge of a target clientele can be place to save money is one of the most demanded prod- challenging, new methods have emerged in recent years. ucts by low-income individuals, who often have unpredict- Financial diaries, which closely follow the financial lives of able and seasonal incomes. Without access to formal households at a granular level, and other types of market savings products, low-income individuals often resort to research can be used to gain a more detailed understand- informal means of saving—in cash, in assets such as live- ing of consumer behavior. Emphasis on human-centered stock, or through social networks—that are more vulnera- or customer-centric design, which goes beyond traditional ble to theft or loss in value. Finally, credit is useful for market research, is also growing. The human-centered production and consumption purposes, and more broadly design process focuses on learning directly from custom- for income smoothing. Credit can include microenterprise ers by carefully listening to and observing them in their loans, consumer loans, education loans, mortgages, environment, allowing designers to understand customer home improvement loans, etc. needs, preferences, and behaviors and deliver solutions The role of digital finance has been expanding rapidly that work in specific contexts.11 Findings are then incorpo- and has significant potential to increase product diversity rated into new or different product offerings. for purposes of achieving financial inclusion. Digital Convenience is another important component of the finance encompasses new, innovative products and ser- appropriateness of products and services. For consumers, vices created for digital channels (such as mobile money convenience can refer to both physical access as well as and online lending); digitally enabled business models the timeliness and bureaucratic efficiencies (or inefficien- that leverage technology (such as big data analytics for cies) of the financial service. Requirements related to loan credit scoring purposes and agent-based models); and documentation, number of days for approval of applica- digital access to traditional financial products and ser- Key Elements of Financial Inclusion   9 BOX 2.2 Store-of-Value Transaction Accounts One product category where greater attention to on e-money offered by banks, other authorized appropriate product design can yield significant deposit-taking financial institutions, and non-deposit- impacts is store-of-value transaction accounts. In taking payment service providers such as mobile net- recent years, a consensus has emerged that most work operators. adults can benefit from these types of basic prod- While evidence on the benefits of many financial ucts, which allow them to store value and send and products has been inconsistent, modest consensus receive payments. This consensus is driven by a exists among researchers that basic payments and robust evidence base that finds significant and store-of-value instruments offer meaningful benefits meaningful benefits to consumers from the adoption to their owners, as exemplified in the Global Financial and use of these products and the near-universality Development Report 2014 (World Bank, 2014). At the of the types of behaviors that these products facili- global level, WBG President Dr. Jim Kim made a sig- tate —most adults make or receive payments as part nificant acknowledgement of the value of these of their regular money management, and nearly all accounts and the existing gap in ownership of such adults seek a safe place to store money. accounts in late 2013 when he announced an initiative The 2016 Payments Aspects of Financial Inclusion to achieve Universal Financial Access by 2020. The (PAFI) report, prepared by the CPMI and the WBG, goal of this initiative is for all adults to own a store-of- defines store-of-value transaction accounts as follows: value transaction account. Store-of-value transaction accounts can be defined Of course, the widespread uptake and use of store-of- as accounts (including e-money accounts) held value transaction accounts will require more than just with banks or other authorized and/or regulated improvements to product design—it will require payment service providers, which can be used to improvements related to many of the themes dis- make and receive payments and to store value. cussed in this chapter. The PAFI report provides a framework for increasing uptake and usage of such More specifically, this includes all deposit accounts accounts, structured around seven guiding principles held with banks and other authorized deposit-taking and spanning a wide range of public and private sec- financial institutions that can be used for making and tor actions. receiving payments and prepaid instruments based vices. The advent and use of digital technology applied to COMMERCIAL VIABILITY AND 2.3  financial services has greatly increased the potential range SUSTAINABILITY of products and services available to the underserved by allowing providers to develop innovative new products at Accessibility and diverse and appropriate products are lower cost that reach a much broader range of consumers critical elements of financial inclusion from the consumer via more accessible channels. perspective, but an important challenge is to develop and Many of the aforementioned points relating to product sustain a financial ecosystem in which providers can range and appropriateness have policy and regulatory deliver these products and services in a cost-effective and implications. The regulatory environment can help or hin- sustainable manner over the long term. A financial system der financial inclusion efforts. Financial sector authorities that expands its reach to previously underserved consum- can play a high-level role in promoting innovation in prod- ers but does not do so sustainably ultimately fails at meet- uct design and delivery, and regulation can address spe- ing the long-term objectives of financial inclusion. cific issues. For example, flexible, risk-based know-your- A diverse, competitive, and innovative marketplace is customer and customer due diligence rules can help over- critical to achieving sustainable levels of financial inclu- come the obstacle of serving low-income consumers with- sion. While consumers need a range of basic financial out formal identification. As always, policymakers must products and services, in most markets commercial banks balance the risks and benefits of new approaches to reach alone are unlikely to provide this full range to all under- the underserved. served segments. Different types of providers, operating on a fair and level playing field and utilizing different busi- 10   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons ness models to target market niches and consumer seg- collateral to obtain capital for investment and growth. ments, can collectively generate innovations in product Insolvency and debt resolution systems that effectively design and delivery models and encourage the long-term save struggling firms when possible or productively reallo- development of a diverse and sustainable financial eco- cate the assets of failing firms can encourage entrepre- system. Commercial banks, rural banks, financial coopera- neurs to make investments and take informed risks and tives, microfinance institutions, postal banks, payment increase financial service providers’ willingness to lend to service providers, mobile network operators (MNOs), and such firms. fintech companies can all contribute to financial inclusion. As noted in the Payment Aspects of Financial Inclu- For example, rural banks and financial cooperatives often sion (PAFI) report, prepared by the Bank for International have long-standing ties in the communities where they Settlement’s Committee on Payments and Market Infra- operate and may be better positioned to build trust and structures (CPMI) and the WBG, key elements of a to understand and meet the specific needs of their cus- national payments system include an interbank system tomer base. Postal banks and agent-banking models pro- for retail electronic funds transfers, a payment card pro- vide the opportunity to leverage broad infrastructure cessing platform or platforms, and a large-value inter- networks in remote areas to increase access. China has bank clearing system. Interoperability among payment also recognized and followed this approach, first with the systems—which allows for seamless interaction of two or creation of new types of providers (including VTBs and more proprietary acceptance and processing platforms— MCCs), and more recently with the licensing of Internet can promote competition and allow providers to avoid banks, as well as the entry of new fintech companies such large sunken investments in parallel infrastructure sys- as Internet-based lenders. tems. Efforts to restrict access to shared payment systems Business practices can also be adapted to lower oper- for some providers, especially new or nontraditional pro- ational costs and overcome the inherent obstacles to prof- viders, via anticompetitive measures can hinder market itably and sustainably serving the unserved and entry and long-term competition and market dynamism. underserved. One common obstacle is information asym- Further development in mobile and retail payment infra- metries. Providers often lack access to credit histories of structure can also facilitate the expansion of digital potential borrowers among the unserved and under- finance models. served. Past strategies to address this challenge included Finally, a key element of commercially viable and sus- relying on group lending or reputational collateral. The tainable provision of financial services to underserved and increasing availability of “big data” and “alternative unserved segments is recognizing the appropriate role data,” including transactional and social data, gives pro- of government. Well-intentioned government efforts to viders further sources of information to utilize for credit- expand financial inclusion can sometimes have distortion- worthiness assessments and risk management, among ary impacts on market dynamics that are ultimately detri- other uses. Digital technologies can also be leveraged for mental to consumers. One example is imposing overly operational processes, such as loan repayments and pro- strict interest rate caps that limit the amount of credit cessing, further lowering the ongoing administrative and available. Another example is providing subsidized lend- operational costs of serving low-income consumers. ing that may encourage poor repayment behavior from Another critical factor for the sustainable provision of consumers and discourage market entry by the private financial services is a robust financial infrastructure that sector. The efforts and resources of financial sector author- supports efficient transmission of information and transac- ities should instead be directed at developing (1) well-co- tions among a wide range of market participants. Finan- ordinated policy dialogue and engagement with the cial infrastructure primarily consists of credit infrastructure private sector, (2) an enabling legal and regulatory envi- (including credit reporting systems, secured transaction ronment with proportionate regulatory requirements and systems, collateral registries, and insolvency systems) and adequate supervisory capacity, and (3) a far-reaching and national payment systems. Credit reporting systems that robust financial and information and communication tech- collect and disseminate relevant and in-depth data (e.g., nology (ICT) infrastructure. repayment data) among all relevant credit providers enables the reliable and cost-effective evaluation of con- sumer creditworthiness, thereby reducing informational 2.4 SAFETY AND RESPONSIBILITY asymmetries and transaction costs that often deter pro- viders from lending to low-income individuals and MSEs. Achieving long-term financial inclusion requires that prod- Secured transaction systems and collateral registries allow ucts and services be responsibly delivered to consumers businesses to leverage their immovable assets (e.g., land) and that the policy objectives of financial inclusion align and movable assets (e.g., equipment and inventory) as with those of financial stability and market integrity. Over- Key Elements of Financial Inclusion   11 all, this balance requires financial sector authorities to con- Realizing long-term financial inclusion also depends tinually assess the risks and trade-offs among these on the overall safety and soundness of the financial sys- various policy objectives. tem. For example, financial sector authorities incentivizing The core elements of financial consumer protection, certain types of providers or delivery channels by relaxing such as clear disclosure and transparency of the terms and regulatory requirements to meet financial inclusion objec- conditions of products and services, fair treatment of con- tives should ensure that sufficiently robust regulatory and sumers, and accessible recourse mechanisms, are neces- supervisory frameworks remain to allow long-term finan- sary to ensure that consumers obtain the products and cial stability and protect consumers. Particularly in the services that best meet their needs and do not suffer harm realm of fintech, balancing risks and innovation is neces- in their interactions with financial service providers. Finan- sary to enable continued growth in new products, new cial consumer protection plays an important role in build- delivery mechanisms, and new business models and part- ing trust in the financial system, particularly for consumers nerships that expand the potential for achieving full finan- who are new to the formal financial sector. The legal and cial inclusion. regulatory environment should ensure that a sufficient Maintaining market integrity while pursuing financial framework is in place for financial consumer protection inclusion objectives also requires striking the right bal- that sets clear rules regarding the conduct of financial ser- ance. As the PAFI report notes, national authorities may vice providers. struggle to achieve a regulatory regime that protects the Low levels of financial capability can present a further financial system from money laundering and terrorist obstacle to the responsible uptake and usage of financial financing activities while building in sufficient flexibility to products and services, regardless of the level of accessibil- address customer identification issues that impede serv- ity or appropriateness of products. Financial capability is ing the underserved, enable the entry of new providers, defined as the internal capacity to act in one’s best finan- and allow the development of innovative financial prod- cial interest and encompasses the knowledge, attitudes, ucts. The Financial Action Task Force (FATF) supports a skills, and behaviors of consumers with regard to manag- risk-based approach to implementing FATF recommenda- ing their resources and understanding, selecting, and tions, particularly with respect to customer due diligence using financial services that fit their needs.12 Individuals (CDD). However, some authorities’ fear of being found with low levels of financial capability may distrust formal noncompliant with FATF recommendations can outweigh financial providers and/or may be unaware of the poten- the perceived financial inclusion benefits of a risk-based tial benefits or uses of financial products and services. approach. As a result, overly restrictive anti-money laun- Improved financial capability can lead to increased uptake dering/combating financing of terrorism (AML/CFT) and usage of financial products and services to effectively regimes will have some impact on the development of meet the needs of consumers. Both providers and finan- financial inclusion. cial sector authorities should consider and pursue approaches to improving the levels of financial capability of the unserved and underserved. NOTES Thirty-five percent of respondents chose “because designated bank to receive salary/wages or subsidy payment”; 10 percent 3.   chose “because it has convenient hours”; 7 percent chose “because of good service”; 5 percent chose “because it has many ATMs”; and less than 5 percent chose reasons related to online banking, low fees, simple business procedures, unlimited withdrawals, small risk of bank failure, and lack of another option. For examples, see Banjeree and others (2013); Bruhn and Love (2014); Burgess and Pande (2005); Sanford (2013). 4.   IMF FAS (2016). 5.   6.  Kumar (2011). IMF FAS (2016); World Bank GPSS (2016). 7.   Demirguc-Kunt and others (2015). The Global Findex is a World Bank database on financial inclusion in over 140 countries. The 8.   data is collected triennially through surveys with individuals conducted as part of the Gallup World Poll. 9.  www.centerforfinancialinclusion.org. World Bank (2014). 10.   McKay and Seltzer (2013); Kilara and Rhyne (2014). 11.   12.  http://responsiblefinance.worldbank.org/publications/financial-capability. 3 BENCHMARKING CHINA’S FINANCIAL INCLUSION PROGRESS This chapter provides a quantitative, cross-country bench- Partnership for Financial Inclusion (GPFI) under the leader- marking analysis of China’s progress in expanding financial ship of the People’s Bank of China (PBOC) during 2016. inclusion. The analysis contained herein is from a high The benchmarking analysis employs four groups of com- level; chapter 4 explores the trends highlighted here and parison countries to provide context to China’s current the drivers and factors behind these trends in greater state of financial inclusion: depth. This chapter leverages various global and national 1) G-20 high-income countries (G-20 HIC), databases relevant to financial inclusion, including the 2) G-20 middle-income countries (G-20 MIC), China Household Finance Survey (CHFS), the WBG Global 3) East Asian and Pacific large middle-income countries Findex, the International Monetary Fund Financial Access (EAP L-MIC), and Survey (IMF FAS) database, the WBG Global Payment Sys- 4) Other large middle-income countries (other L-MIC). tem Survey (GPSS), the WBG Enterprise Surveys. Key indi- cators for the analysis derive from the recently updated Table 3.1 provides an overview of these comparison G-20 Financial Inclusion Indicators, including new indica- groups. tors on digital financial inclusion developed by the Global TABLE 3.1 Benchmarking Comparison Groups RURAL # OF AVERAGE POPULATION GNI PER COMPARISON GROUP ABBREVIATION COUNTRIES INCLUDES POPULATION (% TOTAL) CAPITA (US$) China — 1 China 1,378,665,000 43.2 8,260 G-20 high-income G-20 HIC 12 Argentina; Australia; Canada; France; 88,170,704 17.8 34,990 countries Germany; Italy; Japan; Korea, Rep.; Russian Federation; Saudi Arabia; United Kingdom; and United States G-20 middle-income G-20 MIC 6 Brazil, India, Indonesia, Mexico, 342,650,232 34.6 6,603 countries South Africa, and Turkey East Asian and Pacific large EAP L-MIC 4 Malaysia, Philippines, Thailand, and 74,018,025 48.6 5,280 middle-income countries Vietnam Other large middle- other L-MIC 12 Algeria; Bangladesh; Colombia; Egypt, 83,669,777 47.2 3,030 income countries Arab Rep.; Iran, Islamic Rep.; Kenya; Nigeria; Pakistan; Peru; Sudan; Ukraine; and Uzbekistan Source: World Development Indicators 2017. All data as of 2016. Note: “Large” is defined as an adult population above 20 million. “Middle-income” is defined according to the World Bank Group (WBG) income classifications. China and the European Union are excluded from the two G-20 comparison groups. Gross national income (GNI) per capita calculated using Atlas method, current US$.   13 14   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   3.1 PHYSICAL AND REMOTE ACCESS POINTS actions. Mobile phone access is virtually universal in China, with 97 percent of adults reporting that they or As discussed in section 2.1, physical access is a key ele- someone in their household has a mobile phone (figure ment of financial inclusion. Overall, available data show 3.2).15 By contrast, just over half of adults report that their that the physical reach of China’s financial sector—includ- household has access to the Internet, which, while lower ing branches, ATMs, and agents—is on par with that of than the average in G-20 HICs, is far above the average in the median G-20 HIC and significantly higher than that of G-20 MICs and L-MICs. In fact, the increasing prevalence the G-20 MIC and L-MIC group medians, a result largely of smartphones that facilitate Internet access may poten- driven by China’s vast agent network (figure 3.1). The tially reduce the significance and utility of traditional reach of China’s branch network lags behind that of the broadband Internet connection. median G-20 HIC, though it is on par with that of the median G-20 MIC. China’s automated teller machine (ATM) network is larger than that of the median G-20 MIC, ACCOUNTS AND PAYMENT INSTRUMENTS 3.2  median EAP L-MIC, or median other L-MIC, though FOR INDIVIDUALS smaller than the median G-20 HIC. China’s branch network is complemented by a large China has achieved considerable success in expanding and far-reaching agent network which, at close to 1 million uptake of a basic but essential financial instrument: the agents, is the largest in the world by absolute size.13 How- store-of-value transaction account. According to data ever, when normalized by population, China’s agent den- from the 2014 Global Findex survey, 79 percent of Chi- sity rate (88 agents per 100,000 adults [age 15+]) is nese adults report owning at least one store-of-value roughly equivalent to that of Brazil (84 agents per 100,000 transaction account, a category that includes transaction adults), but lags behind those of Kenya (156), Peru (344), and deposit accounts at regulated financial insitutions or and Bangladesh (505).14 The limited functionality of agents e-money providers (figure 3.3). The 2014 value represents in China is also an important consideration, as agents cur- a significant increase from 2011, and the value has likely rently do not fully facilitate the uptake of financial prod- increased further since 2014 (new Global Findex data is ucts (i.e., account opening and loan repayments), nor do forthcoming in 2018). It should be noted that PBOC cur- they facilitate the deposit of funds into customer accounts. rently estimates account ownership to be above 90 per- High rates of mobile and Internet access provide Chi- cent in China. Nevertheless, Global Findex data is used in nese adults with additional channels through which to this report in order to undertake a cross-country and access and use financial products and services. Indeed, time-series benchmarking analysis.16 many emerging fintech models in China (e.g., nonbank While several drivers are likely behind the impressive digital payment providers and peer-to-peer lending plat- increase in account ownership, it almost certainly reflects forms) rely on access to mobile or Internet devices or the explicit efforts of financial sector authorities and build off data gleaned from the mass scale of digital trans- financial service providers (discussed in detail in chapter FIGURE 3.1 Physical Access Points Median number of access points per 100,000 adults 200 183 179 150 130 100 96 100 88 81 76 61 50 38 33 30 30 28 19 19 13 9 12 0 All Branches Agents ATMs China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC Source: IMF FAS 2016; WBG GPSS 2016; national authorities. Benchmarking China’s Financial Inclusion Progress   15 FIGURE 3.2 Remote Access Points FIGURE 3.3 Ownership of Store-of-Value Transaction % adults (age 15+) reporting household-level access to mobile phone Accounts over Time or Internet % adults (age 15+) reporting ownership of a store-of-value 97 transaction account 100% 95 91 87 100% 82 2011 88 80% 77 2014 79 80 80% 64 60% 52 60% 55 54 47 40% 42 32 40% 38 29 29 28 20% 20% 0% 0% Mobile phone in household Internet access in household China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC Source: Global Findex 2014 (Demirguc-Kunt and others 2015). Note: Values for other L-MICs do not include the Islamic Republic of Iran as Source: Gallup World Poll 2014. 2011 data for the country are unavailable. Including the Islamic Republic of Iran, the 2014 value for this group is 42 percent. FIGURE 3.4 Ownership of Store-of-Value Transaction Accounts across Selected Countries % adults (age 15+) reporting ownership of a store-of-value transaction account 100% 97 97 99 99 99 99 92 94 94 87 81 80% 78 79 75 70 67 68 69 60% 57 57 53 53 50 50 44 39 39 40 41 40% 36 29 31 31 31 20% 13 14 15 0% Pakistan Egypt, Arab Rep. Sudan Peru Vietnam Bangladesh Philippines Indonesia Colombia Mexico Tanzania Uzbekistan Nigeria Argentina Algeria Ukraine India Turkey Venezuela, RB Russian Federation Brazil Saudi Arabia South Africa Kenya Thailand China Malaysia Italy Iran, Islamic Rep. United States Korea, Rep. France Japan Germany Australia United Kingdom Canada Source: Global Findex 2014 (Demirguc-Kunt and others 2015). Note: Figure includes countries from all comparison groups defined in table 3.1. 4) and broader economic and demographic trends, regarding this core metric of financial inclusion—a finding including migration, urbanization, formal labor market that is also apparent when China is compared with the 140 participation, and the evolving role of technology in countries for which Global Findex data are available (figure everyday life in China. 3.5). Among EAP L-MICs, the average ownership rate of Across G-20 countries, the average rate of ownership of store-of-value transaction accounts is 55 percent, and store-of-value transaction accounts in 2014 fell just under among other L-MICs, it is 42 percent. that of China, at 76 percent, ranging from 36 percent in However, despite the significant progress made in Indonesia to 99 percent in Australia, Canada, Germany, recent years, some Chinese adults still lack a basic finan- and the United Kingdom (figure 3.4). When considering cial instrument to make and receive payments and store that China’s GNI per capita is significantly lower than that value (as of 2014).17 These adults are disproportionately of the G-20 average, China is clearly far ahead of its peers poor and live in rural areas (figure 3.6). The rate of account 16   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   FIGURE 3.5 Ownership of Store-of-Value Transaction Accounts Compared with GNI per Capita % (age 15+) adults reporting ownership of a store-of-value transaction account 100% China % of adults with store-of-value 80% transaction account 60% 40% 20% 0% 5 6 7 8 9 10 11 12 Log GNI per capita (Atlas method US$) Source: Global Findex 2014 (Demirguc-Kunt and others 2015); World Bank Development Indicators 2017. FIGURE 3.6 Store-of-Value Transaction Accounts in China, by Individual Characteristics % adults (age 15+) reporting ownership of a store-of-value transaction account Gender Women 76 Men 81 distribution Income Lower 40% 72 Upper 60% 84 Education Primary or less 73 level Secondary or more 90 Urban/Rural Rural 74 Urban 84 0% 20% 40% 60% 80% 100% Source: Global Findex 2014 (Demirguc-Kunt and others 2015). ownership among rural residents in China is lower than Beyond ownership and use of store-of-value transac- the corresponding value for urban residents. Given that tion accounts, using digital instruments to transact is a key the Chinese population is overall considerably more rural indicator of digital financial inclusion. Overall, 31 percent than that of the average G-20 country, achieving rural-ur- of Chinese adults report using a debit card, Internet plat- ban financial inclusion parity is a larger and more signifi- form, or mobile platform to make payments in the past cant challenge in China than elsewhere. year (figure 3.7). While on par with the corresponding rate Ownership is of course distinct from usage. Eleven per- in G-20 MICs and above the rates of EAP L-MICs and cent of accountholders in China report not making any other L-MICs, the prevalence of digital payments in China deposits or withdrawls from their account in the past year, is lower than that of G-20 HICs. similar to the average across G-20 countries. Account The popularity of e-commerce and social network– holders in China with a primary education or less and based nonbank digital payment platforms have made those in the bottom income quintile are significantly more Internet-facilitated payments and mobile phone pay- likely to hold inactive accounts. ments (not mutually exclusive categories) relatively preva- Benchmarking China’s Financial Inclusion Progress   17 FIGURE 3.7 Making Digital Payments % adults (age 15+) reporting having made a digital payment in the past 12 months 100% 80% 74 60 60% 45 40% 31 32 26 24 21 19 18 20% 17 17 15 14 10 8 9 5 6 5 0% Any Debit card Internet payment Mobile payment China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC Source: Global Findex 2014 (Demirguc-Kunt and others 2015). lent in China. Nineteen percent of Chinese adults report ship provide some insight. As discussed previously, a having made a payment over the Internet in the past year, portion of adults in China still lack a store-of-value trans- while 14 percent report having made a payment from action account, a basic and essential financial tool that their account using a mobile phone. While the prevalence addresses the need to make day-to-day payments and of Internet payments lags behind that of G-20 HICs, it store value and can also open up access to other finan- far exceeds that of G-20 MICs, EAP L-MICs, and other cial products and services. An adult may not be able to L-MICs. With respect to mobile phone payments, Chinese own, or may choose not to own, an account for several adults are almost as likely as their G-20 HIC counterparts reasons. This analysis focuses on those reasons that to report a mobile-based transaction (14 and 18 percent, public and private sector actions can help address: dis- respectively), though other L-MICs have also achieved tance, cost, and documentation. Of adults without a similar rates in mobile-based transactions, primarily driven transaction account in China, 19 percent report that they by successes in Kenya and similar branchless banking pio- do not have an account because “financial institutions neers. In comparison to other G-20 countries, while indi- are too far away” (table 3.2). This may be related to the viduals in China are relatively likely to own debit cards, fact that while there are many agents and they provide they are less likely to use this particular payment instru- convenient channels to use accounts for certain transac- ment, which may be partly due to the increasing preva- tions (e.g. consumption, cash withdrawals, and trans- lence of (and preference for) Internet- and mobile-based fers), they generally cannot be used to open accounts, payments. Significant growth has likely occurred in the make deposits, or conduct other types of transactions. uptake and usage of digital financial instruments since the Exclusion because of lack of physical access is reported data was collected in 2014. at similar rates among the unbanked in G-20 and other Data on specific payment use cases provide further insight into the integration of digital payments into the TABLE 3.2 Obstacles to Account Ownership financial lives of Chinese adults. For example, the vast % of adults (age 15+) without an account reporting obstacle to account ownership majority of social transfer recipients in China report receiv- REPORTED OBSTACLES ing these payments directly into an account (figure 3.8). (% OF ADULTS WITHOUT AN ACCOUNT) Across the four comparison groups, approximately 12–20 percent of adults report having received a social transfer COUNTRY GROUPING DISTANCE COST DOCUMENTATION payment from the government in the past year. In China, China 19 10 10 66 percent of these adults report that the payment was G-20 HICs 4 13 13 made into their account, below the G-20 average of 77 G-20 MICs 28 33 28 percent but above the averages of EAP L-MICs and other EAP L-MICs 29 31 24 L-MICs (41 percent and 64 percent, respectively). What are the main obstacles to full financial inclusion Other L-MICs 19 28 17 in China? Available data on barriers to account owner- Source: Global Findex 2014 (Demirguc-Kunt and others 2015). 18   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   FIGURE 3.8 Digital Payments Use Cases % adults (age 15+) reporting use of digital payment instrument, of those who report undertaking each activity 100% 84 80% 66 69 64 60 60% 54 49 41 43 43 40% 34 36 31 27 26 23 19 18 20% 16 13 7 6 4 6 0% Receiving government Sending domestic Receiving domestic Paying utility Receiving agricultural transfers remittances remittances bills payments China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC Source: Global Findex 2014 (Demirguc-Kunt and others 2015). L-MICs. Cost and documentation are less commonly Chinese adults are as likely as adults in G-20 HICs to cited as an obstacle in China, compared with both dis- report having borrowed in the past year, but are signifi- tance and with corresponding levels for these obstacles cantly less likely to report having done so from a regulated in other countries. financial institution. Overall, 36 percent of adults in China reported borrowing money in the past year, with less than a third of those adults (i.e., 10 percent of all adults) having  AVING AND BORROWING FOR 3.3 S reported borrowing from a regulated financial institution INDIVIDUALS (figure 3.10). Among rural residents and adults in the bot- tom 40 percent of income distribution in China, formal Savings behavior is relatively prevalent among Chinese borrowing is even less common: just 6–7 percent of these adults. Approximately 72 percent of Chinese adults report individuals reported borrowing from a regulated financial having saved or set aside money in the past year, signifi- institution, despite no difference between these groups cantly more than adults in G-20 HICs and MICs but in line and the population as a whole with respect to overall bor- with the rate in EAP L-MICs (figure 3.9). Most savers in rowing prevalence. China use formal financial institutions to do so, a pattern Credit cards represent a significant source of short- that distinguishes China from EAP L-MICs and is likely term credit for adults in China. Sixteen percent of adults related to the high ownership rate of accounts. Current report owning a credit card, and 14 percent report hav- data do not indicate whether these savings accounts are ing used a credit card in the past year. Ownership and linked to digital platforms (e.g., mobile apps and nonbank use of credit cards is higher in G-20 countries, at 37 and digital payment platforms) that would facilitate conve- 32 percent respectively. However, credit cards do not nient deposit and withdrawal. appear to be a widely used financial tool among rural However, 31 percent of adults in China report saving, residents and the poor in China. Just 4 percent of adults but not at a formal financial institution. Formalizing the in the bottom 40 percent of the income quintile and 6 “hidden” savings of these informal savers remains a signif- percent of rural residents report having used a credit icant opportunity for the financial sector and may also card in the past year. indicate the need to develop simple, accessible, and low- Existing demand-side date may not capture either cost savings products, particularly for individuals with low peer-to-peer (P2P) borrowing or borrowing from family and irregular incomes. or friends, given that respondents likely do not consider Saving for old age is the most commonly reported rea- such form of borrowing to be from a regulated financial son for saving, reported by 39 percent of Chinese adults, service provider. Certain forms of short-term digital followed closely by saving for education or school fees (30 credit may also not be included. These gaps highlight percent) and saving to start, operate, or expand a busi- the need for continued development in the measure- ness (22 percent). ment of financial inclusion to cover evolving models and ensure comprehensive data. Benchmarking China’s Financial Inclusion Progress   19 FIGURE 3.9 Saving % adults (age 15+) saving in the past 12 months 100% 80% 72 73 64 60% 50 44 44 41 39 40 40% 37 33 30 26 21 21 22 20% 18 17 17 13 15 13 10 9 11 0% Any savings At a regulated For education/ For old age To start, operate, financial institution school fees expand business China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC Source: Global Findex 2014 (Demirguc-Kunt and others 2015). FIGURE 3.10 Borrowing % adults (age 15+) borrowing in the past 12 months 100% 80% 60% 56 52 42 40% 36 38 34 37 25 27 20% 17 16 16 16 16 12 13 10 9 8 10 5 7 7 7 3 0% Any borrowing From a regulated From family/friends For health/medical To start, operate, financial institution purposes expand business China G-20 HIC G-20 MIC EAP L-MIC Other L-MIC Source: Global Findex 2014 (Demirguc-Kunt and others 2015). 3.4 INSURANCE FOR INDIVIDUALS adults living in rural areas, social health insurance cover- age reaches 91 percent. Global data on individual and household uptake of insur- As of 2015, approximately 7 percent of all Chinese ance products are limited, thus preventing comprehensive individuals (all ages) purchased or were covered by non- benchmarking of the inclusiveness of China’s insurance vehicle commercial insurance, which includes business market. National insurance data do exist, however, and the life insurance (covering 4 percent of Chinese individuals), 2015 CHFS provides valuable context for the insurance commercial health insurance (2 percent), and other com- aspects of chapter 4. The CHFS data indicate that approx- mercial insurance (1 percent). imately 87 percent of working age (21 or older) and retired Among households that report owning a vehicle (in- adults in China are covered by social health insurance, a cluding cars, trucks, motorcycles, etc.), 95 percent report category that includes various insurance programs like having vehicle insurance, though this varies between 91 basic medical insurance for urban workers, new rural coop- percent among rural households and 97 percent among erative medical insurance, student health insurance, etc., nonrural households. The most commonly reported but does not include commercial health insurance. Among forms of vehicle insurance are traffic insurance (reported 20   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   by 72 percent of vehicle-owning households), third-party Approximately 25 percent of Chinese firms report hav- liability insurance (47 percent), and loss of vehicle insur- ing a loan or line of credit, though the percentage varies ance (33 percent). significantly from 14 percent among small firms, to 35 per- cent among medium firms, to 51 percent among large firms (figure 3.12). Indeed, while the average prevalence 3.5 ACCESS TO FINANCE FOR FIRMS of loans among Chinese firms is on par with that in other G-20 MICs and above that of other L-MICs, significantly Firm-level access to credit is a policy priority in China. more variation exists in access to finance across firm size This analysis draws on recent data from the WBG’s Enter- in China. The result is that while large and medium firms in prise Surveys (World Bank 2017(a)), a cross-country data- China are more likely than large and medium firms in base of firm-level data collected from firms with five or other country groups to have a loan or line of credit, small more employees. Firms are segmented into three size firms in China are far less likely than their counterparts in categories: G-20 MICs and EAP L-MICs to report the same. 1) Small, defined as firms with 5–19 employees; Among firms that report not having applied for a loan or 2) Medium, defined as firms with 20–99 employees; and line of credit in the past year, the most common reason is 3) Large, defined as firms with 100 or more employees. “no need for a loan—establishment has sufficient capital” (reported by 57 percent of firms that have not applied for a The analysis uses data collected between 2012 and 2016, loan), followed by “collateral requirements were too high” varying across countries. The data on Chinese firms were (10 percent), and “application procedures were complex” collected in 2012 and must therefore be interpreted in this (10 percent) (figure 3.13). Between 5 and 10 percent of context. Due to limited data availability, no G-20 HIC firms that did not apply for a loan or line of credit in the past grouping is used and the sample of countries included in year report the following reasons: “interest rates were not the remaining categories are defined in the notes below favorable,” “did not think it would be approved,” and “size each figure. and maturity of loan not sufficient.” Relatively little variation At the basic level of access to payment and savings exists across firm size categories in these responses, though services, account ownership is nearly universal in China, small and medium firms are significantly less likely to report with more than 96 percent of firms reporting owning a “no need for a loan.” Compared with other country group- checking or savings account (figure 3.11). Even among the ings, small and medium Chinese firms are less likely to subsample of small firms in China, 95 percent of respon- avoid applying for loans due to interest rates and more dents report owning an account. This compares favorably likely to cite high collateral requirements as an obstacle. with G-20 MICs, where account ownership among firms is Measuring and defining the degree to which a firm is considerably lower, on average. credit constrained can be done in many ways. One method, developed by WBG researchers in the Enterprise Survey FIGURE 3.11 Account Ownership among Firms % firms with an account at a bank 100% 96 99 97 95 83 81 80% 77 73 72 72 74 74 69 69 68 69 60% 40% 20% 0% All Large firms Medium firms Small firms China G-20 MIC EAP L-MIC Other L-MIC Source: WBG Enterprise Surveys 2012–2016. Note: Countries with available Enterprise Survey data since 2012 include Bangladesh (2013); China (2012); Egypt, Arab Rep. (2013); India (2014); Kenya (2013); Malaysia (2015); Nigeria (2014); Pakistan (2013); Philippines (2015); Sudan (2014); Thailand (2016); and Turkey (2013). Benchmarking China’s Financial Inclusion Progress   21 FIGURE 3.12 Access to Finance for Firms % firms with loan or line of credit 100% 80% 60% 51 40% 35 32 33 33 32 25 26 25 25 27 20% 14 11 13 11 11 0% All Large firms Medium firms Small firms China G-20 MIC EAP L-MIC Other L-MIC Source: WBG Enterprise Surveys 2012–2016. Note: Countries with available Enterprise Survey data since 2012 include Bangladesh (2013); China (2012); Egypt, Arab Rep. (2013); India (2014); Kenya (2013); Malaysia (2015); Nigeria (2014); Pakistan (2013); Philippines (2015); Sudan (2014); Thailand (2016); and Turkey (2013). FIGURE 3.13 Reasons for Not Applying for a Loan or Line of Credit % firms responding affirmatively to each reason Other L-MIC Small 66 7 10 5 4 5 Medium 68 6 12 3 5 3 Large 66 7 10 5 4 5 Small EAP L-MIC 66 8 11 6 5 Medium 66 9 8 8 7 Large 54 9 6 10 4 15 Small 57 3 15 7 4 5 7 G-20 MIC Medium 53 7 14 6 5 6 8 Large 53 5 15 7 6 5 8 Small 57 10 4 11 10 7 China Medium 54 11 10 10 6 4 3 Large 67 8 12 7 3 0% 20% 40% 60% 80% 100% No need Size of loan and maturity insufficient Complex application procedures Didn’t think it would be approved Interest rates not favorable Other Collateral requirements too high Source: WBG Enterprise Surveys 2012–2016. Note: Countries with available Enterprise Survey data since 2012 include Bangladesh (2013); China (2012); Egypt, Arab Rep. (2013); India (2014); Kenya (2013); Malaysia (2015); Nigeria (2014); Pakistan (2013); Philippines (2015); Sudan (2014); Thailand (2016); and Turkey (2013). 22   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   Unit, establishes four categories—“not credit constrained,” finance is an obstacle to their operations and growth. “maybe credit constrained,” “partially credit constrained,” Indeed, Chinese firms report access to finance as their big- and “fully credit constrained”—and categorizes respond- gest business environment obstacle. The Enterprise Survey ing firms based on responses to questions including questionnaire asks responding firms to rank their biggest whether or not the firm has any source of external finance, business environment obstacles from a list of options. whether or not the firm has applied for a loan or line of Approximately 22 percent of Chinese firms report that credit, whether or not the firm was granted financing, and access to finance is their biggest obstacle, more than the why the firm chose not to apply for a loan or line of credit. informal sector (20 percent), tax rates (15 percent), and The analysis finds that 29 percent of Chinese firms are fully poorly educated workers (13 percent) (figure 3.15). Rela- credit constrained, 7 percent are partially credit con- tively little variation exists across firm size categories in strained, 18 percent are maybe credit constrained, and 46 reporting access to finance as the biggest obstacle. Chi- percent are not credit constrained (figure 3.14).18 nese firms are far more likely than their counterparts in Another method to assess the degree to which firms are other country groupings to report access to finance as the credit constrained is to ask firms directly whether access to biggest constaint. Between 9 and 12 percent of firms in G-20 MICs, EAP L-MICs, and other L-MICs report the same. FIGURE 3.14 Credit-Constrained Status of Chinese Firms Approximately 78 percent of Chinese firms report that % firms corresponding to each category their most recent loan or line of credit required collateral. This is on par with what is observed in other country groupings. The survey data reveal that Chinese firms primarly fund investments (e.g., fixed assets such as machinery, vehicles, 29 land, buildings, etc.) through internal financing (figure Fully credit constrained 3.16). On average, firms in China finance 90 percent of Maybe credit constrained their investments using internal sources of finance (e.g., 46 Partially credit constrained retained earnings). Relatively little variation in this indica- Not credit constrained tor is observed across firm size. Fifteen percent of firms in 18 China report using banks to finance investments, and bank financing accounts for approximately 5 percent of 7 funding for investments. Among small firms, just 4 percent use banks to finance investments, and bank financing Source: Kuntchev and others 2014. accounts for less than 1 percent of funding for invest- Note: Countries with available Enterprise Survey data since 2012 include ments. Across all firm size categories, Chinese firms are Bangladesh (2013); China (2012); Egypt, Arab Rep. (2013); India (2014); Kenya less likely than their counterparts in G-20 MICs and EAP (2013); Malaysia (2015); Nigeria (2014); Pakistan (2013); Philippines (2015); Sudan (2014); Thailand (2016); and Turkey (2013). L-MICs to use banks to finance investments. FIGURE 3.15 Access to Finance as Biggest Obstacle % firms (>5 employees) reporting that access to finance is their biggest business environment obstacle 100% 80% 60% 40% 22 25 20 22 20% 13 13 15 10 9 8 11 11 6 7 8 7 0% All Large firms Medium firms Small firms China G-20 MIC EAP L-MIC Other L-MIC Source: World Bank Enterprise Surveys 2012–2016. Note: Countries with available Enterprise Survey data since 2012 include Bangladesh (2013); China (2012); Egypt, Arab Rep. (2013); India (2014); Kenya (2013); Malaysia (2015); Nigeria (2014); Pakistan (2013); Philippines (2015); Sudan (2014); Thailand (2016); and Turkey (2013). Benchmarking China’s Financial Inclusion Progress   23 FIGURE 3.16 Use of Banks to Finance Investment % firms using banks to finance investments, among firms having made investments in the past year 100% 80% 60% 40% 35 35 33 33 28 27 26 28 23 20 20% 15 14 13 13 9 4 0% All Large firms Medium firms Small firms China G-20 MIC EAP L-MIC Other L-MIC Source: World Bank Enterprise Surveys 2012–2016. Note: Countries with available Enterprise Survey data since 2012 include Bangladesh (2013); China (2012); Egypt, Arab Rep. (2013); India (2014); Kenya (2013); Malaysia (2015); Nigeria (2014); Pakistan (2013); Philippines (2015); Sudan (2014); Thailand (2016); and Turkey (2013). NOTES PBOC reports 983,400 “rural cash withdrawal points” (i.e., agents) in China at end of 2016. 13.  IMF FAS 2016, GPSS 2016, and author calculations. 14.  Gallup World Poll 2014. 15.  From the supply-side perspective, PBOC also reports more than 6.5 billion accounts in China, which translates to more than one 16.  account per individual when compared with China’s overall population. However, the analysis in this chapter utilizes demand-side data such as Global Findex, as demand-side data can more accurately account for the prevalence of dormant accounts and the fact that many individuals own multiple accounts, which is of greater relevance for assessing financial inclusion at the individual level. According to Global Findex 2014 data, 21 percent of Chinese adults do not own a store-of-value transaction account. 17.  See “What Have We Learned from the Enterprise Surveys Regarding Access to Credit by SMEs?” at https://www.enterprisesur- 18.  veys.org/~/media/GIAWB/EnterpriseSurveys/Documents/ResearchPapers/Enterprise-Surveys-access-to-finance-and-SME.pdf. . 4 CHINA’S FINANCIAL INCLUSION EXPERIENCE China’s financial inclusion experience has evolved through tives over the last 15 years, China’s financial inclusion many phases. Expanding access to financial services first experience has features in common with other coun- became an explicit policy priority in the early 1950s with tries—including the use of agents and the establishment the establishment of rural credit cooperatives (RCCs). of new institutional types meant to serve underserved While the full scope and impact of marketization and pri- populations—as well as characteristics that are unique to vatization on the financial sector in the decades that fol- China, such as the significant role of development-ori- lowed are outside the purview of this report, this evolution ented financial service providers and policy banks and is important context for understanding China’s financial the proliferation of nonbank digital payment platforms inclusion experience since 2000. By the early 2000s, the linked to e-commerce and social networks. impacts of marketization and financial sector reforms had This chapter provides a targeted summary of China’s led to the closure of tens of thousands of financial service financial inclusion experience in recent years. It is not providers in rural areas, leaving RCCs and the postal sav- meant to be comprehensive, but rather focuses on key ings system as the primary providers of financial services developments, particularly those that may be relevant or for rural residents.19 As of 2005, there was just one depos- interesting to other countries. The first three sections of it-taking institution at or below the county level for every this chapter are roughly organized by categories of finan- 20 villages.20,21 Compounding the relative lack of access to cial service providers and the role of each in contributing financial products and services were RCCs’ limited capacity to financial inclusion. to meet rural households’ financial needs (due in part to a • Section 4.1 addresses “traditional” financial service legacy of high levels of nonperforming loans [NPLs]) and providers, including state-owned commercial banks the postal savings system’s limited range of product offer- (e.g., Postal Savings Bank of China [PSBC] and Agricul- ings (primarily money transfer services and savings tural Bank of China [ABC]), joint-stock commercial accounts). Banks, for their part, focused mainly on lending banks and city commercial banks, rural commercial to state-owned enterprises, leaving a vast informal credit banks (RCOMBs), rural cooperative banks (RCOPBs), market and significant market gaps for underserved indi- and RCCs. viduals and firms.22 In the early 2000s, Chinese financial sector authorities • Section 4.2 covers “new-type” providers such as vil- turned their attention to improving the banking system’s lage and township banks (VTBs) and microcredit com- commercial viability and leveraging the financial system panies (MCCs). to support the national goals of social harmony and sus- • Section 4.3 addresses fintech companies, including tainable development.23 In line with the latter objective, nonbank digital payment providers, peer-to-peer (P2P) financial inclusion policy objectives focused on three lending platforms, Internet-based microlenders, Inter- main areas: (1) universal access to basic banking services net banks, Internet-based insurance, Internet-based (i.e., bank accounts and payment services), (2) productive fund management, and Internet equity-based crowd- credit for rural households, and (3) bank credit for micro funding. and small enterprises (MSEs). In pursuing these objec-   25 26   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   TABLE 4.1 Overview of Select Financial Service Providers in China TOTAL ASSETS CATEGORY OF FINANCIAL # OF (BILLION RMB TOTAL # OF SERVICE PROVIDER PROVIDERS [BILLION US$]) BRANCHES REGULATOR State-owned commercial banks 5 86,598 (12,990) 68,953 CBRC Joint-stock commercial banks 12 43,473 (6,521) 15,366 CBRC City commercial banks 134 28,238 (4,236) 16,156 CBRC Rural Commercial Banks (RCOMBs) 1,114 20,268 (3,040) 49,307 CBRC Rural Cooperative Banks (RCOPBs) 40 436 (65) 1,381 CBRC Rural Credit Cooperatives (RCCs) 1,125 7,950 (1,193) 28,285 CBRC Insurance companies 203 15,120 (2,268) — CIRC Village and Townships Banks (VTBs) 1,443 1,238 (186) — CBRC Microcredit companies (MCCs) 8,673 — — Local government Nonbank digital payment providers 266 — — PBOC P2P lending platforms 3,709 — — CBRC Source: CBRC, CIRC and PBOC. Data is of 2016. “Branches” includes special branches, but does not include agent-based service points. • Finally, section 4.4 focuses on the role of the Chinese cal reach of their service networks into remote and rural government in promoting financial inclusion, including areas by establishing special sub-branches, agents, mobile via fiscal and monetary policies, financial infrastructure, branches, and self-service outlets. In 2007, CBRC launched development-oriented and policy banks, and financial the China Rural Banking Services Distribution Map on its consumer protection. website, emphasizing its policy objective of increasing the physical reach of the financial sector. Table 4.1 provides an overview of these different pro- Government authorities have actively promoted the viders. expansion of basic financial coverage. In 2014, the CBRC issued the Guidelines on Promoting Village-Level Cover- 4.1 T  HE ROLE OF TRADITIONAL FINANCIAL age of Basic Financial Services, which stated an overall SERVICE PROVIDERS IN FINANCIAL target of achieving coverage of basic financial services in INCLUSION all villages in three to five years. Local governments at all levels have also taken active measures to support further Traditional financial service providers have played a criti- expansion of basic financial services. These measures cal role in expanding financial inclusion in China. With pol- vary in form, but many relate to subsidies, tax deductions icy guidance from the Chinese government, traditional and exemptions, risk compensation, guarantee mecha- financial service providers have significantly expanded the nisms, and adapted branch security requirements. For physical reach of their service networks, modernized Chi- example, the finance department of Fengdu County in na’s payments infrastructure, and innovated at the product Chongqing gives a subsidy of RMB 20,000 (US$3,000) to level, including through partnerships with fintech compa- each bank outlet newly established with deposit, with- nies. The result has been a significant increase in product drawal, and lending functions in villages or towns. uptake and usage, most notably for bank accounts and In addition, increased per capita income in rural areas bank cards. and improvements in physical and financial infrastructure, combined with strong competition among financial ser- vice providers in urban areas, have incentivized many mproving Accessibility by Expanding the 4.1.1 I financial service providers to develop new customer Physical Reach of Service Outlets bases and take advantage of untapped business oppor- As discussed in chapter 2, accessibility is a core element tunities in rural and remote areas. Table 4.2 shows that and driver of financial inclusion. As in many countries, tra- automated teller machine (ATM) and point-of-sale (POS) ditional financial service providers in China have histori- infrastructure has increased rapidly in recent years, with cally been characterized by limited and uneven geographic approximately 924,000 ATMs as of 2016 (37 percent of coverage. Yet in recent years, government policies, which are located in rural areas) and approximately increased competition, and business opportunities have 24,535,000 POS terminals as of 2016 (28 percent of motivated financial service providers to expand the physi- which are located in rural areas). The absolute numbers of China’s Financial Inclusion Experience    27 ATMs and POS terminals in rural areas have increased in TABLE 4.2 ATMs and POS Terminals recent years (although the total share of ATMs and POS NUMBER OF ATMS (THOUSANDS) NUMBER OF POS (THOUSANDS) terminals in rural areas has decreased due to relatively YEAR NATIONWIDE % IN RURAL AREAS NATIONWIDE % IN RURAL AREAS greater increases in absolute numbers in urban areas). 2011 334 41% 4,827 60% Special Sub-Branches of Commercial Banks 2012 416 43% 7,118 56% Since 2013, CBRC has actively encouraged small- and 2013 520 39% 10,632 42% medium-sized commercial banks to open simplified or 2014 615 41% 15,935 33% “special” sub-branches. Such sub-branches benefit from 2015 867 36% 22,821 28% lighter licensing requirements and approval processes. Establishing special sub-branches allows these banks to 2016 924 37% 24,535 28% achieve a more geographically diverse range of opera- Source: PBOC, 2016. tions and provide professional and accessible financial services to underserved communities and MSEs. The two types of special sub-branches are (1) commu- approved the first batch of community sub-branch nity sub-branches and (2) small and micro sub-branches. licenses in 2014. By the end of 2015, more than 5,000 Community sub-branches provide services to customers community and small and micro sub-branches had been through a “self-service + consulting” model. The main established. Site selection of special sub-branches typi- activities of community sub-branches are to accept cally avoids highly centralized areas such as city centers deposits and sell financial products, including microloans and actively targets the extension of banking services to in some sub-branches. Usually, community sub-branches the county, town, and village level. For example, in Zheji- are equipped with ATMs or CRS (cash recycling systems, ang Province, approximately 48 percent of community which are similar to ATMs but also facilitate cash deposits sub-branches are located in towns and approximately 22 and other financial transactions). Normally, a community percent in villages. Small- and medium-sized commercial sub-branch has two to three employees to provide coun- banks, especially city commercial banks, have leveraged seling, product marketing, and other services. sub-branches to shorten the geographic distance to cus- Small and micro sub-branches are similar to commu- tomers. Some city commercial banks have established nity sub-branches, but focus on providing basic financial sub-branches in peri-urban areas and urban villages to services to MSEs. These sub-branches tend to be located further expand into underserved markets. Table 4.3 pro- in industrial parks. Special sub-branches are also able to vides an overview of community sub-branches and small offer flexible hours that align with the operating hours and micro sub-branches. and shift schedules of workers within the industrial clus- From the perspective of commercial banks, network ters they serve. expansion through special sub-branches has many In recent years, commercial banks have actively estab- advantages. Special sub-branches attract new clientele in lished many community sub-branches and small and underserved areas where rent and operating costs are micro sub-branches. China Minsheng Bank, Shanghai often relatively low. From the perspective of regulatory Pudong Development Bank, and the Bank of Communi- authorities, establishing special sub-branches helps to cations, among others, have received licenses to estab- promote the development of financial inclusion and lish special sub-branches. Regulatory authorities formally improve vulnerable groups’ access to financial services. TABLE 4.3 Community Sub-Branches and Small and Micro Sub-Branches of Commercial Banks COMMUNITY SUB-BRANCH SMALL AND MICRO SUB-BRANCH Location Residential areas at county, town, and Clusters of MSEs village levels Target segment Provide community residents with basic Provide MSEs with basic financial services financial services Business scope Provide basic financial services like Provide basic financial services like savings, savings, payments, financial management, payments, financial management, buying buying national debt, etc.  national debt, etc.; lending up to cap (see below) Restricted activities No manual cash business No manual cash business; single-entity maximum line of credit of RMB 5 million (US$750,000) Source: CBRC. 28   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   Specialized sub-branches are helpful in meeting the Agent-Based Models for Cash Withdrawal Services in unique needs of their customers. A key objective of Rural Areas community sub-branches is to meet the financial needs In recent years, China has issued and implemented vari- of middle-aged and older customers, who often have ous subsidies and programs for rural and agricultural low financial capability and familiarity with digital households, such as subsidies supporting agricultural finance. Such customers prefer to have financial trans- activities, new rural social endowment insurance, and new actions conducted tangibly and in person, within their rural cooperative medical insurance. According to the community. The flexible hours of special sub-branches 2013 China Household Finance Survey (CHFS), approxi- provide an additional convenience. Small and micro mately 40 percent of all households and 68 percent of sub-branches can leverage their knowledge of specific rural households report having received some form of industry segments to offer more tailored financial prod- subsidy or grant payment from the government in the ucts and services to meet the needs of their MSE cus- past year.24 However, many subsidy recipients living in tomers, including innovations related to supply chain remote areas historically had limited access to basic finan- financing. cial services, requiring an expensive and inefficient distri- However, at present, community sub-branches and bution system of cash payments. To address this problem, small and micro sub-branches face several challenges, as well as to achieve the broader goal of improving finan- including limited independence from their parent cial access, the PBOC launched a pilot program in 2010 branches, a narrow range of product and service offer- to test cash withdrawal services for rural residents via an ings, and difficulties in achieving profitability. To be sus- agent-based model using debit cards linked to bank tainable, such sub-branches must clearly define and accounts. These pilots were initially undertaken in part- leverage their unique market position, improve opera- nership with ABC, PSBC, and other financial service pro- tional models, improve managerial practices, and pro- viders in select towns in Chongqing, Shandong, Zhejiang, vide more tailored and adapted products to meet the Hunan, and Shaanxi (see box 4.1). financial needs of MSEs and residents in rural and urban In 2011, the PBOC-issued Notice on Promoting Bank- communities. card Withdrawal Services for Rural Residents established BOX 4.1 Postal Savings Bank of China: Agent-Based Service Points Help Reach the “Last Mile” PSBC has positioned itself to serve sannong (the agricultural In addition to financial accessibility, PSBC also strives to sector, farmers, and rural areas), MSEs, and small communities make agent services safer, more reliable, efficient, and adapted since its establishment in 2007. Thanks to its extensive physical to rural consumers’ diverse needs. For example, “shangyitong” network, PSBC now has more than 40,000 access points all (easy commerce settlement) machines (similar to POS termi- over the country covering 98 percent of counties nationwide nals) were developed to facilitate rural agent transactions and and with 71 percent of outlets located in counties and sub- improve settlement.29 PSBC has also attempted to diversify county areas. This makes PSBC the most broadly represented transactions at service points beyond cash withdrawals and financial service provider in rural China. balance inquiries. A broader range of services are now avail- Increasing financial inclusion in rural areas has been an inte- able in pilot areas, such as minimum livelihoods guarantee pay- gral part of PSBC’s strategy. In response to the PBOC’s policy, ments, grain subsidies, rural medical insurance subsidies, utility PSBC began deploying agent-based service points in 2010, payments, remittances, e-commerce services, loan applica- which became part of its “village service point—town out- tions, and investment counseling. To ensure operational and lets—county-level branch” strategy. By the end of February transaction security, agent screening and selection are con- 2016, PSBC had established 21,888 access points in the cen- ducted in a strict manner. Selected agents are usually affiliated tral and western regions of China (comprising 54.6 percent of with reputable and credible merchants or stores, and business all PSBC access points), and had set up nearly 152,000 agent- operation and risk prevention trainings are required. PSBC also based service points nationwide. The transaction volume and conducts onsite and offsite inspections and monitoring of turnover of PSBC agent-based service points are among the agents. In cases of operational abnormalities, customer service largest nationwide. managers are informed for further investigation. Source: PSBC. China’s Financial Inclusion Experience    29 the policy objective of scaling up initial pilots such that by transaction value; the average amount of a cash with- the end of 2013, agent-based service points for cash drawal is RMB 493 (about US$74) (figure 4.2). Transfers withdrawal would cover nearly all rural towns in China. and remittances constitute 27 percent of all transactions The notice prohibited agent-based service points from but represent 68 percent of the total transaction value; accepting deposits and stipulated a daily cash withdrawal the average amount of a transaction is RMB 2,131 (about limit of RMB 1,000 (US$150) per card. In 2014, via the US$320). Finally, bill payments account for 21 percent of Guiding Opinions on Promoting the Development of all transactions but represent just 3 percent of the total Rural Payment Service Environment, PBOC removed transaction value; the average bill payment amount is restrictions on providing remittance and bill payment ser- RMB 105 (about US$16).25 vices via agent-based service points, subject to applica- As in many countries with large agent networks, a sig- tions from acquirers. The withdrawal limit was also raised nificant share of service points in China have low levels of to RMB 2,000 (US$300), but discretion was given to PBOC branches at the sub-province level and above to FIGURE 4.1 Locations of Agent-Based Service Points adjust these limits. Currently, agent-based service points % of service points in each area by location type can also provide person-to-person transfers. Ningbo (Zhejiang Province) Qinghai Province By the end of 2016, the number of agent-based ser- vice points across China had reached 983,400, covering more than 90 percent of administrative villages and aver- 4% 3% aging 1.8 service points per administrative village. Agent- 12% 11% based service points have been established by financial service providers (since expanded beyond ABC and 20% 41% PSBC to include local banks, RCCs, and nonbank digital payment providers with a “bank card acquirer” license) in towns and villages and equipped with POS terminals and 82% other tools. Approximately 2 percent of service points 27% have been established by nonbank digital payment pro- viders (e.g., Alipay and Tenpay). Agent-based service points are typically located in Retail locations Retail locations local retail stores and commune offices, though the Post offices Public clinics breakdown varies significantly across and within prov- Commune offices Commune offices inces. For example, among the more than 2,800 service Others Others points in the rural areas of Ningbo in Zhejiang province as Source: PBOC. of mid-2017, approximately 41 percent of service points are located in retail locations, 27 percent in post offices, and 20 percent in commune offices (figure 4.1). Among FIGURE 4.2 Transactions via Agent-Based Service Points the nearly 5,000 service points in Qinghai province as of % share of transactions by number and value mid-2017, approximately 82 percent are located in retail Number of Transactions Value of Transactions locations, 11 percent in public clinics, and 4 percent in commune offices. 3% To promote electronic payment and e-commerce in rural areas, some provinces have made efforts to encour- 21% age resource sharing between agent-based service 30% points and e-commerce outlets in rural areas. For exam- ple, some agent-based service points and e-commerce 52% outlets (e.g., a retail store or household that facilitates the 27% 68% sale of goods on the Taobao e-commerce platform for the village) are integrated or share common information 20% technology and human resources. In 2016, agent-based service points conducted a total of 495 million payment transactions totaling RMB 424.78 Cash withdrawals Cash withdrawals billion (US$63.72 billion), representing year-on-year Transfers/remittances Transfers/remittances growth rates of 14 percent and 6 percent, respectively. Bill payments Bill payments Cash withdrawal services account for 52 percent of all transactions, but represent only 30 percent of the total Source: PBOC. 30   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   activity. Though no national, comprehensive data exist on tional costs, improve efficiency, and promote the sustain- agent activity levels, data from select areas illustrate this able development of agent-based service points. Financial trend: among the more than 2,800 service points in the sector authorities will need to consider whether further rural areas of Ningbo in Zhejiang province, 57 percent expanding agent functionality (e.g., to include cash-in had a monthly average of more than 30 transactions, 14 transactions) is an effective way to further strengthen the percent had a monthly average of 3–30 transactions, and viability of the business model. 29 percent had a monthly average of 0–2 transactions as Balancing interoperability and investment incentives is of mid-2017.26 Low activity of some service points may be also a challenge for government authorities. To increase driven by consumers substituting with online channels convenience and utility for rural residents, PBOC has and declining population in rural areas. developed the financial infrastructure for interbank clear- The agent-based service point model in rural areas ing in rural areas, lowered the cost of interbank clearing, was established to create a mutually beneficial situation and encouraged acquirers to accept debit cards issued by for all participants and stakeholders, including consum- other institutions. However, acquirers can be resistant to ers, financial service providers, merchants, the govern- such requests, as their aim is to expand their market share ment, and so on. First, the model allows consumers the in rural areas via agent-based service points. If govern- convenience of withdrawals, transfers, and bill payments ment authorities require acquirers to provide interbank without having to leave their villages, thus eliminating services, the latter’s enthusiasm for installing the equip- direct and indirect costs associated with transportation to ment necessary to further expand such points may be branches and other outlets. Second, the model comple- compromised to a certain degree. To address this issue, ments the existing retail business model of merchants local PBOC branches would, in the initial phases of devel- operating such points, providing them with additional oping the service point network, sometimes gave acquir- income sources and higher foot traffic for cross-sales. ers a temporary period during which POS terminals could Third, financial service providers (mostly local small- and be made exclusive to the respective acquirer.27 More medium-sized banks and RCCs) can achieve market recently, the typical approach has been to allow acquirers expansion in rural areas through transactional services to charge a small interchange fee to customers using a and enhance brand awareness and loyalty with rural resi- debit card from a different financial service provider. dents. Moreover, they can more accurately understand Another important lesson is the need to strengthen rural consumers’ transaction behaviors, providing infor- supervision to monitor and manage risks. The agent- mation to support business development. Fourth, based service model, which outsources part of the cash national and local government bodies that provide subsi- business of traditional banking outlets to agent-based ser- dies supporting agriculture, rural social endowment vice points, represents a delivery channel and business insurance, and rural cooperative medical insurance have model innovation. As always, new businesses and new a means to disburse such subsidies more efficiently and models generate new risks. To manage these attendant cost-effectively. Such subsidies usually occur in small risks, the PBOC issued management requirements, trans- amounts and large frequencies, involving multiple links action ceilings, service point qualifications, location distri- and high costs when released in cash. To simplify these bution requirements, and operational management transactions and reduce these costs, the PBOC and rele- requirements to control risks effectively while ensuring vant departments encourage local governments to pro- further and sound development of agent-based service vide subsidies to financial service providers for installing points in rural areas.28 POS terminals, given the long-term cost savings for all Finally, given that regulatory authorities heavily pro- involved. Fifth, agent-based service points can be lever- moted and guided the piloting and initial expansion of aged to disseminate financial knowledge and carry out the agent network in China, reconsidering government’s financial education of rural consumers. appropriate role in this model will be necessary going for- Since 2010, China has learned important lessons from ward. Indeed, many service points currently do not oper- both the success and challenges of developing the agent- ate profitably because of infrequent, limited, and based service point model. One important lesson and low-value transactions, but remain open due to social ongoing challenge is the need to ensure the model’s sus- responsibility commitments by banks. It has been noted tainability. At present, service fees charged by agents are anecdotally that some service points have only one trans- capped by regulation, which in practice often means that action every few days, or even less frequently (although an agent cannot cover his or her operational costs through reliable data on transaction volumes are lacking). Finan- cash withdrawal services only. Expanding to additional cial sector authorities (and consequently providers as permissible services such as transfers and remittances and well) have traditionally viewed expanding service point bill payments may partially address this issue. Strategic coverage to all villages as a social responsibility rather efforts will need to be undertaken to better cover opera- than as a strategic, market-based decision. China’s Financial Inclusion Experience    31 The very terminology used for service points (which  nhancing the Ease and Efficiency of 4.1.2 E are often referred to as “cash withdrawal service points” Payments in Rural Areas in China) illustrates that they are not fully leveraged for The limited physical presence of bank outlets in rural and their potential as proactive agents of financial service remote areas has historically constrained the supply of providers—mainly due to policy concerns regarding con- financial payments and settlement services for many Chi- trolling for risks—although they could be capable of pro- nese individuals. Over the past fifteen years, PBOC has pri- viding a broader range of financial services. A more oritized establishing a payment service system that can flexible, market-based policy approach is needed that meet the demands of rural areas for payment and clearing allows financial service providers to innovate to improve services and facilitate the development of agriculture, rural commercial sustainability, including considering adjacent areas, and farmers. Since 2004, PBOC has issued several revenue streams and developing strategies to increase guidelines with the objective of promoting and guiding the traffic and transaction volume and thus better realize the expansion and improvement of payment systems in remote potential of service points as fully functional agents. and rural areas. These guidelines include the following: Research to more closely analyze the characteristics of agent-based service points and segment such points by • Guidelines on the Connection of Rural Credit Cooper- their potential would also be helpful, as the optimal strat- atives to the Payment System (issued 2004) sought to egy will likely differ by type of service point. leverage the expansion of PBOC’s large-value pay- ment system to support and guide RCCs in connecting Mobile Service Outlets to the PBOC’s transbank payment system. In areas that have poor or no access to financial services, • Guidelines on Implementing Effective Payment and but which cannot support the establishment of a full-ser- Settlement Activities in Rural Areas (issued 2006) vice outlet, financial service providers have used innova- aimed to accelerate development of rural payment tive approaches to lower operational costs and still systems, expand the reach of clearing systems in rural provide basic financial services to residents. Mobile ser- areas, and promote the use of noncash payment vice outlets are one important innovative approach. instruments. Some financial service providers provide mobile services • Guidelines on Improving Payment Service Environ- in surrounding villages based on existing town-level out- ment in Rural Areas (issued 2009) emphasized the fac- lets, thus expanding their service radius to nearby villages tors needed to transition to account-based payments and expanding accessibility to village residents. For for subsidy transfers and sought to further encourage example, to address the “last mile” challenge, Shangyu the integration of rural financial service providers into Rural Cooperative Bank of Zhejiang began operating a payment and clearing systems. “bank on wheels” in September 2014 to provide financial • Guidelines on Comprehensively Promoting the Devel- services to rural residents. The “bank on wheels” is a bus opment of Rural Payment Service Environment (issued equipped with service counters and ATM machines that 2014), among other things, established basic princi- are connected to the host bank network via 3G. The bus ples to guide payment system development in rural itself is made of secure materials (i.e., bulletproof) to pre- areas, provided modifications and guidance on agent- vent theft. Customers can use the “bank on wheels” to based service point models, outlined policy support open or close current and deposit accounts, deposit or (e.g., tax incentives) for expanding payment systems, withdraw money, make remittances and payments, pay and emphasized risk management requirements for bills, etc. In Xiapu county, the number of mobile banking payment systems in rural areas. clients has grown dramatically from 189,500 in 2014 to 339,330 in 2016. PBOC has also established new payment and clearing Another example comes from mountainous Shouning systems over the past fifteen years to meet the needs of county in Fujian province, where the Shouning Rural small and medium banks and rural areas for payment and Credit Cooperative launched a “Backpack Bank” pro- clearing. Developing integrated urban and rural payment gram. Members of the “Backpack Bank” team visit systems in China has reduced the gap between urban remote villages and provide onsite financial services to and rural payment environments. For example, to facili- residents in their homes. Village residents can submit tate transbank, transregion, and transborder use of debit loan applications to the team, who review the application cards, China UnionPay (CUP) was established in March and make a decision. If the loan is approved, the appli- 2002 to provide an interbank transaction clearing system. cant’s account is credited within 20 minutes. As of the The main shareholders of CUP are more than one hun- end of March 2017, the “Backpack Bank” service pro- dred commercial banks, and it is currently the only gram covers more than 40 villages in Shouning county. domestic bank card association in China. CUP has more 32   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   than 400 domestic and overseas associate members, and The Rural Credit Banks Funds Clearing Center has coop- its networks have been extended to both rural and urban erated with nonbank digital payment providers repre- areas in China. As a result, bank card holders can not only sented by Alipay and TenPay to provide rural customers use cards via ATMs, POSs, and other devices, but also for with access to more opportunities to make consumption consumption purposes, such as payment of utility bills, payments and a more convenient consumption payment air ticket and hotel reservations, credit card repayments, experience. Coordination of China’s payment systems and self-service transfers via emerging channels such as infrastructure has been strengthened through the estab- the Internet, mobile phones, landlines, self-service termi- lishment of the China Payment and Clearing Association nals, and smart TV terminals. in 2011. PBOC has also developed several interbank clearing systems, including the China National Advanced Pay- ncrease in Ownership and Use of 4.1.3 I ment System (CNAPS), China Domestic Foreign Currency Bank Accounts and Debit Cards30 Payment System, and local clearing systems, to support the application of negotiable instruments, payment The aforementioned efforts to expand the physical reach cards, and other payment instruments. In addition, PBOC of service networks and improve payments infrastructure operates the Internet Banking Payment System (IBPS), have supported the dramatically expanded uptake of which offers near real-time interbank direct credit and bank accounts and debit cards. Opening a bank account debit transfers for Internet banking initiated transactions. enables a consumer to access the broader range of To address difficulties in transregion clearing by city financial services that a formal financial service provider commercial banks in different regions, the Clearing Cen- offers, such as payment, credit, savings, and insurance ter for City Commercial Banks was set up in September products and services. Therefore, the ownership rate of 2002, which operates as a national payment and clearing bank accounts is an important indicator of financial services provider jointly sponsored by city commercial inclusion. Chinese financial sector authorities pay close banks (CCBs) across China. To provide better funds attention to this rate and to two indicators in particular: clearing services to all rural small- and medium-sized (1) the number of debit cards issued and (2) the number financial service providers in China, the Rural Credit of bank accounts. Banks Funds Clearing Center, jointly established by pro- The first debit card in China was issued in 1985 by vincial Rural Credit Unions, RCOMBs, and RCOPBs in Bank of China. Initiated by the State Council in 1993, the April 2006, operates as a national payment and clearing “Jinka Gongcheng” program was used to encourage services provider of professional payment and clearing electronic payments via debit cards. Debit cards have services to rural areas. PBOC encouraged the develop- since become the noncash payment tool most used by ment of both clearing centers, and both centers are con- consumers in China. Thanks to the establishment of nected to PBOC’s system, thereby enabling transactions national payment and clearing systems and the contin- among the providers in these centers and other nation- ued expansion of commercial banks’ networks in recent wide banks. years, the foundation has been laid for opening a large As of the end of 2016, 382 member institutions have number of bank accounts and for greater usage of debit been connected to the Clearing Center for City Commer- cards. According to PBOC, the number of accounts cial Banks, including 127 CCBs and joint-stock banks, 248 issued by traditional providers grew from 2 billion to 8.3 VTBs, and seven other financial service providers (for billion between 2006 and 2016, and the number of debit example, private banks). As of the end of 2016, the Rural cards issued grew from 1.1 billion to 5.7 billion over the Credit Banks Funds Clearing Center covers about 80,000 same period (table 4.4). outlets of small- and medium-sized rural financial service As described in chapter 3, the proportion of adults in providers, such as RCCs, RCOPBs, RCOMBs, and VTBs. China with a bank account increased from 64 percent in As such, an effective cross-province real-time payment 2011 to 79 percent in 2014, according to the Global Fin- and clearing network has taken shape, enabling many dex database, representing an increase in the number of small and medium rural financial service providers to pro- adults with a bank account of 180 million.31 In particular, vide a broader range of services, such as issuance of bank significant gains were made among previously under- drafts and universal cash deposit and withdrawal for indi- served segments of the population. The bank account viduals, particularly rural residents who previously lacked penetration rate of adults from the bottom 40 percent of convenient access to such services. In addition, the Rural households increased by 26 percentage points (the rate Credit Banks Funds Clearing Center has also actively for the top 60 percent of families grew by only 8 percent- developed innovative payment service products, age points); the growth rate in rural areas was higher expanded payment and settlement channels, and pro- than in urban areas; and the rate among rural adults and moted the use of noncash payment tools in rural areas. seniors also saw a robust growth. That said, given the China’s Financial Inclusion Experience    33 TABLE 4.4 Number of Bank Accounts and Debit Cards, by Institutional Category and over Time BANK ACCOUNTS (MILLIONS) DEBIT CARDS (MILLIONS) INSTITUTIONAL CATEGORY 2006 2016 2006 2016 State-owned commercial bank 1,635 5,937 816 3,817 Joint-stock commercial bank 164 804 173 462 City commercial bank 69 411 51 347 Village and township bank — — — 13 Rural credit cooperatives 94 857 22 447 Rural cooperative bank — — — 30 Rural commercial bank 14 262 19 542 Other — 32 — 2 Total 1,976 8,303 1,081 5,660 Source: PBOC. Note: “State-owned commercial bank” includes figures for Postal Savings Bank of China. “Other” includes figures for urban credit cooperatives, foreign banks, and others. discrepancy between demand- and supply-side data on through issuing debit cards, deploying mobile phones the penetration of bank accounts and debit cards, a for money transfers, expanding rural cash withdrawal need exists for better data and research to understand services, strengthening public communications, and the degree to which adults are holding dormant and/or other approaches. Other factors that have contributed to multiple accounts and cards. Anecdotal evidence sug- increased bank account ownership include dynamic eco- gests that while many consumers own multiple cards, nomic growth; stronger consumer demand; and more they only use one or two of them and use the rest infre- competition, providing incentives for financial service quently, if at all. providers to compete for customers and hence driving From a policy perspective, the Chinese government greater numbers of debit cards issued and bank accounts helps residents obtain bank accounts and debit cards by opened. requiring commercial banks to provide bank accounts that are free of charge (for example, with no application nnovations in Financial Products to Enhance 4.1.4 I fees or annual fees) and debit cards at no additional cost Access, Use, and Quality when such products are used to receive government sub- sidies, thus encouraging consumers to use their accounts As discussed in chapter 2, financial inclusion is more than and cards. The government has also been encouraging just physical access and ownership of basic accounts. banks to introduce debit cards to facilitate the transfer of Meaningful and long-term financial inclusion requires a various subsidies on behalf of the government to increase range of financial products and services that are appropri- disbursement efficiency and reduce costs. Between 2010 ately designed and fit the needs of consumers, particu- and the first half of 2015, a cumulative total of 9.77B non- larly the unserved and underserved. While much attention cash payments of subsidies were made via bank accounts has focused on financial service innovations by new and debit cards, amounting to a total value of RMB 3.15T. entrants to the consumer financial market, such as Alibaba These subsidies include new rural endowment insurance and Tencent, traditional financial service providers have subsidies, new rural cooperative medical care subsidies, also made concerted efforts to develop innovative prod- and fiscal subsidies supporting agriculture, farmers, and ucts that are more appropriate for the underserved and rural areas. The establishment of agent-based service leverage new technologies. points in rural areas has enabled farmers to withdraw their subsidies without leaving their villages. PBOC has Payment Products and Services also recently introduced a risk-based tiered account sys- In addition to expanding their physical reach, traditional tem to enable online banks to offer low-value transaction financial service providers have substantially increased accounts (discussed further later in box 4.8). the availability of basic payment services through product In recent years, PBOC has directed financial service design and delivery channels that leverage modern tech- providers operating in rural and agricultural areas to pilot nologies. Financial service providers have actively pro- innovative approaches to enhance farmers’ awareness of moted the development of noncash payment businesses, finance and payments and meet their payments needs including promissory notes and debit cards. From 2012 34   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   to 2016, these noncash payment businesses grew rapidly. to those of Internet-based financial management prod- In 2016, noncash payment transactions by traditional ucts. These innovations in Yuebao-like products are likely financial service providers in China numbered 125.1 bil- to help better satisfy the general public’s needs for lion with a total transaction value of RMB 3,687.24 trillion investment and financial management and have broad (US$553.09 trillion), reflecting growth of 304 percent and potential for expansion. 287 percent, respectively, since 2012. The development In addition, commercial banks such as Shanghai Pud- of Internet-based and mobile payment businesses has ong Development Bank have launched new business enabled customers to make payments without traveling lines such as “agreed transfer between fixed and demand to a financial service provider or retail outlet, greatly deposits” in debit cards, which can help customers improving the convenience and security of payments and increase their deposit income while improving conve- reducing payment costs. nience. For this business line, customers can determine CUP has launched a trial payment service with CUP the rules of transfer between fixed and demand deposits cards that allows procurement of agricultural products in in advance, according to their own financial management grain-producing areas. With the support of the CUP non- arrangements, allowing for more flexible, tailored prod- cash clearing system, grain brokers and purchasers may ucts to meet the specific needs of consumers. pay farmers directly in real time through POS terminals, Some banks have developed tools to help MSEs thereby not only increasing convenience to farmers but manage their accounts which span multiple banks. For also reducing operational costs for purchasers. Accord- example, the cross-bank funds management system, ing to data from CUP, transaction turnover in 2015 across developed by Huaxia Bank, can link all of an MSE’s vari- the country exceeded RMB 200 billion (US$30 billion). ous bank accounts. Through this system, the MSE can Some commercial banks and RCCs are also innovating make transfers and inquiries in real time across its various using mobile encryption chips that can be integrated into accounts and use various other financial management a SIM card, which enables financial services to be carried tools, reducing overall transaction costs. out on mobile phones via near field communication Section 4.3 discusses further deposit and financial (NFC). The chip provides customers with high-quality, management product innovations by new, digitally-driven secure, and portable mobile payment functionality fintech companies. through their phones rather than debit cards. This tech- nology has been leveraged in multiple applications, Innovations in Credit Products including mobile phone credit, travel applications, credit In recent years, regulatory authorities have actively services, and identification certification. encouraged commercial banks and other financial service Section 4.3 discusses further payment innovations by providers to expand lending to the agricultural sector, new, digitally-driven fintech companies. rural residents, and MSEs. In doing so, regulatory authori- ties have aimed not only to create a favorable lending Innovations in Deposit and Financial Management environment, but have also set forth specific lending Products requirements for commercial banks. For example, author- Many commercial banks are actively developing innova- ities have implemented differentiated monetary and tions in deposit and financial management products to credit policies, agriculture-associated loan incentives, risk increase customer loyalty, convenience, and profitability compensation funds, and government guarantee funds and to attract and retain new customers. Commercial and tax incentives (see section 4.4). CBRC also issued banks are improving the design of deposit and financial Guidelines on Financial Services for Micro and Small management products and services to increase their Enterprises in 2015, which specifies the “Three No-less- appropriateness to attract the general public, rural resi- thans Goal”: dents in particular, to deposit their money in banks. • Loan growth for MSEs is no less than the average To compete with Internet-based, Yuebao-like finan- growth of all loans, cial management products (discussed further in section 4.3) and meet untapped market demand, commercial • The number of MSEs receiving loans is no less than banks have launched products with flexible buying and that over the same period of the previous year, and selling terms that are more accessible and convenient to • The approval rate of MSE loan applications is no less low-income consumers. Most of these products are than the rate over the same period of the previous year. linked with money market funds launched by fund com- panies and support instant selling and rapid transfer. To meet regulatory authorities’ specific requirements and Some commercial banks have upgraded former financial in response to growing market competition, commercial management products to enable instant selling. In terms banks and other financial service providers have sought of rates of return, the gains on such products are similar to develop innovative business models, including innova- China’s Financial Inclusion Experience    35 tive product design for loans, new types of collateral, development, often together with the WBG’s Interna- innovative credit evaluation methods, and new loan tional Finance Corporation (IFC). Current products in the repayment approaches. These efforts—some of which market range from simple receivables, inventory, or are discussed elsewhere in this report—have contributed equipment loans to complex, structured, and heavily to achieving the “Three No-less-thans Goal,” though monitored movables credit. their respective magnitudes and the targeted impact of Supply chain finance based on receivables and inven- these contributions are difficult to quantify. Overall, as of tory has also grown rapidly. A diversified pool of lenders the end of March 2017, CBRC data show that the number has provided services in this field. With the assistance of of customers with an outstanding MSE loan reached 13.6 the IFC, at the end of 2013, PBOC established a supply million, an increase of 1.2 million over the same period chain finance platform based in Tianjin. Cumulatively, the the previous year; the balance of loans from banks to platform has facilitated RMB 4.5 trillion (US$675 billion) MSEs represented 24.1 percent of the total balance of all in credit for agricultural borrowers, MSMEs and large types of loans, and the balance of loans to MSEs grew by enterprises by April 2017.32 14.4 percent over the same period in the previous year, Section 4.3 discusses credit innovations by new, digi- 1.9 percentage points higher than the average growth of tally-driven fintech companies. all types of loans. Traditional methods of risk assessment and a narrow 4.1.5 Reforming RCCs to Better Serve Sannong range of acceptable collateral have often restricted farm- ers and MSEs from accessing loans. In recent years, regu- Rural Credit Cooperatives have historically been the finan- latory authorities have actively encouraged commercial cial service providers with the most widely distributed out- banks to innovate in this area and expand the scope of lets in China’s rural areas and are thus a critical institution acceptable collateral. In 2010, PBOC, CBRC, and CIRC jointly issued Guidelines on Comprehensively Advancing Innovations in Rural Financial Products and Services, which requires financial service providers to improve BOX 4.2 operational procedures for loans related to agriculture, Agricultural Bank of China: Developing Innova- farmers, and rural areas; develop sound evaluation, man- agement, and disposal of properties used as collateral for tive Products and Services to Serve Sannong such loans; and leverage a broader range of information Since 2007, the Agricultural Bank of China (ABC), one of China’s to assess customer creditworthiness. In response, finan- largest state-owned commercial banks, has been a leader in imple- cial service providers have explored ways to improve risk menting the government’s three-pronged policy of serving the management of credit portfolios. agricultural sector, rural communities, and farmers (sannong). Over In the past fifteen years, PBOC and CBRC have the past few years, ABC has made strides in product and service encouraged commercial banks and other financial service innovation to better serve these three areas. providers to use movable assets—including receivables, inventory, equipment, and title documents—as the basis Movable Asset Finance Innovation. Given that the National Peo- for lending or for issuing debt instruments (box 4.2). After ple’s Congress only authorizes a few select pilot areas to use con- a new property law was approved in 2007, PBOC estab- tracted land management rights and farmer housing property rights lished a unified system to register security interests in as collateral for loans, ABC developed various nonland related col- movable assets under the PBOC’s Credit Reference Cen- lateral, such as farming equipment, agricultural inventory, and direct ter (see section 4.4). For example, government transfers grain subsidies, to facilitate secured lending in rural areas. and subsidies (in effect, a form of receivable) have been Sannong Product Innovation. Jinyinong (gold that benefits farmers) leveraged in an innovative manner as collateral by ABC, is a composite brand that consolidates 149 sannong-targeted prod- RCOMBs, RCOPBs, RCCs, and other providers. Loans ucts ABC has developed in recent years and that offers many finan- that use government transfers or subsidies as collateral cial services to farmers, rural residents, and entrepreneurs. Special typically equal 5–10 times the subsidy amount. These financial products, such as grain production loans and offseason changes have expanded the scope of permissible collat- commercial reserves of fertilizers, were developed to accommodate eral, improved the transparency of collateral interests, production seasonality of leading agricultural enterprises. Urbaniza- and allowed lenders to establish the priorities of their tion construction loans and new rural residence loans were also security interests, thus giving them confidence to develop developed to facilitate urbanization. movable asset finance products. Over the years, the two financial sector authorities have also organized or sup- Source: Agricultural Bank of China. ported numerous outreach, training, and knowledge development activities on movables finance product 36   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   BOX 4.3 Industrial and Commercial Bank of China’s Approach to Digital Finance As China’s largest state-owned commercial bank, to be popular with MSEs because they are tailored the Industrial and Commercial Bank of China (ICBC) to meet MSEs’ actual needs. has developed various digital finance products and In addition to various digital finance products, platforms to better serve MSEs and individuals. ICBC also launched its e-ICBC business line in 2015, Over the years, ICBC has developed e-Payment, which consists of three platforms and one center. an online tool for fast payment of small amounts; The mobile messaging application platform aims to e-Link, the bank’s online investment service and provide a secure and convenient communications online financial management tool; and several channel that allows customers to communicate with online financing products targeted at MSEs. For ICBC staff. The e-commerce platform offers various example, “Corporate Easy Loan” is an unsecured financial products with a high level of attention paid microcredit product for MSEs that benefits from to vendor access, pricing, and dispute resolution ICBC’s proprietary database and big data analysis to procedures. An online direct banking platform and assess creditworthiness. “Online Revolving Loan,” an Internet financing center have also been set up, another product targeted to MSEs, offers online, with the latter leveraging a combination of ICBC’s self-service revolving loans that allow borrowers to historical data, online platform data, and offline withdraw and repay the loan online by themselves. investigation information to better serve MSEs and Since their launch, these two products have proven individuals with facilitated access to financing. Source: Industrial and Commercial Bank of China for achieving China’s financial inclusion goals. Since its In 1996, the State Council issued its Decisions on the economic reform and opening-up in 1978, China has Reform of Rural Financial System, which stated that RCCs gone through several RCC reform phases to improve would no longer be affiliated with ABC and would be reg- operations and effectiveness. At the end of 2016, 1,125 ulated according to the cooperative principle. To enhance RCCs were operating in China. In addition, 1,154 RCOMBs the risk management and operational capacity of RCCs, and RCOPBs had transformed from RCCs following the the General Office of the State Council forwarded the 2003 reforms. PBOC-issued Guidelines on Further Reform of the Admin- RCCs were founded in the 1950s, yet prior to China’s istration Mechanism of Rural Credit Cooperatives in 1997, economic reform and opening-up, they failed to play an which again confirmed the cooperative principles accord- effective role in serving sannong, the government’s broad ing to which reforms of RCC’s administration mechanisms three-pronged policy of serving the agricultural sector, were to be conducted. While these reforms improved the rural development, and rural residents. In early 1979, the administration system of RCCs as a whole, the withdrawal State Council shifted the management of RCCs to the of branches of state-owned commercial banks from county- Agricultural Bank of China. By 1984, constrained by poor level operations led RCCs to further take on the primary governance and poor financial health, RCCs were still role of serving sannong. However, due to heavy historical thought not to serve sannong effectively. The State Coun- financial burdens, poor quality assets, and poor opera- cil implemented a comprehensive program to reform tions, RCCs experienced widespread losses in the ensuing equity arrangements, organization, and management of years. By the end of 1999, owners’ equity had a negative RCCs to restore their cooperative financing function and value across the whole RCC industry, significantly affect- enable them to better serve rural and county economies. ing RCCs’ capacity to serve sannong. Thereafter, RCCs existed mainly in the organizational form In June 2003, the Central Government initiated fur- of a village- or town-level corporate body. The reforms ther RCC reforms. In this reform, RCCs no longer had to during this phase helped to improve the financial strength maintain the “cooperative” nature of their ownership of RCCs and effectively promoted their business develop- structure, governance, or business operations. Two new ment, but new problems also emerged, such as local institutional forms were created: Rural Commercial Banks interference in RCCs’ rights for independent management (RCOMBs) and Rural Cooperative Banks (RCOPBs). Many and operation, impairing their ability to realize their finan- RCCs have been transformed into these new forms to cial inclusion potential. improve governance arrangements and to reorient China’s Financial Inclusion Experience    37 towards a commercially sustainable business model. was 8.4 percent, and the total balance of sannong-related Local governments were empowered to conduct further loans was RMB 2.7 trillion (US$405 billion; table 4.5). reforms and subsequently developed and implemented In this latest reform and development period, the tar- policies to help write off bad loans and contribute to get has been to further transform RCCs into market-ori- RCCs’ ownership reform. As of the end of 2016, 1,114 ented financial enterprises with sufficient capital, strong RCOMBs and 40 RCOPBs are operating in China. compliance, and steady growth. A further objective was To facilitate the goals of RCC reform, PBOC designed to leverage the advantages of RCCs’ flexibility and and implemented various policies and measures accord- encourage their timely adaptation to the new require- ing to the principles set by the State Council.33 PBOC ments of agricultural modernization and rural economic developed and issued special notes and special loans to restructuring for financial services. As the reforms deepen, strengthen RCCs’ capital base, with the amount approved the hope is that RCCs will play an even greater role in of both special notes and special loans amounting to the serving sannong and in promoting financial inclusion. equivalent of 50 percent of the actual insolvency amount Yet several challenges continue to constrain RCCs’ of RCCs at the end of 2002. Various incentive mechanisms role in financial inclusion. Poor governance, small cus- were also designed and implemented. Special notes were tomer bases, and excessive interference from local issued to those county/municipal rural credit unions that authorities continue to plague some RCCs. As a whole, met certain prerequisites, with issuance and redemption RCCs have also demonstrated relatively limited capacity linked to the process and effectiveness of RCC reforms. to innovate and, in particular, leverage digital technolo- These special notes could be cashed in by PBOC condi- gies to improve product design and delivery models for tional on RCC improvements, such as meeting require- underserved segments. They therefore face significant ments regarding increase in capital adequacy ratio (CAR) competition from new market entrants. Further strength- and reduction in NPL ratio. The disbursement of special ening is needed, otherwise whether RCCs can success- loans in one province was also linked to the process and fully compete for client segments that are drawn to effectiveness of reforms of RCCs. In Q1 2004–Q1 2014, digitally enabled financial products and services or fulfill PBOC issued and paid special notes of RMB 169.9 billion their intended mandate to serve rural consumers on a (US$25.5 billion) to RCCs from 2,408 counties and sustainable, market-oriented basis remains to be seen. granted special loans of RMB 1.4 billion (US$210 million) to Xinjiang, Jilin, and Heilongjiang provinces/autono- nnovations in the Insurance Industry to 4.1.6 I mous regions. Contribute to Financial Inclusion The 2003 reforms have helped to stabilize RCCs. By March 2009, RCC portfolio quality and earnings had In recent years, insurance companies have broadened improved considerably and significant progress had been their target markets to include previously unserved and made in RCC business operations, ownership structure, underserved market segments. This evolution has been and corporate governance. As a result, RCCs have entered pursued through innovations in delivery channels, prod- into its fastest development period in history, with overall ucts, procedures, and management, as well as through business conditions and capacity continuing to improve. In regulatory reforms and encouragement. The entrance of 2016, the net earnings of RCCs across the country reached new providers that have demonstrated the viability of new RMB 51.9 billion (US$7.8 billion); by the end of 2016, the technology-driven models and thereby increased compe- NPL ratio of RCCs was 7.3 percent, capital adequacy ratio tition in the sector has also impacted the insurance market. TABLE 4.5 Performance of the RCC System over Time BALANCE OF NET EARNINGS CAPITAL NONPERFORMING SANNONG-RELATED NUMBER OF (BILLION RMB ADEQUACY LOANS LOANS (BILLION RMB NUMBER OF RCOPBS AND YEAR [BILLION US$]) RATIO (%) RATIO (%) [BILLION US$]) RCCS RCOMBS 2002 −5.8 (–0.9) −8.3 36.9 — 35,540 3 2005 18 (2.7) 8.45 14.8 — 27,036 70 2009 22.8 (3.4) 2.9 15.3 2,244 (337) 3,056 239 2012 65.4 (9.8) 9.1 7.2 3,129 (469) 1,927 484 2015 66.4 (10.0) 8 7.8 3,196 (479) 1,373 930 2016 51.9 (7.8) 8.4 7.3 2,679 (402) 1,125 1,154 Source: CBRC. 38   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   Digitalizing marketing and delivery channels in partic- income dipped 34.6 percent from the previous year, ular has increased the availability and uptake of insurance while Internet-based life insurance premium income products and services. Indeed, the Internet is the fastest increased 22.6 percent (reaching RMB 179.7 billion growing delivery channel for nonlife insurers, which the [US$27 billion]). State Council and the CIRC actively encourage. Inter- Applying digital technologies has allowed for the cre- net-based channels allow consumers to explore and pur- ation of various innovative insurance products. For exam- chase insurance products more conveniently and allow ple, “returned cargo insurance” is a new insurance scheme insurance companies to benefit from lower customer arising from the development of e-commerce, reflecting a acquisition and policy management costs. Broadly speak- more targeted insurance product geared toward consum- ing, four digital distribution models exist: ers’ evolving consumption behaviors. Another area of product innovation is in insurance schemes that the tradi- 1) A general insurer that sells through its own platform. tional insurance sector has difficulty underwriting, for Given the increasing number of consumers accessing example, catastrophe insurance such as earthquake insur- the Internet on their mobile phones and consumers’ ance. The traditional insurance sector often has trouble increasing familiarity with using their mobile devices for pooling homogenous risks to a sufficient scale to let the transactions and financial management, insurance law of large numbers work. In contrast, Internet-based companies’ sales platforms have begun to extend to insurance can utilize digital channels to overcome physical Internet-based and mobile devices. constraints and quickly and easily reach a large number of 2) A general insurer that sells through a third-party bro- consumers over wide geographic areas, allowing them to ker platform. Several third-party broker platforms, better address the issue of risk pool size and better evalu- such as Ubao or Zhongmin, have emerged in recent ate and underwrite homogenous risks. years allowing consumers to compare and obtain Insurance companies have also actively explored and insurance products from a range of insurance compa- applied new technologies to improve operational proce- nies, effectively providing “one-stop” shopping for dures, the precision of underwriting, and the speed of consumers. Some platforms offer simple and standard- claims settlement. For example, PICC Property and Casu- ized insurance products such as automobile insurance alty Company Limited offers basic agricultural insurance and accidental injury insurance. products that employ novel technologies such as remote sensing technology, an integrated field information col- 3) A general insurer that sells through social or e- lection system and integrated management and informa- commerce network platforms. Insurers are increas- tion service platform, and a mobile investigation device ingly tapping into social and e-commerce network building on the Beidou Navigation System (a satellite platforms such as Taobao, Jingdong, and Ctrip (and system) and a drone hardware platform. These efforts their large, existing customer bases) to market insur- have resulted in the creation of an integrated, three-di- ance products.34 mensional “air-space-ground” system to support insur- 4) An online-only insurer. New, online-only insurance pro- ance operations. Such application of new information viders such as Zhong An Online P&C Insurance Co— and digital technologies offers more accurate spatial data which has both Ant Financial and Tencent as major for underwriting and claims settlement, addresses prob- shareholders—are discussed further in section 4.3.5. lems with difficult insurance verification and slow claims settlement, and enhances insurance companies’ risk In all cases, an important development is the “online-to- management capacity. Furthermore, such technologies offline” business model, where an inquiry initiated through allow insurance companies to accumulate a vast amount the Internet is closed by a call center operative or an agent. of data to price insurance more precisely. According to the CIRC, income from insurance premi- The central and local governments have implemented ums exceeded RMB 3.1 trillion (US$465 billion) in China measures that promote the development of agricultural in 2016, with year-on-year growth of 27.5 percent. Income insurance, leading to adaptations of agricultural insur- from Internet-based insurance premiums was approxi- ance products so that they are more accessible to the mately RMB 234.8 billion (US$35.2 billion), or 7.5 percent underserved and more appropriate for their specific of the total annual premium income in China,35 compared needs. These measures include premium subsidies to with approximately 15 percent in the United States. farmers. Insurance companies have developed innova- Though still a small share of the overall industry, online tive insurance products tailored to production cycles and insurance is growing rapidly: nonlife premiums grew by livelihoods of underserved segments, such as weather 113.7 percent in 2014 to RMB 50.6 billion (US$7.6 billion) index insurance, price index insurance, crop yield insur- and by a further 69 percent in the first six months of 2015. ance, income insurance, and agricultural product quality In 2016, Internet-based property insurance premium insurance. For example, at the end of 2016, pilot pro- China’s Financial Inclusion Experience    39 grams existed across 33 provinces and municipalities, served customers. In some sense, establishing these new- with a total of 50 pilot price index insurance products, type rural providers can be viewed as an extension of and 400,000 insured rural households/insurance policies, and complement to ongoing efforts to strengthen RCCs’ role a risk insurance portfolio value of RMB 16 billion (US$2.5 in serving sannong and as a mechanism to promote com- billion). A coinsurance entity comprising several insur- petition in financial service provision at a rural level. ance companies jointly underwrites insurance in some These providers share several common features, pilot programs, with premiums primarily subsidized by including an explicit target population and relatively light local government, and smaller percentages subsidized regulatory requirements for establishment (table 4.6). The by enterprises and paid for by farmers. However, the target population includes rural residents and medium, large-scale viability and commercial sustainability of small-, and micro-sized enterprises. The new-type rural these pilot programs remains to be seen. financial service providers are characterized by differenti- While insurance innovations have contributed to ated and lighter requirements for registered capital, orga- increased access to more appropriate insurance prod- nizational structure, and ownership arrangements.36 The ucts, there remains a need to accelerate the develop- flexible regulations of new-type rural financial service ment of well-designed, accessible, and affordable providers allow legally sanctioned individuals to invest in insurance products. In 2014, the State Council issued a provider as an independent enterprise within a limited Guidelines on Speeding up the Development of Modern geographic sphere of operation. VTBs and MCCs can Insurance Service Industry, encouraging reforms in insur- establish branches, while branches are not allowed for ance market access and exit mechanisms and product RMCCs. This approach is intended to strengthen the and service innovation with the aims of increasing com- management flexibility of these institutions and adapt- petition and providing more personalized service in ability to the local target population. Since 2010, govern- insurance markets. Expected increases in competition in ment authorities have offered subsidies (of no more than the insurance market may be able to play a catalytic role 2 percent of average loan balance) to VTBs and RMCCs in this regard. To grow their market share, small and that meet certain requirements, such as achieving a cer- medium insurance companies will need to develop their tain level of growth in total loan balance or reaching a competitive advantage in understanding user needs, certain percentage of sannong and MSE loans to total product innovation, and actuarial models to develop loans. The costs of such subsidies are shared between new products that are better tailored to the actual needs central and local finance departments, for example at of consumers. Internet-based companies are also ratios of 30/70 percent, 50/50 percent, and 70/30 per- expected to increase activity in the Internet-based insur- cent in the eastern, central, and western regions, respec- ance sector and become an important driver of sector tively.37 In 2015, funds of RMB 2.9 billion (US$435 million) innovation. Traditional large insurance companies still were designated by the MoF as targeted subsidies to have several advantages in large-scale underwriting, these efforts. special insurance schemes, and application of spatial information technologies. With the gradual rise of qual- 4.2.1 Village and Township Banks ity small and medium insurance companies and Inter- net-based companies, the hope is that the insurance The national pilot program for VTBs was officially initiated sector will exhibit a more diversified, competitive land- in December 2006, followed by the issuance of the Provi- scape that benefits the underserved in accessing better sional Rules for Management of Village/Town Banks in insurance services. January 2007. Pursuant to relevant national regulations, permitted activities for VTBs include accepting deposits; short-, medium-, and long-term loans; domestic settle- THE ROLE OF “NEW-TYPE” RURAL 4.2  ments; bill acceptance and discount; interbank borrowing; FINANCIAL SERVICE PROVIDERS IN bank card issuance; government bond underwriting; FINANCIAL INCLUSION agent service of funds receipt/payment and insurance. In terms of governance structure, VTBs are independent Between 2006 and 2008, the Chinese government intro- enterprises and legal entities. However, a “sponsor sys- duced regulations for establishing “new-type” rural finan- tem” applies, whereby commercial banks serve as princi- cial service providers, including “new-type” rural financial pal sponsoring banks, provided they meet certain institutions such as village and township banks (VTBs) and supervisory and regulatory requirements. Sponsoring rural mutual credit cooperatives (RMCCs), as well as banks must have at least a 15 percent ownership stake in microcredit companies (MCCs), a new type of credit pro- their sponsored VTB,38 and provide some level of over- vider. The intended policy objective was to increase finan- sight. As of the end of 2015, all “Big Five” banks39 and cial inclusion among traditionally unserved and under- approximately 40 percent of joint-stock banks had estab- 40   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   TABLE 4.6 Comparison of Baseline Information of New-Type Rural Financial Service Providers VILLAGE AND TOWNSHIP MICROCREDIT RURAL MUTUAL CREDIT BANKS COMPANIES COOPERATIVES Number (as of 2016) 1,519 8,673 48 Pilot year 2006 2005 2006 Supervision CBRC Provincial governments, CBRC financial offices, or relevant departments Normative CBRC and PBOC jointly CBRC issued Provisional documents issued Guidelines on Pilot Rules for Management of for Microcredit Companies Rural Mutual Cooperatives on May 4, 2008. Based on on January 22, 2007. these guidelines, provinces also issued management methods of microcredit companies. Key features An independent enterprise An independent enterprise An independent enterprise and legal entity, wherein the and legal entity that provides and legal entity that is largest shareholder, or the small loans, but does not absorb composed of famers from only shareholder, must be a public savings. Capital includes a town or village and rural banking financial institution capital paid by shareholders small enterprises. A with a shareholding ratio of and capital endowment. The community mutual banking no less than 15 percent of funds balance collected from financial institution that the total stock of a VTB. banking financial institutions provides deposit, loan, and shall be no more than 50 settlement services. Services percent of net capital. are limited to members. Source: CBRC. lished VTBs. Further, approximately 15 percent of RCOMBs 4.2.2 Microcredit Companies and 76 percent of city commercial banks had established An MCC is a limited liability company or joint-stock com- VTBs. For these latter institutions, VTBs present a valu- pany established by natural persons, corporations, or able opportunity to reach new customer segments in other social organizations, which offers microcredit ser- rural areas. vices and does not accept public deposits. The PBOC ini- Pursuant to relevant law, the outstanding loans issued tiated the pilot program for MCCs in 2005, and CBRC and by a VTB to the same borrower cannot exceed 10 percent PBOC jointly issued the Guidelines on Pilot for Microcredit of the VTB’s capital balance (the same as for typical com- Companies in May 2008. mercial banks). Given that VTBs’ operational scale is gen- An MCC that is established with private capital has erally small, under normal circumstances, the loan independent corporate properties and bears civil liabili- balances for individual customers are therefore typically ties to its debts with all its assets. MCC shareholders are not very large. Data from the CBRC illustrate this point. As entitled to asset returns, participation in major decisions, of the end of 2016, the average loan balance of VTBs to and selection of managers, and are responsible for the a single borrower was RMB 410,000 (US$61,500). company relative to their shareholdings. The MCC corpo- As of the end of 2016, 1,519 VTBs were operating in rate governance structure is relatively independent, with China, with 65 percent located in the central and western separation between ownership and management. MCCs regions of the country. VTBs’ total assets were RMB 1,238 operate in line with market-oriented principles. They face billion (US$186 billion), and their total loan balance was certain restrictions on borrowing. RMB 702 billion (US$105 billion). The total balance of MCCs do not engage in savings, only in loans. There- loans to sannong and MSEs amounted to RMB 653 billion fore, they are not allowed to take public savings, and are (US$98 billion), representing 93 percent of the total loan encouraged to focus on serving farmers, agriculture, and balance. Loans of less than RMB 5 million (US$750,000) rural areas and MSEs. Like VTBs, MCCs’ focus on target accounted for 80 percent of all VTB loans. underserved segments of the market is defined by regu- lation in some provinces; for example, 70 percent of an MCC’s outstanding credit portfolio must be issued to China’s Financial Inclusion Experience    41 small-sum borrowers, defined as those with a loan bal- areas (especially in poor, economically lagging areas), and ance of not more than RMB 0.5 million (US$75,000). The achieve farmers’ self-development through the mutual remaining 30 percent must be lent to borrowers whose funding approach. outstanding loans do not individually exceed 5 percent of In 2007, the first RMCC to be voluntarily established in net capital of the MCC. China by farmers was formed—Jilin Lishu Yanjiacun Vil- By the end of 2016, 8,673 MCCs were operating lage Baixin Rural Mutual Credit Cooperative. By the end throughout the country. Total paid-in capital of MCCs was of 2016, 48 RMCCs had been established throughout the RMB 823 billion (US$123 billion), and total loan balances country, distributed across 16 provinces although central- were RMB 927 billion (US$139 billion). Seven provinces, ized in Zhejiang, Heilongjiang, and Shanxi. Membership including Jiangsu, Hebei, Inner Mongolia, Liaoning, Jilin, of RMCCs reached 60,000, deposit balance reached RMB Anhui, and Guangdong had established more than 400 2.7 billion (US$405 million), and loan balance stood at MCCs each, with Jiangsu having established 629 MCCs, nearly RMB 1.9 billion (US$285 million), including RMB the most among these provinces (box 4.4). 1.8 billion (US$270 million) of loan balance to farmers, accounting for 96.8 percent of total loans. By 2012, it had become clear that the RMCC model 4.2.3 Rural Mutual Credit Cooperatives was not achieving its objectives, and CBRC has stopped In 2007, CBRC issued the Provisional Rules for Manage- issuing new RMCC licenses in order to focus on other pol- ment of Rural Mutual Cooperatives to cultivate the devel- icy approaches. The main problems impeding the devel- opment of RMCCs. RMCCs are established with links to opment of RMCCs include improper internal governance villages or farmers’ specialized cooperatives, handle and their small size. In addition, there were several inci- members’ deposits, loans and settlement, and buy and dences of improper fund-raising or absorption of depos- sell government debts and financial bonds. The establish- its from the general public by organizations using the ment of RMCCs aims to unite farmers, fill gaps in financial guise of financial cooperatives, hurting the reputation of services, address difficulties in access to finance in rural the sector as a whole. BOX 4.4 MicroCred Nanchong: A Microcredit Company Committed to Serving Smaller Customers Established in September 2007, MicroCred Nanchong was (US$92 million), single loans smaller than RMB 100,000 among the first batch of microcredit pilot projects initiated by (US$15,000) account for 90 percent of all loans. (3) Adherence the PBOC. It was also the first foreign-funded MCC in China.a to the “quick decision-making and quick disbursement” prin- MicroCred Nanchong disbursed its first batch of loans in Octo- ciple. Microcred Nanchong has standardized its lending deci- ber 2007. It currently has three branches, 11 outlets, and 268 sion-making process, adopted a streamlined credit review employees, 184 of whom are portfolio managers. process, and developed information system-based manage- Since its establishment, Microcred Nanchong has been ment and remote approval of loans. It takes only 2.3 days on committed to serving underserved segments and smaller cus- average from loan application to loan disbursement. Loan tomers, such as farmers, individual business owners, and applications from frequent customers can be approved and MSEs. The company demonstrates the following four opera- disbursed within one day. (4) Adherence to the twin goals of tional principles: (1) More focus on credit analysis as opposed achieving commercial sustainability and generating social to collateral. Unlike traditional lending models that rely on col- benefits. Since 2011, Microcred Nanchong has conducted lateral and guarantees, Microcred Nanchong’s lending opera- social performance management of enterprises and carried tions focus more on customer cash flow analysis and on out customer protection activities. As a result, Microcred Nan- customer’s operational stability and business outlook. About chong was awarded the Smart Campaign’s Customer Protec- 90 percent of Microcred Nanchong’s loans are unsecured. (2) tion Certification and became the first MCC to get such Adherence to the principle of providing “small-amount (single certification in China. loan), large-volume (total loans), dispersed and short-term a  icroCred Nanchong is a wholly owned subsidiary of MicroCred China, M loans.” As of the end of 2015, the cumulative number of loans which is owned by Microcred S.A, International Finance Corporation, KfW, had reached 81,158, but the average size of a single loan was AXA Belgium S.A and Developing World Markets. only RMB 44,100 (US$6,615). While the company now has Source: MicroCred Nanchong. 16,601 customers and a loan balance of RMB 615 million 42   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   4.2.4 Contributions results. However, these new types of providers also face several challenges. Some of these problems are common Since their establishment, these three new-type rural across all three types of providers—such as limited inno- financial service providers have leveraged their unique vation—while other problems are specific to a particular features and respective advantages to serve target under- kind of new-type rural financial service provider. served segments of the population and fill the gaps of The main problems confronting VTBs relate to man- traditional financial service providers. Specifically, their agement costs, operational flexibility, and the ability to respective advantages include the following: innovate. VTB sponsors face high management costs. As 1) New-type rural financial service providers have loca- specified by CBRC, VTB outlets must be established both tional advantages in reaching the underserved. Most in developed and underdeveloped areas. If a sponsoring VTBs are located in counties or towns, RMCCs are bank does not have a branch office in a province, the VTB located in rural areas, and many MCCs are located in is usually managed by the head office of the sponsoring areas or communities where MSEs concentrate. The bank. This increases management costs and reduces the target groups that these providers serve are located or operating flexibility of the VTB. Due to its smaller scale, the live close to each other. capability of VTBs to innovate with respect to products and services can be weak. Given ownership requirements, 2) They have a clear market position and key target cus- VTBs may also be heavily influenced by their sponsoring tomer groups. VTBs and MCCs mainly serve MSEs and banks (as opposed to the influence of other potential farmers, while RMCCs mainly serve their members, investors). As a result, the operational models of VTBs can partly due to regulatory requirements regarding target end up closely resembling that of sponsoring banks and customers. VTB products and services are often not differentiated 3) Their advantages in management and information from those of traditional banks, diminishing their ability to enable them to better serve their target customers. provide target market segments with more tailored, appro- Compared with traditional banks, new-type rural finan- priate product offerings initially intended by policymakers. cial service providers have fewer management hierar- High management costs, limited operational flexibility, chies and more accessible and faster loan approvals and homogenous products contribute to low margins and and are thus better able to meet the financing needs difficulties in scaling up to sustainably serve greater num- of farmers and MSEs for small, short-term loans on a bers of underserved consumers with innovative products. frequent and rapid basis. To a large extent, new-type The main challenges confronting MCCs include limited rural financial service providers operate within defined differentiation in market positioning from commercial communities. As in the case of traditional microfi- banks, weak risk management, limited access to sources of nance, these providers know their customers well and funding, heavy tax burdens, and geographic restrictions have a lower degree of information asymmetry and on operations. First, some MCC operations have deviated thus lower transaction costs. The awareness of the rep- from targeting underserved customers and thus failed to utation of farmers and MSEs in villages and communi- fill the gaps in financial inclusion. In practice, many MCCs ties also helps overcome risks resulting from the lack also operate similarly to traditional financial service provid- of collateral. ers and do not target “micro” segments with small loans. The results of a survey of 279 MCCs in China conducted in In addition, VTB sponsors play a critical role in providing 2015 show that the average loan amount for sampled hardware, training professionals, and managing and con- MCCs is RMB 1.90 million (US$285,000) and the median is trolling risks at their sponsored VTBs. RMB 1.27 million (US$190,500). The number of loans less As a result, new-type rural financial service providers than or equal to RMB 50,000 (US$7,500) account for only have had many positive effects. They can provide easier 11.7 percent of all loans, and the total amount of these access to rural finance, have filled gaps in financial ser- loans accounts for 1.5 percent of the total portfolio. In vices in rural areas, and have reduced the dependence of contrast, the number of loans over RMB 1 million farmers and MSEs on civil society finance, thereby con- (US$150,000) accounts for 38.3 percent of all loans, and tributing to the improvement of the financial environment the total amount of these loans accounts for 67.9 per- in rural areas. cent of the total portfolio.40 Second, risk prevention and control has become a 4.2.5 Remaining Challenges core challenge impeding sustainable development of the MCC sector. Some MCC customers are from industries The establishment of new-type rural financial service pro- limited by regulatory policies or enterprises with high viders represents one of China’s most important attempts debt ratios and lacking in financial sustainability. Some to promote financial inclusion and has achieved positive MCCs have problems such as limited types of guaran- China’s Financial Inclusion Experience    43 tees, poor procedures, weak internal management, and focused on serving state-owned enterprises. Yet assess- low capacity in risk prevention and control, thereby ing the contribution of fintech companies to financial increasing operational risks. inclusion is not straightforward. While many customers Third, under their lending-only regulatory framework, have been able to access new products that are well tai- MCCs must issue loans that rely on the equity capital con- lored to their needs, not all products offered by fintech tributed by shareholders. The CBRC Guidelines on Pilots companies are necessarily appropriate for the needs of for Microcredit Companies issued in 2008 specifies that underserved populations, and many last-mile customers “the main sources of funds include capital funds paid by have not benefited from the fintech revolution. Different shareholders, capital endowment, and funds raised from types of fintech models also represent new risks to finan- no more than two banking financial institutions […and] the cial stability and consumer protection.41 balance of funds collected from the banking financial insti- Due to these various factors and considerations, Chi- tutions shall not be more than 50 percent of the net capi- nese regulatory authorities have sought to maintain a bal- tal.” These provisions have limited the availability of funds anced policy approach toward the entrance and scaling of for MCCs, equating to corresponding constraints on their fintech companies. The objective of this approach has lending operations. Regulatory requirements are inconsis- been to encourage innovation while introducing moder- tent across provinces, with some provinces imposing high ate and proportionate levels of supervision. This balanced entry barriers due to high initial minimum capital require- approach is referenced in the 2015 Guidelines on Promot- ments. The tax burden of MCCs was also generally higher ing Sound Development of Internet Finance, which notes than those of typical financial service providers in the past, the need to “give ample room for innovations in internet and MCCs did not enjoy preferential state-promulgated finance” while also highlighting the need for “ensuring tax policies to support rural areas and MSEs. However, this the healthy development of internet finance so that inter- situation was addressed in the beginning of 2017, when net finance can better serve the real economy, via mutu- MCCs began to enjoy preferential tax policies as well. ally supporting enhancing supervision and regulation as Fourth, MCCs’ operations are typically limited to well as encouraging innovation.” The Guidelines clearly within a single county’s boundaries. Expanding opera- references “law-based, moderate, differentiated, coordi- tions to a neighboring county requires reapplication and nated, and innovative supervision and regulation” as the setting up a new, independent entity, limiting scalability principles for regulating and supervising internet and efficient expansion of operations. finance—including fintech—in China. To what degree As a result of these various risk management, finan- authorities have successfully adhered to these principles cial, and geographic challenges, MCCs have difficulty has varied by provider and product and is discussed in achieving scale and commercial sustainability. Many more detail in subsequent sections. MCCs are undergoing financial difficulties. Such chal- The following subsections cover seven main types of lenges in the legal and regulatory environment must be fintech companies in China: (4.3.1) nonbank digital pay- addressed to enable MCCs to play a greater role in con- ment providers, (4.3.2) peer-to-peer lending, (4.3.3) tributing to financial inclusion. Internet-based microlending, (4.3.4) Internet banks, Finally, following the temporary suspension of new (4.3.5) Internet-based insurance, (4.3.6) Internet-based licenses for RMCCs, CBRC faces a challenge to determine fund management, and (4.3.7) Internet equity-based the future role of these providers (or similar providers) in crowdfunding. Finally, subsection 4.3.8 summarizes the facilitating cooperative-based finance for agricultural contributions of fintech—and digital finance more households in rural areas. broadly—to financial inclusion and remaining challenges. 4.3.1 Nonbank Digital Payment Providers DEVELOPMENT AND REGULATION 4.3  OF FINTECH Nonbank network payment has emerged in China with the explosive growth of online e-commerce and social In recent years, China has emerged as a global fintech network platforms. Nonbank network payment refers to leader. New entrants to the Chinese financial sector have payments a payer makes through a nonbank payment42 innovated with new models, delivery channels, and prod- platform, such as Alipay, developed by the Alibaba ucts, many of which leverage the massive scale and net- Group’s affiliate Ant Financial, or Tenpay, developed by work effects of online e-commerce and social media Tencent, which operates the social media platforms platforms. The rapid growth of fintech companies in China WeChat and QQ. can also be partly explained by their ability to tap into Alipay launched in 2004 as a means to facilitate pay- unmet demand from consumers and MSEs that were ments (and thus, commercial transactions) on the e-com- often neglected by traditional financial service providers merce platforms owned by Alibaba (e.g., Taobao, Tmall). 44   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   Alipay provided a mechanism through which funds pro- regulations, with a combined reach of hundreds of mil- vided by the buyer could be stored in “escrow” until the lions of customers (table 4.7).45,46 The top two nonbank buyer received the purchased product and confirmed that digital payment providers with the largest payment vol- it was satisfactory, at which point the funds would be ume in 2016 were Alipay (China) Internet Technology Co., released to the seller. This arrangement addressed a fun- Ltd. and Shenzhen TenPay Co., Ltd (table 4.8). For many damental issue that hampered e-commerce in China in its Chinese consumers—particularly those in urban areas— early days: a lack of trust between buyers and sellers. The payments on these platforms have effectively replaced following year, Tencent introduced a payment platform cash and bank cards for many day-to-day transactions. called Tenpay on its messaging platform QQ, allowing its The rapid growth in use of nonbank digital payment users to pay for online gaming and music purchases. platforms can be attributed to their common, core fea- Beginning in 2009, these Internet-based payment prod- tures: ucts were adapted to mobile applications to facilitate 1) Reliability and recourse. Nonbank digital payment mobile payments.43 For example, Tenpay was integrated providers such as Alipay were established to facilitate into the WeChat app in the form of an e-wallet linked to an escrow system in which payment to the retailer is an existing bank account or credit card, allowing for a not made until the customer reports that he or she has greater range of payment uses including person-to-per- received the product and is satisfied. son transfers, bill payments, and travel reservations, QR codes facilitate some of these transactions. Other non- 2) Use of existing platforms. The largest nonbank digital bank payment providers also entered the digital pay- payment providers (e.g., Alipay and Tenpay) integrate ments space, including China UnionPay and China a payment functionality into existing e-commerce and Telecom. By 2010, Alipay and Tenpay had cumulatively social media platforms with large user networks, which reached hundreds of millions of users. enables economies of scale. WeChat’s Red Envelope Despite the rapid initial growth, Chinese regulatory campaign, launched in 2014, was a notable success in authorities initially took a “wait and see” approach, allow- using digital payments to send monetary gifts, with ing the emerging industry to innovate and grow with rel- more than 8 billion red envelopes sent over WeChat atively few restrictions. Not until 2010—six years after the during Chinese New Year in 2016.47 launch of Alipay—did PBOC issue regulations addressing 3) Affordability. Customers of many nonbank digital pay- nonbank digital payment providers, setting out licensing ment providers (including Alipay and Tenpay) can requirements and procedures covering topics such as transfer money into their e-wallets and make payments minimum capital requirements and investor require- at no cost. This relates to the integration of payment ments.44 Five years later, in December 2015, the PBOC tools into existing e-commerce and social media plat- issued the Administrative Rules for Network Payment of forms; the adjacent revenue streams of these social Nonbank Payment Institutions, setting forth requirements and e-commerce platforms effectively subsidize the related to customer identification and anti-money laun- payment services, which are offered at low cost to cus- dering/combating the financing of terrorism (AML/CFT) tomers. Most nonbank digital payment platforms allow compliance, capping monthly payment activity for indi- a certain free withdrawal amount, and charge their cus- vidual users, and establishing data privacy requirements. tomers a withdrawal fee e.g., 0.1 percent of the The “wait and see” approach appears to have had amount withdrawn exceeding the free amount. The certain benefits. As of the end of 2016, more than 260 cost structure is also enticing for merchants and has led licensed payment institutions were operating under these TABLE 4.7 Industry Development of Nonbank TABLE 4.8 Overview of Key Digital Payment Providers Nonbank Digital Payment Products 2013 2014 2015 2016 ALIPAY TENPAY Number of providers 250 269 268 266 Year launched 2004 2005 Number of transactions 371.34 538.97 917.91 1,854.76 Affiliated company Ant Financial Tencent per year (100 million) Number of customers 450 n/a Volume of transactions 17.57 35.30 63.71 119.51 (million) per year (trillion RMB (2.64) (5.30) (9.56) (17.93) Market share (%) 54 37 [trillion US$]) Source: Company disclosures (number of customers with Source: PBOC. identity verified), Analysys (2016; market share values). China’s Financial Inclusion Experience    45 to a shift toward using nonbank digital payment plat- products on an e-commerce platform such as Taobao forms (instead of credit or debit cards) for various retail would subsequently receive a fraudulent link (closely transactions. resembling a real payment link) asking the buyer to make a direct payment. In reality, the link would send the buyer 4) Convenience and interoperability. Mobile applications to a phishing site simulating the real webpage. If the by nonbank digital payment institutions provide con- buyer filled out his or her information on the phishing sumers with convenient and fast payment services. site, the fraudster would then have access to the buyer’s Currently, use cases include online shopping pay- account and password. ments, prepaid (mobile phone) recharge, transfers, air With the aim of addressing fraud and money launder- travel ticket payment, catering, and credit card repay- ing issues while not stifling the development of digital ment. Most nonbank digital payment providers inte- payments, PBOC introduced a tiered account system for grate the internal payment platforms of several banks, nonbank digital payment providers in 2015 (see box 4.5). which allows customers to use their existing accounts and enables more convenient and faster transactions. 4.3.2 Peer-to-Peer Lending 5) Cost savings for retail firms. Retail firms can use non- P2P loans refer to a direct peer-to-peer loan transacted on bank digital payment providers to accept electronic an Internet platform. A P2P online platform typically payments—including via a simple printout of a QR undertakes detailed due diligence on borrowers’ qualifi- code—thus avoiding costs associated with cash and cations and credit status, selects borrowers with low fees typically associated with card-based payment default risks, and refers them to individual investors who instruments. are expected to lend (invest) money. Pursuant to relevant Ant Financial is a good illustration of leveraging an inte- regulations, online P2P platforms are information interme- grated online financial service platform, building off the diaries by nature rather than credit intermediaries, as they core Alipay platform. Launched in October 2014, Ant provide information collection, disclosure, credit evalua- Financial consolidates several Alibaba-affiliated business tion, information exchange, matching of borrowers and units, including Alipay, Alipay Wallet, Yuebao, Zhaocai- lenders, and other services for direct transactions between bao, Ant Micro, and MYbank (further described in section borrowers and lenders. As a result, they cannot absorb 4.3.4), to provide a range of financial services that span deposits from the general public, gather funds or set up payment, investment and financial management, micro pools of funds, or provide guarantees in any form to lend- lending, and insurance. The associated data resources ers.48 Some P2P platforms utilize an online-to-offline across business units allow Ant Financial to better under- model, with offline teams performing assessments of stand customers’ financial behaviors and needs, enabling potential borrowers and risk control activities due to a lack Ant Financial to better manage risks and develop innova- of comprehensive credit information. Paipaidai is a typical tive, appropriately tailored products. online model, while Creditease and Renren Dai represent However, nonbank digital payment platforms also an online-to-offline model. pose potential risks, including fraud and money launder- In recent years, online lending via P2P platforms has ing—one of the potential drawbacks of the “wait and been increasing rapidly in China. Many online P2P lending see” approach if pursued for too long and without proper platforms have been launched, including PPDAI, Renren monitoring. The China Internet Finance Report of 2016 Dai, Lufax, CreditEase, and Hongling Capital (table 4.9). cites an example of fraud wherein buyers who ordered Unlike in other countries, P2P platforms primarily obtain TABLE 4.9 Overview of Key P2P Lending Platforms KEY INDICATORS PPDAI RENREN DAI CREDITEASE LUFAX Year launched 2007 2010 2012 2011 Affiliated company PPDAI Renren Ucredit CreditEase Ping An Number of investors 240,000 319,925 420,584 546,767 Number of borrowers 3,380,000 333,965 386,634 903,836 Number of loans 7,110,000 133,687 462,453 — Volume of loans (billion 19.9 11.2 33.8 87.3 RMB [billion US$]) (3.0) (1.7) (5.1) (13.1) Source: Respective companies’ data, 2016. 46   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   BOX 4.5 Tiered Account System for Nonbank Digital Payment Providers In December 2015, PBOC released the Administrative Rules payments system. The tiered system clearly separates non- for Network Payment of Nonbank Payment Institutions (the bank payment accounts from bank accounts. The Administra- “Administrative Rules”). tive Rules established three types of nonbank payment The objective of the Administrative Rules was to establish accounts that are differentiated by their respective know-your- distinct tiers or categories of payment accounts provided by customer requirements and the type and size of transactions nonbank digital payment providers to balance financial inclu- that can be made using the account. sion objectives with the integrity, safety, and efficiency of the NONBANK PERSONAL DIGITAL PAYMENT ACCOUNT FEATURES TYPE I TYPE II TYPE III (FULLY FUNCTIONAL) Transaction volume limit RMB 1,000 (US$150) RMB 100,000 (US$15,000) RMB 200,000 (US$30,000) (accumulated lifetime limit, (accumulated annual (accumulated annual including transfers to own limit, not including transfers limit, not including transfers bank account) to own bank account) to own bank account) Daily transaction limit RMB 1,000 (US$150) or RMB 1,000 (US$150) or RMB 1,000 (US$150) or RMB RMB 5,000 (US$750) or other RMB 5,000 (US$750) or 5,000 (US$750) or other amount stated in the customer other amount stated in the amount stated in the customer agreement, depending on customer agreement, agreement, depending on security level of transaction depending on security level security level of transaction validation (excluding transfers of transaction validation validation (excluding transfers to own bank account) (excluding transfers to own to own bank account) bank account) Identification verification Identity verified remotely via Identity verified in person or Identity verified in person or requirements to open at least one legal and secure remotely via at least 3 legal remotely via at least 5 legal and external database, and applicant and secure external databases, secure external databases, with must be opening a payment with aim of multiple validation aim of multiple validation of account with the provider for of identity by payment institution identity by payment institution the first time itself or cooperating institutions itself or cooperating institutions Functionality Consumption purchases and Consumption purchases and Consumption purchases, transfers transfers transfers, financial product purchases (e.g., investment or wealth management) These account-level restrictions can be adjusted depending to PBOC approval and filing in PBOC branches. Around the on provider-level ratings from PBOC. For example, platforms same time as it released the Administrative Rules, PBOC also with an “A” rating from PBOC and more than 95 percent of issued separate regulations to establish a tiered account sys- Type II and III accounts having verified identification would be tem for banks, further discussed later in box 4.7. allowed to use alternative methods for ID verification, subject Source: PBOC. China’s Financial Inclusion Experience    47 funding from retail investors, rather than institutional investors and borrowers, thereby significantly lowering investors. By the end of 2016, 2,448 online P2P lending P2P loan transaction costs. platforms were in operation, decreasing slightly compared As the P2P industry evolves, Chinese financial sector with the number at the end of 2015 (table 4.10). As of the authorities have determined that changing the regulatory end of 2016, the total outstanding loan balance of online strategy from the “wait-and-see” approach to an active P2P lending had reached RMB 816.2 billion (US$122.4 bil- regulatory approach is more appropriate (further dis- lion),49 equivalent to 4.3 percent of the balance of house- cussed in sections 5.4 and 6.4). The first Chinese online hold loans issued by deposit-taking financial service P2P company, PPDAI, was launched in 2007 and, as in providers in China. The total transaction volume of online other countries, regulation lagged behind industry devel- P2P lending reached RMB 2,063.9 billion (US$309.6 bil- opment in its initial stages. By 2010, the size of China’s lion) in 2016, an increase of 110 percent over 2015. The P2P market was estimated at RMB 1.4 billion (US$206 overall rate of return on online P2P lending in 2016 was million), with about 15 platforms linking investors and 10.5 percent, which decreased by 284 base points over borrowers, yet no specific regulation on P2P had been 2015. In 2016, the average maturity of online P2P loans issued.51 In August of 2011, CBRC issued the Circular on was 7.9 months and the number of investors and borrow- Risks Associated with Peer-to-Peer Lending, which identi- ers in the online P2P lending sector reached 13.8 million fied risks such as money laundering and fraud, but did and 8.8 million, respectively, up by 135 percent and 207 not yet provide any specific rules governing P2P plat- percent, respectively, over 2015.50 forms. In practice, many online P2P platforms had by Several factors account for the rapid development of then deviated from their initial function as information online P2P loans in China. First, the previous climate of intermediaries and become credit intermediaries by pro- financial repression (e.g., interest rate caps) limited viding guarantees and setting up pools of funds, an activ- investment channels for idle funds, making obtaining ity in conflict with existing financial sector regulations. loans from formal financial service providers difficult for Other P2P platforms were engaged in outright fraud. In potential loan seekers and limiting options for retail one high-profile case, the company Ezubao was shut investors. In this context, P2P platforms emerged as a down in 2015 after authorities discovered it had been much needed alternative source of credit for individuals operating a Ponzi scheme in which it sold fraudulent and firms that were otherwise not served by the financial investment products to nearly one million investors.52 system and provided higher rates of return to retail These activities created financial risks, undermined the investors. Second, regulatory policies provided the legitimate rights and interests of investors, and signifi- opportunity for easy entry of P2P platforms into the mar- cantly harmed financial security and social stability. ket and their subsequent growth. Financial sector author- Therefore, CBRC, the Ministry of Industry and Informa- ities initially adopted a “wait-and-see” approach with tion Technology, the Ministry of Public Security, and the close observation and timely interventions that created State Internet Information Office jointly issued the Interim the conditions for a rapid increase in P2P platforms. Rules for the Administration of the Business Activities of Third, advances in and the application of information Internet-Based Lending Information Intermediary Institu- technology significantly reduced information asymmetry tions in August 2016 (“Interim Rules”), with the objective between debtors and creditors and the cost of matching of reforming and standardizing the industry to ensure TABLE 4.10 Industry Development of P2P Lending KEY INDICATORS 2011 2012 2013 2014 2015 2016 Number of providers 50 200 800 1,575 2,595 2,448 Number of investors (tens of thousands) — — 25 116 586 1,375 Number of borrowers (tens of thousands) — — 15 63 285 876 Volume of transactions per 3.1 21.2 105.8 252.8 982.3 2,063.9 year (billion RMB [billion US$]) (0.5) (3.2) (15.9) (37.9) (147.3) (309.6) Average rate of return (%) — 19.1 21.3 17.9 13.3 10.5 Average maturity (months) — 6.0 4.7 6.1 6.8 7.9 Source: Wangdai Zhijia, (2014, 2015, and 2016). 48   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   healthy and sustainable development. The Interim Rules microlending can be roughly divided into the following clarified that P2P lending platforms were information three types: intermediaries, specified activities that P2P lending plat- 1) Financing for online store operators. An example is forms were prohibited from engaging in,53 established loans provided by Ant Financial for Taobao store own- business rules and risk management requirements for P2P ers, which were piloted beginning in 2010. Given that lending and obligations of borrowers and lenders, and many Taobao store owners are typically underserved determined the joint and coordinated supervisory respon- segments with unmet needs for financial services, Ant sibilities of various authorities overseeing the industry. The Financial launched Taobao credit-based loans. Taobao Interim Rules also included procedures designed to pro- determines the credit scores of store owners based on tect consumers, such as requirements related to informa- the comments of shoppers on Alipay and Taobao. tion disclosure, third-party custody of consumer funds, Qualified owners can get loans released directly via and limits on loan concentration risk. By the end of 2015, Alipay. This lending approach enables convenience 1,171 P2P service providers had closed due to fraudulent and speed. These loans were an important enabler of business practices, with 804 providers doing so in 2015 the escrow model used to facilitate online payments, alone.54 How the industry will evolve remains to be seen, allowing merchants to cover their short-term financing though the financial sector authority approach of shifting needs while waiting for payments to arrive. from “wait and see” to taking concrete action appears to have been timely and impactful (box 4.6). 2) Consumer lending for online shoppers. An example is “Ant Check Later”, a financing product for e-com- merce shoppers. Shoppers can apply directly for 4.3.3 Internet-Based Microlending financing online in the payment link for online shop- Internet-based microlending refers to the practice of ping, and Ant Financial assesses the creditworthiness Internet companies providing small loans to their custom- of applicants through big data, resulting in rapid loan ers through an MCC under their control. Internet-based disbursement. BOX 4.6 Special Campaign to Address the Risks of Internet Finance Beginning in April 2016, PBOC and 16 other agen- finance are mainly in P2P online lending, Inter- cies jointly began carrying out a special campaign net-based financial asset management, and adver- approved by the State Council to address the risks tising of Internet finance. The Plan notes that the of Internet finance to promote the healthy and campaign should work to tighten standards for mar- orderly development of Internet finance. The ket entry for new participants, strengthen fund objectives of the campaign are to reverse and rec- monitoring, establish whistle-blowing and “ample tify improper behaviors in some types of Internet reward and severe punishment” systems, intensify finance, exclude those institutions that violate laws efforts to rectify unfair competition, enhance inter- and regulations in the name of innovation and set nal controls, and leverage technology to increase clear standards for the industry, support and pro- the campaign’s effectiveness. tect institutions that engage in useful innovation A working mechanism has been established for and operate in accordance with laws and regula- the campaign, stressing the need to improve orga- tions, guide Internet finance toward the right track nization and coordination and increase relevant of innovation, clarify the division of labor among authorities’ accountability. The campaign aims to relevant government authorities and strengthen identify and address problems, regulate collabora- collaboration, and balance short- and long-term tively, treat both symptoms and root causes, and objectives. eventually promote the establishment of a mecha- The Implementation Plan for the Special Cam- nism to support the long-term development of a paign to Address Risks of Internet-Based Finance healthy and responsible Internet finance sector. (“Plan”) notes that the potential risks of Internet China’s Financial Inclusion Experience    49 3) Small loans to agricultural households. These loans TABLE 4.11 Overview of Internet Banks occur through Internet and mobile platforms to help KEY INDICATORS WEBANK MYBANK XW BANK agricultural households solve financing problems dur- ing production. Examples of providers include Ant Year launched 2015 2015 2016 Financial (via Ant MCC) and Jingdong (via JD MCC), Major shareholder Tencent Group Ant Financial New Hope Group two Internet-based companies that also serve rural Total assets (RMB billion 52 (7.8) 61.5 (9.2) 5 (0.8) areas. In this model, loans to farmers can usually be [US$ billion]) used for seeds, fertilizer, and other inputs used for Deposit balance (RMB 23.1 (3.5) 23.2 (3.5) 0.6 (0.1) production. Goods are then required to be sold on billion [US$ billion]) e-commerce platforms such as Taobao and JD.com, Outstanding loan balance 30.8 (4.6) 34 (5.1) 4 (0.6) and the revenue generated goes to the lender as (RMB billion [US$ billion]) repayment for the loan. Number of outstanding 7 n/a 1 The rapid development of Internet-based microlending in loans (million) China can be attributed to the following factors. First, the Average size of loans 4,368 (655) n/a 2,550 (383) Internet has developed quickly in China, enabling people (RMB [US$]) to use Internet technology to perform operations related Source: Respective companies’ data. Data for WeBank and MYbank is as of December 2016, to small loans, thus lowering the cost of origination. Sec- data for XW Bank is as of June 2017. ond, the development of e-commerce has led to the emergence of new types of consumers who demand Internet-based microlending, including online shoppers individuals and MSEs with credit products. MYbank, for and online store owners. Third, the development of example, has a customer base mainly composed of online e-commence and advances in information technology stores on the e-commerce platform of its parent company have enabled institutions to capture and leverage new Alibaba. MYbank can leverage big data on such consum- data sources to assess repayment capacities of potential ers for creditworthiness assessments and loan-granting borrowers. For example, lenders associated with an decisions. WeBank, for its part, launched its own unse- e-commerce platform can use an online merchant’s trans- cured microloan (Weilidai) and auto microloan (Weichedai) action history to assess his or her creditworthiness. These products in September 2015. For Weilidai, consumers can factors have lowered costs, improved the efficiency of borrow up to RMB 200,000 (US$30,000) without guaran- small loan origination, and made small loans more conve- tee or collateral. nient and accessible for consumers. While their banking licenses allow them to accept However, companies engaging in Internet-based deposits, the 2015 tiered-account regulations (see box microlending operations for small loans are still limited in 4.7) thus far limits the degree to which remote identifica- number and only target individuals and MSEs on their tion can be used to open accounts with full functionality respective e-commerce platforms. Meanwhile, their online (such as accepting cash deposits). Internet banks can lending operations rely on information technologies and open Type II and Type III accounts, but such accounts transaction data that have only been in use for a short must be linked to an existing Type I bank account (pre- period of time and still need to be tested. sumably at a traditional bank). By the end of 2016, the loan balance managed by WeBank had reached RMB 57.2 billion (US$8.6 billion), 4.3.4 Internet Banks including its own loan balance of RMB 30.8 billion With advances in information technology, many Inter- (US$4.6 billion; representing 697 percent year-on-year net-based enterprises have achieved success in e-com- growth) and loan balance of RMB 26.4 billion (US$4.0 merce and digital payments and developed large billion) from banks operating via its intermediary plat- customer bases, transactional data, and experience with form. All of these loans were extended to individual con- online businesses. These enterprises have recognized the sumers. The consumer lending balance of unsecured competitive advantages of these attributes and have microloans (Weilidai) amounted to RMB 25.2 billion entered into Internet banking. At present, three estab- (US$3.8 billion, an 82 percent share of its own loan bal- lished “Internet banks” exist in China. WeBank and ance), while the lending balance of auto microloans MYbank were granted commercial banking licenses by (Weichedai) amounted to RMB 5.5 billion (US$0.8 billion, CBRC in 2014, and XW Bank was granted a license in 2016 an 18 percent share). MYbank opened in June 2015, and (table 4.11). These Internet banks have no outlets or by the end of 2016, its balance of loans to MSEs (includ- counter services. Their current focus is to leverage tech- ing personal businesses) had reached RMB 28.7 billion nology and data rather than offline resources and to target (US$4.3 billion). 50   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   BOX 4.7 Tiered Account System for Banks In December 2015, PBOC released the Notice on Improving by their respective know-your-customer requirements and the Services of Personal Bank Accounts and Strengthening Account type and size of transactions that can be made using the Management, which was later supplemented in November account. The second notice require each bank account to have 2016 by the Notice on Implementing the Rules for the Catego- a unique individual identification number and be associated rized Management of Individual Bank Accounts. The objective with a unique phone number to prevent fraud. of these notices was to establish distinct tiers or categories of Around the same time, PBOC also issued separate regula- bank accounts provided by banks to balance financial inclusion tions to establish a tiered account system for nonbank digital objectives with integrity, safety, and efficiency. The first notice payment providers, further discussed in box 4.5. established three types of bank accounts that are differentiated Categorized Management of Personal Bank Accounts FEATURES TYPE III TYPE II TYPE I (FULLY FUNCTIONAL) Daily transaction Account balance limit of RMB No account balance limit None and balance limits 1,000 (US$150). Daily transaction limit on funds Daily transaction limit on funds transfers from non-linked transfers from non-linked accounts accounts of RMB 5,000 (US$750), of RMB 10,000 (US$1,500), and and annual transaction limit of annual transaction limit of RMB RMB 100,000 (US$15,000). 200,000 (US$30,000). Daily transaction limit on consumption Daily transaction limit on consump- purchases, bill payment, and fund tion purchases, bill payment, and transfers to non-linked accounts of fund transfers to non-linked accounts RMB 5,000 (US$750), and annual of RMB 10,000 (US$1,500), and transaction limit of RMB 100,000 annual transaction limit of RMB (US$15,000). 200,000 (US$30,000). Identification •  In-person via bank counter or • In-person via bank counter or • In-person via bank counter verification self-service machine or self-service machine or self-service machine requirement to (if the latter, needs to verify open account • Remote via electronic channel • Remote via electronic channel applicant’s identification in (need to activate account by (need to link to the applicant’s person) transferring any amount from type I account or credit card existing bank account and account) verifying that the applicant is the bank account owner) Functionality Consumption purchases (with limits), Deposits, consumption purchases Cash deposit/withdrawal, bill payments (with limits), transfers (with limits), bill payment (with limits), transfers, consumption to/from non-linked bank accounts financial product purchases (e.g., purchases, bill payment, (with limits) investment or wealth management), financial product purchases transfers to/from non-linked bank (e.g., investment or wealth accounts (with limits) management) Source: PBOC. China’s Financial Inclusion Experience    51 The business models of Internet banks are still evolv- activities, while Internet banks rely on big data and data ing, yet current players demonstrate some common models for risk management. characteristics. Internet banks must have a powerful To date, Internet bank operations remain limited, and Internet service provider that can handle high amounts their business models are still evolving, as are regulatory of traffic and online transactions. The online-only model approaches. At present, Internet banks mainly focus on allows Internet banks to minimize transaction costs and small loans and lending to certain types of customers. use big data to analyze customer behaviors, including These banks face challenges in expanding their business creditworthiness. Due to their wealth of data, sophisti- beyond credit products or leveraging retail deposits, cated analytical tools, and their own funding constraints because Type II and III accounts (the only types of bank (i.e., lack of deposits), Internet banks have incorporated accounts that can be opened remotely) have certain partnerships with traditional banks into their business restrictions on deposit taking, and Internet banks have no model. Through these partnerships, Internet banks link offline (physical) access points. As mentioned previously, traditional banks to potential borrowers, providing tradi- remote identification technology has not yet been tional banks with basic personal information and basic deemed sufficiently robust to facilitate remote account profiles about the credit limits and borrowing of poten- opening for fully functional bank accounts, and financial tial borrowers. The customer resources and revenues sector authorities require customers to be physically pres- from loans disbursed through this type of partnership ent when first opening a fully functional account. Although arrangement are then shared between the Internet bank not yet approved, banks are exploring the use of remote and the traditional bank.55 identification technology in the hopes of using such tech- Important differences exist between Internet banks as nology in the future to open higher-tier accounts and they currently operate and traditional banks. First, they expand to a more diversified product offering. have different operating philosophies. Traditional banks mainly depend on their own resources for business devel- 4.3.5 Internet-Based Insurance opment, whereas Internet banks integrate and leverage various resources for business development from their The development of Internet-based insurance rep- parent companies, including data and information resents a significant milestone in China’s insurance acquired from e-commerce platforms and generated in industry. These new, Internet-only fintech insurance operational processes, including logistics, and industrial companies leverage new business models and plat- and commercial activities. forms to design and deliver new types of Internet-based Second, they have different customer bases. Internet insurance products and services to consumers. Tradi- banks’ target customers are MSEs, entrepreneurs, and tional insurance companies and other providers have individual consumers who are often familiar with and subsequently followed suit and have pursued partner- active in e-commerce. ships with Internet companies, as previously discussed Third, Internet banks have different operating chan- in section 4.1.6. In November 2013, the first online-only nels. Traditional banks still depend on physical counter insurance company in China, Zhong An Online P&C services; their existing e-banking business is an affiliated Insurance Co., Ltd. was founded. Major shareholders in service with traditional products, adapted for delivery via Zhong An Online include Ant Financial, Tencent, and the Internet. Internet banks have adopted the Internet Ping An. Following the establishment of Zhong An model from the outset; for example, the whole process of Online, other Internet-based insurance companies have lending is conducted digitally. been approved and established. Fourth, Internet banks have different measures to Internet-only insurance companies leverage digital identify and assess customers. Traditional banks mostly technologies to conduct transaction processing and data identify customers and assess their creditworthiness storage, analyzing faster and on a much larger scale than based on financial statements and face-to-face communi- traditional insurance companies. Such companies can cations. However, Internet banks depend on Internet utilize big data analytics to develop a wider variety of technologies and draw from data from their parent com- discrete insurance products and use online processing panies to conduct customer identification and creditwor- and digital channels to serve customers more efficiently thiness assessments through a combined approach of and conveniently. Their products are mainly low value, data models for automatic assessment and video or tele- short term, and standardized, with simple contract terms phone credit investigations. and easy operational processes. For example, Zhong Fifth, Internet banks have different risk management An Online launched products mainly related to e-com- means and technologies. Traditional banks to some merce and Internet transactions, including household extent rely on their staff to undertake risk management property insurance, returned cargo insurance, liability 52   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   insurance, credit and guarantee insurance, high tem- • Low investment threshold. Alipay users can open a perature insurance, and flight delay insurance. That said, Yuebao account with just RMB 1 (US$0.15), allowing a not all “innovative” insurance products that Internet-only new “investor class” into the market. insurance companies offer contribute to financial inclu- • Withdrawal at any time. Yuebao customers can with- sion, because many products are targeted to high-in- draw their money virtually immediately, an attractive come customers and do not offer meaningful risk advantage over traditional time-bound financial man- mitigation for the underserved. agement products that typically have penalties for The Chinese government has provided policy support early withdrawal. to promote the development of the Internet-based insur- ance sector, including the Law of the People’s Republic of • Daily interest. Interest on Yuebao accounts accrues China on Electronic Signature, issued in August 2004 and daily, can be tracked in real time, and can be used for revised in 2015, which stipulated the legal force of elec- direct consumption by the customer via Alipay, provid- tronic signatures and safeguarded the legal rights of all ing easy accessibility for consumers (and synergies for parties, helping to facilitate the delivery of online services Alipay and Alibaba). and electronic policies. The Guidelines on Promoting • Relatively high investment returns. The accumulated Sound Development of Internet Finance established funds across Yuebao customers’ accounts are used to operating principles and business requirements and pro- purchase money market funds, a portion of which are hibited certain Internet finance behaviors (such as mis- then placed in a bank as a deposit of a financial institu- leading descriptions or misrepresentations), which benefit tion. Due to the large amount of funds, the higher the healthy development of Internet-based insurance. interest rate received on this deposit (compared with The Provisional Rules for Supervision and Administration an ordinary deposit), and tight liquidity on the market of Internet Insurance, issued by CIRC in July 2015, clearly in the early stage of Yuebao’s creation, the interest rate sets out the provisions for business entity, business scope, on such deposits was relatively high. Therefore, Yue- and access criteria to develop Internet-based insurance, bao could pay relatively high returns to investors, establishing the supervision system for Internet-based while still earning profits due to its low cost of opera- insurance services in China and paving the way for the tions and large pool of customers. Shortly after entry of such companies. launching, Yuebao’s maximum annualized rate of return was nearly 7 percent. Since 2015, the rate has 4.3.6 Internet-Based Fund Management declined to below 3-4 percent. Rates of return have decreased in the money market sector in general. In Before Yuebao emerged in 2013, Chinese fund compa- addition, for commercial banks, reserve requirements nies achieved moderate levels of online sales of fund are now applied to the deposits of Yuebao funds in products via official websites and third-party sales plat- banks (although reserve requirements are temporarily forms. However, such companies did not focus on serving zero at the moment). underserved segments of the population. Typically, the minimum subscription of public funds to fund companies • Simple interface. Yuebao is a simple financial man- was RMB 1,000 (US$150), while various service charges agement product, and its interface is easy to use and would be levied for subscription, redemption, and conver- intuitive for customers, particularly those without any sion of funds. previous investment experience. Yuebao introduced a very different product to the Due to these features, Yuebao rapidly accumulated a market in June 2013. Yuebao is an Internet-based fund large number of users and a large amount of funds soon management product provided by the Ant Financial after it was officially launched. As of the end of 2014, the Services Group (an affiliate of Alibaba) in partnership number of existing customers had reached 185 million with Tianhong Asset Management. Yuebao is accessed and the size of the fund totaled RMB 579 billion (US$87 via Alipay, which enables individual users to make pay- billion). As of the end of 2016, the number of customers ments and transfers easily at any time without service had grown to 324.6 million and the fund size had reached charges.56 The Yuebao product was developed to mobi- RMB 808 billion (US$121 billion). lize the dormant funds sitting in millions of Alipay By providing a feasible and convenient channel for accounts, with customers earning returns on their invest- engagement in financial management, Yuebao’s success ment (Yuebao means “leftover treasure”). The following revealed the significant untapped opportunities in profit- product design and operational features were critical to ably providing financial services to middle- and low-in- Yuebao’s success: come groups in the Internet era. Yuebao has become an important driving force pushing Internet-based financial China’s Financial Inclusion Experience    53 TABLE 4.12 Key Products of Internet-Based Fund Management JINGDONG SUNING KEY INDICATORS YUEBAO LICAITONG XIAOJINKU LINGQIANBAO Year launched 2013 2014 2014 2014 Affiliated company Ant Financial Tencent Jingdong (JD) Suning Number of users (millions) 324.6 n/a n/a n/a Assets under management 808 (121) n/a n/a n/a (billion RMB [billion US$]) Source: Company disclosures, as of end of 2016. asset management to a stage of rapid development specify qualifications for investors. Platforms utilize dif- (table 4.12). Indeed, less than a year after Yuebao hit the ferent fee arrangements, including commission based market, Tencent launched a similar product called Licai- on a percentage of financing, equity, or fees for val- tong, which quickly grew to more than 10 million users. ue-added services. Jingdong (JD) also launched the “JD private coffer” Equity-based crowdfunding developed rapidly in product linked to the JD e-commerce platforms and dig- China in recent years, with various equity-based crowd- ital payment tool. In all cases, such products are pro- funding financing platforms established. More recently, vided online at low cost and easily scalability to providers, to protect investors and consumers, regulation and and they are easily accessed and used by consumers, guidelines have been issued to regulate the market including low- and middle-income consumers. More more formally. The Administrative Rules on Private Equi- broadly, Yuebao’s success has encouraged the entire ty-based Crowd-Funding Financing (Trial) (draft for com- financial management sector to review its products, ser- ments) issued by the Securities Association of China vices, and target markets and to begin thinking about (SAC) at the end of 2014 and the Circular on Conducting how to attract middle- and low-income groups that were Special Supervision on Institutions Engaging in Equity previously excluded and how to serve them sustainably Financing via Internet issued by CSRC in August 2015 and profitably using similar digital business models, require that all internet equity-based crowdfunding plat- technologies, and channels. forms in China be restricted to qualified investors and not open to the general public, with a cap on the total number of investors. 4.3.7 Internet Equity-Based Crowdfunding Internet equity-based crowdfunding has significant Internet equity-based crowdfunding was established in growth potential in China and can help to address China with the objective of offering equity in small busi- MSEs’ financing needs. China’s underdeveloped capital nesses to the general public via online platforms. Specif- markets lead to a lack of suitable products and insuffi- ically, it refers to small public equity-raising activities cient financing channels for MSEs, as well as high that are carried out by MSEs via platforms of equi- financing costs. The problem is particularly stark for ty-based crowdfunding financing intermediaries (Inter- enterprises in the early stages of development. How- net websites or similar electronic media). Internet ever, with the increase of private wealth in China, con- equity-based crowdfunding in China was initially charac- sumers are increasingly willing to participate in equity terized by openness to the general public, the small size investment to achieve higher investment returns than of investments, and the large numbers of investors. they can from savings products. Driven and enabled by Entrepreneurs and MSEs disclose their real information the progress in information technology, private equi- such as business form, operation and management ty-based crowdfunding has developed to a certain models, financial situation, and fund utilization to inves- extent in China. tors via the digital platforms of equity-based crowdfund- However, obstacles still hinder internet equity-based ing financing intermediaries. Internet equity-based crowdfunding from playing a larger role in financial inclu- crowdfunding financing typically involves innovative sion, such as the high investment threshold (which was technical projects with high risk and high return, in early established for financial consumer protection purposes) stages of development and seeking seed and angel and the limited total number of investors. Internet equi- rounds of financing. Investors can choose to provide ty-based crowdfunding has also yet to achieve wide- small equity investments based on the risks posed by spread appeal among investors partly due to a lack of the financing activities and their own risk tolerance. Plat- regulatory clarity regarding such financing platforms. forms may include lead and following investors and may According to the division of responsibilities for regula- 54   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   tion of Internet finance specified in the 2015 Guidelines, payments in China demonstrates how technology-driven CSRC is responsible for formulating regulatory rules for product design can contribute to financial inclusion. internet equity-based crowdfunding. Future regulatory With the proliferation of reliable and efficient digital rules for internet equity-based crowdfunding financing payment products, consumers can now enjoy the conve- are anticipated to help make the operations of such plat- nience of making payments anytime and anywhere. forms more secure for investors and accessible for enter- Mobile payments offer a new approach for shopping, prises seeking financing. utility bill payments, bank account inquiries, transport fee payments, cash transfers, investment-oriented finan- cial management, and other transactions. Digital pay-  ontributions of Digital Finance and 4.3.8 C ments have changed people’s financial transaction Fintech Companies to Financial Inclusion behaviors; for many consumers, digital payments have and Remaining Challenges replaced cash. Furthermore, as a result of digital pay- The rapid rise of digital finance—including fintech compa- ments, millions of transactions are now recorded, allow- nies—in China, its impact on financial inclusion, as well as ing fintech companies to use information technologies remaining challenges can all usefully be considered from such as big data and cloud computing to design and the perspective of the four elements of financial inclusion deliver low-cost, accessible financial products and ser- discussed in chapter 2: accessibility, diverse and appropri- vices to consumers more precisely. ate products, commercial viability and sustainability, and Thanks to online sources of credit such as “Ant Check safety and responsibility. Later,” underserved groups can access more convenient financing channels for consumption loans. Some online Accessibility store owners and MSEs can access loans urgently needed Chapter 2 explains that the emergence of digital finance in their business operations via online borrowing and has lessened consumers’ reliance on physical access Internet-based supply chain finance—critical services to points, enabling them to use mobile phones, computers, help grow their businesses that are often not easily acces- and other personal devices to take up and use various sible from other sources. financial products and services. In this way, digital finance The emergence of P2P and equity-based crowdfund- has contributed to groups who were previously not well ing platforms has not only provided asset-based income served by traditional financial service providers, such as generation opportunities to individuals with idle funds, small farmers and MSEs, low-income individuals, and but also addressed financing challenges faced by individ- those living in remote and rural areas. For example, non- uals and MSEs starting up their businesses. Digitally bank digital payment providers not only provide payment enabled business models have also allowed providers to services to stores and MSEs on e-commerce platforms, offer a wider range of low-cost, innovative, and tailored but also provide convenient payment channels to con- products, such as Internet-based insurance products and sumers in rural and remote areas who otherwise have lim- fund-based financial management products. ited access to such services. As of the end of March 2017, These innovations in product design and operational Alipay users in rural markets numbered 163 million. Farm- processes have generated extensive positive impacts, ers can likewise access small loans via e-commerce plat- lowering operational costs for providers, increasing the forms—rather than in brick-and-mortar branches—to ability to serve more customers efficiently, and expanding address their daily production and consumption financ- the available range of appropriate products. ing needs. However, not all digital finance products are beneficial That said, many adults who make up the last mile are to consumer welfare or appropriate for the underserved. elderly or live in areas with poor information and commu- For example, products such as digital credit that target nication technology (ICT) infrastructure and thus remain unsolicited offers directly to consumers via mobile phones excluded from the reach of digital finance. Digital models pose potential risks of overindebtedness. Financial con- can contribute to, but may not be able to fully close, the sumer protection frameworks need to be strengthened to “accessibility gap” in China, and alternative methods address the risks raised by digital finance related to prod- (including rural financial service providers and agents) will uct appropriateness and other broader issues (further dis- still need to be employed. Further improvements to ICT cussed below). infrastructure to reach the last-mile are also needed. Commercial Viability and Sustainability Diverse and Appropriate Products Fintech companies’ business models are market based Digital finance has contributed to increased conve- and, for the most part, operate without subsidies or nience, greater affordability, and better designed prod- influence from government authorities. Not only are fin- ucts for underserved segments. The digitization of tech companies succeeding via market-based and com- China’s Financial Inclusion Experience    55 mercially viable approaches, but such providers have lenders, and even making loans. Other fintech compa- also served as a “demonstration effect” for the rest of nies have intentionally exaggerated returns from invest- the financial ecosystem. The rise of fintech companies ment products or concealed product risks. Some fintech has created shocks to China’s traditional financial service companies have conducted fraud, resulting in huge providers and prompted them to innovate, adopt digital economic losses to investors and harm to vulnerable finance approaches, and compete for previously under- consumers. served market segments. As a result, digital finance in Fintech, and digital finance more broadly, require China is increasingly not limited to fintech companies new approaches for consumer protection and educa- providing direct products and services to consumers, tion. An effective consumer protection framework is but traditional providers are now also serving new cus- required to address the features of digital financial tomer segments with innovative products in a more effi- transactions that pose potential threats to consumers. cient, digitally enabled manner. In addition, an increasing Consumer education urgently needs to be strength- number of other types of fintech service companies have ened to enhance consumers’ skills to better understand emerged in China, leveraging advanced ICT as and use digital technologies to obtain appropriate described previously to provide credit scoring, risk man- products and services. agement, and other valuable services to traditional In addition, relevant laws, regulations, and supervisory financial service providers, with the same positive practices for digital finance providers need further impacts previously noted. Partnerships between fintech improvement. Digital finance is relatively new, and there companies and traditional financial service providers is little precedent to follow. In order to facilitate its devel- hold much promise, as both sides bring different com- opment, the Chinese government has chosen to remain parative advantages to the table: technological and relatively open to the integration of digital technologies analytical efficiencies on the one hand and reputation, and finance and the market entry of fintech companies. risk management and controls, and financial product However, to ensure that fintech continues to develop sus- knowledge on the other hand. tainably in a way that benefits consumers, authorities have increasingly recognized the need to take action and Safety and Responsibility establish comprehensive, proportionate legal frame- It is important to recognize that digital finance also works and clear standards for emerging models. At this poses risks. Given the new types of risks posed by digital stage, China’s fintech rules are still under development finance, the business practices of some new fintech with significant gaps remaining, though progress has companies, and the still-nascent regulatory and supervi- recently been made as Chinese financial sector authori- sory framework, consumers face risks ranging from loss ties consciously shift away from the “wait and see” of funds and violations of data privacy to false promo- approach to a stage of more active regulation and super- tion and outright fraud, and money laundering risks also vision (see box 4.8).57 exist. Indeed, the nature of digital finance is still finance, In sum, digital finance—including fintech providers— including the essential attributes of financial risk man- has played a role in improving financial inclusion in China agement. In addition, compared with traditional finance, and enriched digital financial inclusion practices for the the risks posed by digital finance are potentially more world as a whole. Chinese fintech companies have lever- implicit, contagious, and extensive. In general, fintech aged opportunities created by the advancement of infor- companies have infringed upon the rights and interests mation technologies to target populations neglected by of consumers in more cases than formal, traditional traditional financial service providers or sectors without financial service providers have, and the nature of such financial services, expanded the accessibility of financial infringements has been more serious, illustrating the service channels, developed innovative and low-cost drawbacks of the “wait and see” approach. Unlike tradi- products and services, and diversified the financial tional financial service providers, the threshold for fin- ecosystem, thereby playing a multifaceted role in con- tech companies to enter the market is low, which allows tributing to the “democratization” of finance in China. in providers with both good and bad intentions. The However, significant challenges remain for market play- results are many potential risks and many recent cases of ers and government authorities to ensure that fintech actual harm to consumers. companies can effectively and safely contribute to Chi- For example, customer funds may not be properly na’s financial inclusion objectives (further discussed in entrusted to a third party, or customers’ personal infor- chapter 5). mation may be leaked, stolen, or sold, infringing upon their privacy. Some P2P platforms have stepped beyond the mandate of information intermediaries, illegally establishing a pool of funds, providing guarantees for 56   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   BOX 4.8 Guidelines on Promoting Sound Development of Internet Finance The Chinese government issued the Guidelines on Promoting The Guidelines notes areas where additional regulation is Sound Development of Internet Finance (“Guidelines”) in July required, including: safeguarding of customer funds, informa- 2015. Jointly issued by PBOC and nine other ministries and tion disclosure and transparency, consumer protection, and commissions, the Guidelines is the first guiding document on information security, as well as anti-money laundering and pre- Internet finance regulation and supervision since 2013, when venting financial crimes. The Guidelines also calls for the Internet finance first saw rapid growth. strengthening of the industry’s self-regulatory capacity, regula- The Guidelines defines major Internet finance business tory and supervisory coordination among financial sector models and proposes a series of measures and objectives, authorities, and data and statistical monitoring. which include (1) promoting innovation of Internet finance Following the issuance of the Guidelines, PBOC issued platforms, products, and services; (2) encouraging coopera- new rules for the nonbank digital payment sector (Administra- tion between financial institutions and Internet finance compa- tive Rules on Network Payment of Nonbank Payment Institu- nies; (3) improving access to capital for Internet finance tions). CBRC took the lead in drafting rules on Internet lending companies; (4) streamlining administrative approvals and (Interim Rules for the Administration of the Business Activities other procedures to better service the industry; (5) implement- of Internet-Based Lending Information Intermediary Institu- ing appropriate favorable fiscal and tax policies; and (6) foster- tions). CIRC also issued Provisional Rules for Supervision and ing the development of credit infrastructure and the cultivation Administration of Internet-Based Insurance. CSRC is in the of supporting intermediary services. midst of formulating relevant rules within its mandate. In The Guidelines clarifies the regulatory mandates of different addition, the National Internet Finance Association of China financial sector authorities with respect to Internet finance. (NIFA), an organization committed to enhancing self-disci- PBOC is responsible for the regulatory oversight of Inter- pline of Internet finance, was established in March 2016. NIFA net-based payments; CBRC is responsible for oversight of has more than 400 members, including many key fintech Internet-based lending, Internet-based trusts, and Inter- companies. The Association is currently developing various net-based consumer finance; CSRC is responsible for oversight self-regulatory standards, beginning with disclosure guide- of Internet equity-based crowdfunding and Internet-based lines for Internet-based lending. fund sales; and CIRC is responsible for oversight of Inter- net-based insurance.  HE ROLE OF THE CHINESE 4.4 T costs of financial service providers serving target under- GOVERNMENT IN PROMOTING served populations, encourage financial service providers FINANCIAL INCLUSION to leverage technology and financial infrastructure to reach new consumer segments, and promote the devel- The Chinese government has actively pursued a range of opment of well-designed financial products for target measures over the past 15 years to increase financial inclu- underserved populations. sion. This section describes key efforts to improve the pol- icy, legal, regulatory, and supervisory environment for Monetary and Credit Policies to Support Financial financial inclusion, as well as the underlying financial infra- Inclusion structure. In recent years, PBOC has incentivized financial service providers to expand credit services to sannong and MSEs through various policies, including differentiated  olicy and Regulatory Environment for 4.4.1 P reserve ratios, loan refinancing, and rediscounted loans. Financial Inclusion As of the end of 2016, the reserve ratio for rural commer- The Chinese government has actively taken a broad range cial banks registered in county areas was 12 percent, and of policy measures to promote financial inclusion, includ- the reserve ratio for RCOPBs, RCCs, and VTBs was 9 per- ing through monetary and credit policies, tax policies, and cent. These ratios are 5 percentage points and 8 per- supervision policies. The objectives of these policies have centage points lower, respectively, than the reserve ratio been to encourage marketization, reduce operational for large commercial banks. If any of the aforementioned China’s Financial Inclusion Experience    57 BOX 4.9 China’s Plan for Advancing the Development of Financial Inclusion (2016–2020) On December 31, 2015, the State Council issued Chi- • Significantly improve the people’ satisfaction with na’s Plan for Advancing the Development of Financial financial services; and Inclusion (2016–2020) (“FIP”). The FIP defines finan- • Satisfy the people’s increasing demands for finan- cial inclusion as “providing appropriate and valid cial services, especially enabling MSEs, farmers, financial services to all social strata and groups with urban low-income groups, impoverished groups, demands for financial services, at affordable costs, the disabled, the aged, and other special groups based on the principles of opportunity, equality, and to obtain financial services at a reasonable price in commercial sustainability.” It further notes that a convenient and safe manner. “MSEs, farmers, urban low-income groups, impover- ished groups, the disabled, the aged, and other spe- The FIP outlines pathways to achieve these cial groups are the targeted customers of financial objectives, including through increasing the diver- inclusion in China.” sity and coverage of financial service providers The FIP notes that financial inclusion in China still within the financial system, innovating in the design faces several issues and challenges, including “imbal- of financial products and services, accelerating con- anced” financial services (i.e., a lack of appropriate struction of financial infrastructure, improving laws products for the underserved, while less suitable and regulations related to financial inclusion, products exist in the market), and more work remains enabling the role of policy guidance and encourage- to be done to further develop financial infrastructure ment, and bolstering financial education and finan- and to strengthen the commercial sustainability of cial consumer protection. financial services provision. The FIP also notes that the relationship between The FIP establishes the following financial inclu- the government and the market should be correctly sion policy objectives for China: arranged, and market principles should be fully respected, with the aim to ensure that the market • Establish a servicing and supporting system of plays a decisive role in the allocation of financial financial inclusion that corresponds to completing resources. The government is expected to better a moderately prosperous society in all respects; play its role in guiding overall planning, organization • Effectively improve the availability of financial ser- and coordination, and balanced distribution, as well vices, significantly increase the sense of fulfilment as in providing policy support. of the people for financial services; rural financial service providers in county areas used a gle microenterprise) and seven other types of loans to certain portion of its newly-taken deposits to disburse underserved segments. loans in the local area, its reserve ratio is 1 percentage PBOC has also used lending and discounting facili- point lower than that of a similar financial service pro- ties to encourage financial service providers to expand vider. In addition, any commercial banks that meet cer- credit to underserved segments, including sannong, tain prudent operation requirements and whose loans to MSEs, and the poor. Financial service providers that sannong and MSEs have reached a certain percentage demonstrate higher outreach to these groups receive may be granted a lower reserve ratio than that of similar better access to these facilities. For the purpose of sup- institutions. To encourage financial institutions to better porting the aforementioned groups in getting more develop financial inclusion, the PBOC decided in Sep- loans from financial service providers, the total amount tember of 2017 to make targeted reductions, effective of loans issued in 2016 under the PBOC lending facility from 2018, to the deposit reserve ratio for commercial was RMB 439 billion (US$66 billion), and the outstand- banks that have complied with prudential requirements ing balance of loans as of the end of 2016 was RMB 375 and have reached the required ratios in their lending to billion (US$56 billion). The total amount of loans issued underserved market segments, including loans to micro- in 2016 under the PBOC discounting facility was RMB enterprises (credit limit less than RMB 5 million to a sin- 381 billion (US$57 billion), and the outstanding balance 58   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   of loans as of the end of 2016 was RMB 117 billion tion funds and support to the poor with interest subsi- (US$18 billion). dies by local governments, as well as the provision and PBOC has also prudently advanced pilots of mort- purchasing of micro-credit insurance to diversify the gage loans in rural areas with “two rights” as collateral related risks. (i.e., management rights to contracted rural land and To provide additional financial support to local gov- farmers’ housing property rights); encouraged SMEs to ernment efforts to expand financial inclusion, in Sep- utilize debt financing instruments from nonfinancial insti- tember 2016, the MoF issued Administrative Rules for tutions; supported qualified financial service providers to the Administration of Earmarked Funds for Financial raise funds through issuing financial bonds to be used Inclusion. These funds are earmarked transfers of cen- exclusively for loans to MSEs; and urged financial service tral finance to support and guide local governments at providers to provide livelihood-oriented financial services all levels, financial service providers, and private capi- to rural migrants, university graduates, minorities, the dis- tal in support of financial inclusion in China. The funds abled, and other groups. These efforts have improved include the following uses: (1) awards for incremental financial services to sannong, MSEs, and other key tar- increases in sannong-related loans by county-level geted underserved segments. financial service providers; (2) special subsidies for the expenses of rural financial service providers; and (3) Fiscal and Tax Policies interest subsidies for guaranteed loans to business The following are select examples of fiscal and tax policies startups, as well as allowances to related banks orother used by Chinese financial sector authorities to incentivize financialservice providers. financial inclusion efforts via market-based approaches, Since 2009, the government has implemented a across various financial products and services. pilot award program for incremental sannong-related loans specifically to county-level financial service pro- 1) Risk compensation funds for agriculture-related viders. In recent years, with continual expansion of its lending and lending to MSEs scope, the pilot program now covers 25 provinces in The central government has encouraged local gov- China, including major grain production areas and ernments to establish risk compensation funds to most of the central and western areas. In 2016, the encourage financial service providers to increase agri- central government granted RMB 16.7 billion (US$2.5 culture-related lending and lending to MSEs. For billion) in “financial inclusion special funds” to local example, in 2009, with local government support, governments, and local governments could use these China Construction Bank (CCB) launched an innova- funds to facilitate financial inclusion by awarding finan- tive product through which local governments and cial service providers at the county level and below CCB jointly select a group of MSEs. Funds provided that increase their sannong-related loans, among other by local governments and by member MSEs are measures. pooled into a guarantee assistance fund. CCB In addition, some local governments have estab- releases loans equivalent to 10 times the amount of lished business startup loan guarantee funds through the fund to member MSEs, with flexible disbursement which financial service providers issue guaranteed and repayment schedules. PSBC launched a similar loans to qualified entrepreneurs to support individuals product in October 2014. to startup businesses or to expand employment. The 2) Earmarked funds for local governments to support interest on such loans is subsidized by fiscal funds. financial inclusion 3) Encouraging and supporting the development of Government authorities have actively promoted the government-owned guarantee companies implementation of guidelines to improve access to The Chinese government has actively encouraged credit for poor households. In 2014, PBOC and six and supported the development of guarantee com- other ministries and commissions jointly released the panies with the objective of improving financial inclu- Guidelines on Comprehensively Delivering Financial sion for underserved market segments. Many local Services for Poverty Alleviation and Development. Later governments have established government-owned in 2014, the State Council Leading Group Office of Pov- guarantee companies to share the credit risk with erty Alleviation and Development (CPAD), the MoF, financial service providers. For example, in Zhejiang PBOC, CBRC, and CIRC jointly released Guidelines on Province, government-owned guarantee companies the Innovation and Development of Microcredit for can provide a guarantee that is 50 percent of total Poverty Alleviation. These two guidelines encouraged investment and does not exceed RMB 10 million the increased provision of unsecured loans by financial (US$1.5 million) for financing technology firms at their service providers, the establishment of risk compensa- initial and growth stages. China’s Financial Inclusion Experience    59 4) Agricultural insurance • The stamp tax is exempted for loan contracts To encourage uptake of agricultural insurance, CIRC, signed between financial institutions and MSEs. the MoF, the Ministry of Agriculture, and local govern- ments have actively promoted agricultural insurance. Additional Regulatory and Supervisory Approaches to Building on the market-oriented operations of insur- Advance Financial Inclusion ance companies, the central government, provincial Chinese authorities have actively leveraged supervisory governments, and municipal and county governments tools to promote financial inclusion, mainly focusing on provide premium subsidies for agricultural insurance differentiated supervision, preferential policies, support to for economic losses caused by natural disasters, major priority sectors, cultivation of new market players, and plant diseases and pests, and accidents. In 2007, a institution building. pilot program of premium subsidies began in six prov- In recent years, PBOC and CBRC have issued various inces. The pilot program provided approximately RMB measures to improve access to finance for sannong and 2 billion (US$300 million) in premium subsidies cover- MSEs, including promoting the use of financial bonds by ing five types of agricultural insurance. In 2015, CIRC, commercial banks exclusively for MSE loans and the use the MoF, and the Ministry of Agriculture jointly issued of differentiated calculation and assessment of loan-to- the Circular on Further Improving the Drafting of Terms deposit (LTD) ratios and NPL ratios for MSE loans. For and Conditions for Agricultural Insurance Products example, commercial banks are allowed to issue financial with Premium Subsidized by Central Government. As a bonds specifically for MSE loans, increasing banks’ avail- result, the average coverage of new agricultural insur- able funding sources for MSE lending. When calculating ance products increased by 15–20 percent; insured LTD ratios for MSE business lines, the MSE loans that cor- liability was further expanded, covering the main risks respond to such bonds can be deducted from the numer- in relevant insured areas; premium rates were reduced; ator. As of the end of 2015, 66 commercial banks claim criteria were improved; and the average rate of nationwide had issued RMB 549 billion (US$83 billion) in indemnity for total losses increased by 10 percent. As financial bonds specifically for MSE lending. CBRC also of the end of 2016, the regional scope of the central allows NPL ratios for MSE loans to be up to 2 percent government’s agricultural insurance premium subsidies higher than industry-wide targets, with no adverse conse- had expanded to the whole country covering 15 types quences on the financial service provider. Commercial of agricultural insurance products, including crop farm- banks are also allowed to issue special sannong financial ing, livestock breeding, and forestry. Agricultural bonds to raise funds for lending to sannong clients, with households normally pay 15–30 percent of the pre- similar preferential treatment in the calculation and mium, depending on their income level and the types assessment of LTD and NPL ratios for the sannong loans of insured products. In 2016, the central government that correspond to the special bonds. allocated RMB 15.8 billion (US$2.4 billion) in premium In recent years, CSRC has supported the financing subsidies (a 7.5 percent year-on-year growth), repre- needs of small and medium enterprises (SMEs) and pro- senting 38 percent of total agricultural insurance pre- moted the more formal operation and healthy develop- miums in the whole country. ment of these enterprises with various measures, including improving the SME board’s institutional measures, lower- 5) Tax policies ing the financial standards for including innovative and As mentioned in section 4.1, tax policies are a tool that growth-oriented enterprises into the Growth Enterprise government authorities in China have leveraged to Board, expanding the pilot program of the National Equi- promote financial inclusion. By reducing overall opera- ties Exchange and Quotations (NEEQ) to the entire coun- tional and transaction costs, these policies aim to try, clearly defining regional equity markets as private encourage financial service providers to expand their equity markets for serving MSMEs in the region, further physical reach and serve targeted underserved groups, expanding the scope of pilots for private bond issuance by including MSEs and sannong. SMEs, and guiding private equity investment funds and Several specific tax exemptions have been estab- venture capital funds to focus their support on MSEs in the lished to achieve these objectives. Past and current initial stage or growth stage. examples include: In 2012, aiming to establish a more comprehensive • The value-added tax (VAT) is exempted for the legal and regulatory framework to encourage the healthy interest income of financial institutions and MCCs development of the agricultural insurance sector, the on small loans to farmers; State Council issued Regulation on Agriculture Insurance, • The taxable income was calculated on only 90 per- which stipulates the operational principles, contract provi- cent of financial institutions’ interest income on sions, and operational regulations of agricultural insur- small loans to farmers; and ance. In 2015, CIRC also developed Provisional Rules for 60   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   the Administration of Agricultural Insurance Underwriting reserve fund of nearly RMB 10 billion (US$1.5 billion) was and Claims Settlement to further specify the operational accumulated and became an important source of financ- procedures of agricultural insurance. In 2014, CIRC sup- ing for post-disaster production restoration and recon- ported the establishment of China Reinsurance Commu- struction of affected areas. nity for Agricultural Insurance, jointly sponsored by the China Property & Casualty Reinsurance Company Ltd. and 4.4.2 Financial Infrastructure 23 insurance companies (such as PICC P&C) qualified for agricultural insurance. By the end of 2016, the Community Credit infrastructure and payments infrastructure are the had 32 members and its total insuring capacity reaches foundational elements of a country’s financial infrastruc- RMB 360 billion (US$54 billion). Establishing the Commu- ture and critical to addressing the informational asym- nity has improved agricultural insurance risk diversification metry and transaction cost challenges that often hinder mechanisms for insurance companies and lays the foun- financial inclusion. A significant portion of China’s prog- dation for insurance companies to provide agricultural ress in advancing financial inclusion can be attributed to insurance. The CIRC also established a national agricul- efforts taken in recent years to strengthen the country’s tural insurance information management platform, which financial infrastructure, though more work still needs to helps to pool nationwide insurance data for crop farming be done. and enhance real-time monitoring and dynamic manage- In collaboration with other stakeholders, the PBOC ment of agricultural insurance, and has greatly improved has established a comprehensive and robust national agricultural insurance information management. payments system infrastructure in China. Government CIRC has supported and encouraged insurance com- authorities have prioritized the development and mainte- panies to develop innovative price insurance products for nance of a sound payment settlement infrastructure in agricultural goods. For such insurance products, if the rural areas, which has facilitated growth in physical access price for an agricultural good is lower than the contractu- networks, improved diversity and efficiency of payment ally agreed-upon price due to factors beyond the exemp- products, and allowed for the digitization of govern- tion of insurance contract liabilities, the insurance ment-to-person (G2P) transfers. Section 4.1.2 discusses company shall provide appropriate compensation. As a these developments in greater detail. result, agricultural households can take advantage of In recent years, PBOC has been actively developing insurance products that cover not only natural risks, but the credit reporting system to reduce information asym- market risks as well. By the end of 2016, 33 provinces or metries between lenders and borrowers and increase the municipalities launched or formulated their pilot pro- responsible provision of credit to households and firms. grams for price insurance for agricultural goods. These This effort has been undertaken mainly through the pilots cover 50 agricultural goods, such as wheat, rice, Credit Reference Center of PBOC (CCRC), a public credit pigs, and vegetables and with 400,000 insured farmer registry established in 2006. The CCRC collects data from households/insurance policies. more than 3,000 financial service providers, including In recent years, agricultural insurance coverage has banks, RCCs, MCCs, insurance companies, and other significantly expanded in China. From 2007 to 2016, the nonbank financial service providers. The CCRC distrib- area of main crops insured by China’s agricultural insur- utes information to these institutions in response to inqui- ance companies increased from 230 million mu58 to 1.72 ries. As of end June 2017, the registry covered 930 million billion mu, and more than 210 types of agricultural prod- individuals, including 450 million with a borrowing his- ucts were insured, covering almost all sectors including tory. It also covers 24 million legal entities, including 6.6 planting, forestry, herding, and fishery. The insurance million with a borrowing history. During the first half of coverage of corn, rice, and wheat exceeded 70 percent 2017, the CCRC handled an average of 3.4 million inqui- of total planting areas. Around 353,700 basic agricultural ries per day relating to individuals, and 220,000 relating insurance service branches or agents were established in to legal entities. However, the PBOC registry does not town or village areas, 95 percent of towns had access to currently collect credit records from P2P lenders. agricultural insurance providers, and the number of PBOC has also acknowledged the role that the private insured farmer households/insurance policies increased sector—and new fintech companies in particular—can from 49.8 million to 204 million. From 2007 to 2016, risk play in improving China’s credit infrastructure. In early coverage provided by agricultural insurance increased 2015, PBOC granted permission to eight companies from RMB 172 billion (US$26 billion) to RMB 2.16 trillion (including companies affiliated with Alibaba, Tencent, (US$324 billion), insurance indemnities of RMB 154.4 bil- and Ping An) to apply for licenses for credit bureaus for lion (US$23.2 billion) were paid to 240 million farmer individuals within a six-month provisional period. How- households/insurance policies, and the catastrophe risk ever, as of mid-2017, no licenses had been issued to China’s Financial Inclusion Experience    61 these new companies due to policymaker concerns mately 40 percent of outstanding commercial loans in regarding corporate governance, independence, and China, up from 12 percent in 2004.59 Other notable conflicts of interest. More work is needed to clarify the developments that have strengthened China’s credit licensing requirements for credit bureaus and to more infrastructure include the 2006 Enterprise Bankruptcy clearly distinguish between credit bureaus and credit Law, which allows flexibility for distressed SME borrowers scoring and data analytics companies, as each type of and their lenders to support long-term and sustainable company provides useful supplemental data for provid- SME lending, and the 2007 Property Law. ers to overcome information asymmetries. In addition, greater access to public information could  igitization of Government-to-Person 4.4.3 D benefit financial inclusion. Government agencies such as Transfers tax, commerce, and judicial authorities hold vast amounts of valuable data on both individuals and MSEs, but such In recent years, China has launched numerous subsidy information is difficult to access. As a starting point, a programs supporting agriculture, rural social endowment comprehensive legal framework for data protection and insurance, and rural cooperative medical insurance. privacy is needed in China to address data issues, includ- According to the 2013 China Household Finance Survey ing with respect to public information and the use of big (CHFS), approximately 40 percent of all households and data and alternative data. 68 percent of rural households receive some form of sub- Several other developments have contributed to sidy or grant payment from the government.60 Such subsi- expanding the scope and improving the quality of China’s dies often comprise small amounts delivered in large broader credit infrastructure. A basic legal framework and frequencies, involving multiple logistical links and high a registry system for secured transactions were estab- costs when distributed in cash. The Chinese government lished in the mid-2000s, spurring the development of a therefore began to shift to distributing subsidies to recip- movable asset finance market and a collateral manage- ients via debit cards linked to accounts to increase account ment industry. The IFC estimates that, as of the end of ownership and usage (as discussed in section 4.1.3). A key 2016, loans involving movable assets represent approxi- function of the payments infrastructure as discussed in BOX 4.10 Integrated Movables Financing Registration System As mandated by the 2007 Property Law, PBOC capacity building, and increased lender confidence. established a modern collateral registry, the Inte- The second-generation registry information technol- grated Movables Financing Registration System, ogy (IT) system is expected to launch soon. A robust under the CCRC in 2013. The system began as an registry along with a series of complementary initia- Internet-based filing system for security interests on tives by the authorities (e.g., extensive training of accounts receivables and has now expanded to financial sector authorities and lenders, develop- cover most interests on most movable assets, includ- ment of the collateral management industry, creation ing finance lease, lien, title retention, hire-purchase, of a digital supply chain finance platform under security deposit pledge, inventory, warehouse CCRC, and the recent joint action plan issued by the receipts, etc. Two notable exceptions are (1) security seven ministries on accounts receivable finance) has interests on movable assets with an existing regis- helped to develop a large movable assets-based tered title (which are registered together with their debt finance market in China. By end June 2017, the title registrations) and (2) mortgages (i.e., nonpos- CCRC registration system alone had about 230,000 sessory security interests) of equipment and inven- users and had recorded 2.7 million registrations and tory (which are still under the State Administration 12.6 million inquiries, cumulatively. Seventy percent of Industry and Commerce). of the borrowers and lessees in the system are SMEs. In recent years, with the support of the IFC, CCRC The next challenge for the CCRC will be to achieve a has continued to improve its registry services and truly integrated registration system; the related new promote movable asset finance more generally. This content of the Civil Code offers a promising opportu- has provided transparency to the market, stimulated nity to do just that. Source: IFC. 62   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   sections 4.1.1 (agent-based service points) and 4.1.2 (set- mented pilots digitizing student loan contracts in Henan, tlement systems) is to support the electronic disburse- Hebei, Shanxi, and other provinces. As of the end of ment of G2P transfers, which has the potential to advance November 2016, CDB has issued 18.6 million loans total- financial inclusion via links to accounts. Various govern- ing RMB 110.8 billion (US$16.6 billion) to 9 million stu- ment departments that distribute these subsidies can now dents from families with financial difficulties.62 do so more efficiently and cost-effectively. Given their own cost savings over the long term, relevant depart- MSE Development ments have therefore been open to providing subsidies to CDB, EximBank, and CADB have played active roles in acquirers for installing POS terminals to facilitate such carrying out the government’s MSE finance policies, electronic disbursement. mainly by providing low-cost financing to institutions that In 2016, more than two billion transfer payments total- then on-lend funds to MSEs. CDB has also provided loans ing RMB 499 billion (US$75 billion) were disbursed to for emergency revolving funds for SMEs, lowering their recipients’ bank accounts and debit cards from rural pen- financing costs and allowing them to rapidly meet their sion insurance and rural medical insurance schemes and financing needs. As of the end of September 2016, CDB’s subsidies for rural households.61 Rural residents can con- SME loan balance amounted to RMB 3.31 trillion (US$497 veniently and efficiently withdraw their subsidies without billion), which includes RMB 1.2 trillion (US$180 billion) in leaving their villages through such rural debit card with- outstanding loans to MSEs, benefiting MSEs, the self-em- drawal services. ployed, farmers, young people starting up a business, urban laid-off workers, and other civil society groups, and covering about 20 sectors, including manufacturing, agri-  ole of Policy Banks and the China 4.4.4 R culture, forestry, animal husbandry, fisheries, and whole- Development Bank sale and retail. China Agricultural Development Bank (CADB) and China Since 2006, EximBank has implemented pilots of Export and Import Bank (EximBank), China’s two policy loans for MSEs and explored viable and sustainable mod- banks, and China Development Bank (CDB), a develop- els for credit services supporting MSE development. As ment-oriented financial service provider, help support of the end of June 2017, the credit balance under this the implementation of national financial inclusion priori- model totaled RMB 28 billion (US$4.1 billion), supporting ties and policies. These institutions are viewed as a use- 80,890 MSEs.63 ful complement to the commercial banking system and have been leveraged to expand access to finance for Supporting Sannong Development university students and to support MSE and sannong Development-oriented financial institutions and policy development. banks have actively leveraged their respective compara- In late 2014 and early 2015, a series of reforms were tive advantages to support key sectors or weak compo- approved, which helped to further clarify and define the nents via financing, such as modern agriculture and the role of CADB, EximBank, and CDB, modernize their construction of water conservancy projects. In collabora- enterprise systems, and improve their capacity to support tion with the MoF, CDB has combined fiscal funds with priorities and weak areas, with the aim of developing private funds, via both loan interest subsidies and allow- society and the economy in a sustainable manner. ances, to support state and family farms and other agri- cultural operators to build high-standard farmland Educational Loans for Students (covering a total area of more than 100 million mu). CDB The Chinese government has actively carried out activities has also explored innovative agricultural financing mod- to improve access to education-oriented credit for stu- els in modern agriculture demonstration zones. dents to enable children from poor families to access EximBank has also worked to support sannong devel- quality education and prevent intergenerational transmis- opment and poverty alleviation. In collaboration with the sion of poverty. Since 2004, CDB has created a national State Council Leading Group Office of Poverty Allevia- model of providing student loans through collaboration tion and Development, EximBank has developed 347 key with local government or education authorities. In recent projects to develope export-oriented economies in poor years, CDB has reformed its lending processes and simpli- areas by supporting local unique and competitive indus- fied its lending procedures. It has launched a pre-applica- tries and local enterprises across the value chain that ben- tion mechanism for loans under which an applicant’s efit poverty alleviation. qualifications can be verified in advance; introduced CADB has developed a model to provide funds for online repayment and repayment via CUP POS terminals, grain purchases, ensuring that farmers receive payments allowing students to repay loans online and offline in from selling their grain and addressing problems farmers many convenient locations with no surcharge; and imple- previously faced, such as having difficulties in selling grain China’s Financial Inclusion Experience    63 or having to receive IOUs. In addition, CADB has played a choice, fair treatment, redress and compensation, edu- role in supporting unique agricultural subsectors and cation, respect, and information security; strengthening construction of agricultural infrastructure. • Defines requirements for activities of government departments, financial service providers, and social Financial Consumer Protection and Financial 4.4.5  organizations in the field of financial consumer pro- Capability tection; The Chinese government recognizes that encouraging • Proposes building six mechanisms to strengthen finan- the uptake and active use of financial services and prod- cial consumer protection, including a long-term and ucts by underserved segments of the population must effective program for financial literacy and the estab- be accompanied by robust financial consumer protec- lishment of comprehensive dispute resolution mecha- tion and efforts to improve consumers’ financial capabil- nisms; and ity. Financial consumer protection and education can • Proposes the activities and tasks that require attention help build awareness of and trust in the financial sector from government departments and financial service and thereby encourage the uptake and use of products providers in promoting the development of financial and services. It can also help authorities manage risks inclusion. associated with changes in the types of providers, prod- ucts, and consumers in the market and encourage fair In 2016, PBOC issued the Implementation Rules on the competition in the market. Recent developments in Protection of Rights and Interests of Financial Consumers, China—including the rapid emergence of P2P lending which was the first general regulation focusing on financial platforms, widely accessible digital investment products, consumer protection issued by the PBOC. It consisted of and nonbank digital payment institutions—highlight the the following main elements: (1) the conduct of financial need for robust consumer protections and greater finan- service providers, (2) specific requirements regarding the cial capability. protection of personal information, (3) the complaints- In recent years, China’s four financial sector regulatory handling regime of financial service providers and PBOC, authorities have respectively established internal financial (4) the redress mechanism of financial service providers, consumer protection departments. The PBOC’s Financial and (5) supervision and enforcement mechanisms. The Consumer Protection Bureau is responsible for protecting measures apply to all providers regulated by PBOC, consumers as part of the PBOC’s mandate (i.e., for pay- including commercial banks and nonbank digital payment ments and credit reporting) and for comprehensively providers. studying major issues related to financial consumer pro- In addition, in 2015, PBOC published the Administra- tection in China and coordinating financial consumer pro- tive Rules for Network Payment of Nonbank Payment tection for cross-sector financial products (e.g., bank-sold Institutions (which went into effect on July 1, 2016). These insurance). The Banking Sector Consumer Protection rules contained various provisions related to online pay- Bureau of CBRC, the Investor Protection Bureau of CSRC, ments and consumer protection, including data protec- and the Insurance Consumer Protection Bureau of CIRC tion and data security, disclosure and transparency in are responsible for protecting consumers and investors in service agreements, and dispute resolution mechanisms. the banking sector, securities sector, and insurance sec- In 2014, CIRC published the Guidelines on Strength- tor, respectively. ening the Protection of Rights and Interests of Insurance In 2014, the revised Law of the PRC on the Protection Consumers. These guidelines highlighted the responsi- of Consumer Rights and Interests came into force. For the bilities of insurance companies, disclosure requirements, first time, the revised law explicitly mentions the obliga- redress mechanisms, insurance literacy and risk aware- tions of financial service providers in the banking, securi- ness for consumers, coordination with civil society, super- ties, and insurance sectors relating to disclosure of vision and monitoring, etc. charges, safeguards, and warnings regarding risks. The revised law also adds provisions on personal data protec- Financial Consumer Protection Supervision tion, standard contract terms, and other aspects that are Over the past several years, Chinese authorities have closely related to the financial sector. gradually developed mechanisms for financial consumer In 2015, the General Office of the State Council issued protection supervision. Financial consumer protection the Guidelines on Strengthening the Protection of Rights departments have carried out in-depth on-site inspec- and Interests of Financial Consumers, which includes the tions, including targeted, thematic inspections related to following: debit cards and protection of personal information, bank- sold insurance, deposit disputes, protection of small and • Outlines in detail financial consumers’ rights to safe- medium investors in the capital markets, misleading insur- guarding of funds, product information disclosure, free 64   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons  Lessons   ance sales, and difficulties in insurance claims settlement. effective manner. Third-party mediation of financial con- Actions resulting from these supervisory activities have sumer disputes has been carried out in a few regions in included “soft” measures, such as consultations with China on a pilot basis, allowing financial consumers to senior management of financial service providers with access convenient mediation services. Financial consumer poor practices to improve their services. protection departments are strengthening cooperation Financial consumer protection departments have also with justice departments and arbitration agencies, pro- conducted off-site supervision. PBOC has initiated insti- moting the establishment of a litigation and mediation tutional and environmental assessments focused on docking mechanism for financial consumer disputes and financial consumer protection and further explored meth- enhanging the legal effect of the results of mediation. ods of “soft” supervision. CBRC has guided banking sec- tor financial service providers to fully integrate consumer Financial Capability and Consumer Education protection requirements into their operational manage- The consumer protection departments of financial regula- ment and performance assessment systems, ensuring tory authorities have prioritized financial education efforts, that all operational management activities reflect the most often through large-scale awareness campaigns. objective of protecting consumers’ rights and interests, Various regulatory authorities participate in the National similar to the concept of “treating customers fairly.” CIRC Consumer Protection Day on March 15. PBOC declares has initiated the establishment of an insurance company every September to be the national “Month for Populariz- service evaluation system and created a basic framework ing Financial Knowledge” and regularly launches activities and indicator system for it. such as expanding financial knowledge in rural areas, mil- To raise awareness among the general populace and itary camps, schools, and communities to help financial among market participants, PBOC has established a consumers accurately understand their legal rights and database of typical cases and a regulatory information avoid illegal financial activities. PBOC also organizes the disclosure system and selects representative financial compilation, publication, and distribution of the Book of consumer protection cases for publication each year. Financial Knowledge Dissemination and explores how to CIRC has also established a system for publicly disclosing evaluate the financial capability and literacy of consumers typical cases of harm to the legitimate rights and interest (box 4.11). of consumers. Nine such cases have been publicly dis- Each year, CBRC organizes banking sector institutions closed, involving insurance sales underwriting and insur- across the nation to conduct a month-long thematic ance claims and payment. financial knowledge dissemination awareness campaign, “Financial knowledge reaching every household.” During Dispute Resolution these activities, banks accept inquiries from consumers; PBOC, CSRC, and CIRC have respectively opened the introduce financial knowledge dissemination tools such “12363” financial consumer complaint and inquiry hotline; as books, cartoons, and apps targeting various groups; the “12386” securities, futures, and funds investor protec- and disseminate financial knowledge through different tion hotline; and the “12378” insurance complaint and channels. rights safeguarding hotline for handling complaints and CSRC has organized successive thematic activities inquiries from financial consumers. These authorities have such as “Advocating Value Investing,” “Actively Reward- also reinforced the primary responsibility of financial ser- ing Investors,” “Securities Industry Rights Protection in vice providers in dealing with consumers’ complaints. Action on March 15th,” and the special investor protec- PBOC has established a PBOC-based complaint informa- tion campaign “Fairness on Your Side.” CSRC also sup- tion platform that is linked with financial service providers. ports establishing investor education bases as one-stop PBOC receives complaints directly from consumers and education and service places where investors can receive forwards them to the responsible financial service pro- fair and high-quality education and services in a concen- vider. The PBOC system then tracks resolution processes. trated, systematic, and convenient manner. PBOC has also initiated a pilot in five provinces to develop CIRC has designated July 8 of each year as the a unified standard for how providers classify complaints “National Insurance Publicity Day,” during which public- from consumers. ity campaigns for insurance services are conducted for Financial consumer protection departments are also the public. CIRC also publishes education columns on promoting the establishment of an external and alterna- online education platforms, official microblogs, WeChat, tive dispute resolution to ensure financial consumer dis- and general media; produces literacy books; and orga- putes can be brought to various neutral, objective, and nizes educational activities to disseminate insurance easily accessible entities (such as financial regulatory knowledge and advocate for sound and rational insur- authorities, industry associations, government depart- ance consumption. In addition, CIRC requires a “risk ments, courts, etc.) and be settled in a fair, timely, and warning” column be placed on the homepages of offi- China’s Financial Inclusion Experience    65 BOX 4.11 PBOC Report on China Financial Consumers’ Capability Survey, 2017 Since 2013, PBOC’s Financial Consumer Protection know how to access financial education and how to Bureau (FCPB) has conducted the Financial Con- resolve financial disputes with providers. Consum- sumers’ Capability Survey every other year. For the ers’ overall level of financial knowledge is relatively third round of the survey in 2017, the survey ques- low, and a significant financial knowledge imbalance tionnaire gauged financial consumers’ attitudes, exists between rural and urban areas and among dif- behaviors, knowledge, and skills to comprehen- ferent regions. Consumers pay most attention to sively reflect the financial capability and literacy of financial knowledge that is closely related to the Chinese consumers. preservation and appreciation of their wealth. Results of the 2017 survey show that Chinese The survey suggests that (1) financial literacy consumers view financial consumer education posi- should be linked with the enhancement of financial tively and tend to be rational about consumption, skills, as well as the risk awareness of financial con- savings, and credit, but still need to enhance their sumers, (2) low income individuals should be a target risk awareness. Families often have a budget but group for financial education, and (3) financial knowl- sometimes fail to stick to it. Consumers have limited edge should be included into the national education understanding of contracts and statements of finan- system to educate consumers at an early age. cial products and services. Consumers generally Source: PBOC. cial websites of insurance companies to disclose the marketing, safety of funds, and dispute resolution should risks associated with insurance consumption and to dis- be expanded to include new fintech companies and seminate risk prevention knowledge. adapted as necessary to digital finance business models. Supervision efforts require further strengthening, as does Remaining Challenges coordination across PBOC, CBRC, CSRC, and CIRC, par- Several challenges remain in the areas of financial con- ticularly as many financial consumer protection issues are sumer protection and financial capability in China. The cross market and cross product. Enforcement of viola- legal and regulatory framework for financial consumer tions is currently weak. Regarding financial capability, protection requires further adaptation to ensure that con- improvement in the effectiveness of financial education sumer protection risks with respect to fintech and digital efforts is required. Special groups such as the elderly finance are comprehensively covered. In particular, a crit- require more tailored efforts. Finally, how to better lever- ical need exists for a comprehensive legal framework for age digital technologies to efficiently and effectively data protection and privacy, as noted in section 4.4.2. deliver financial education that meets consumers’ needs Rules regarding disclosure and transparency, sales and should be further explored. NOTES Sparreboom and Duflos (2012) provide a useful overview of the development of China’s financial sector since 1949, including the 19.  relevance for financial inclusion. 20. Zhang and others (2010). Administrative units in China from largest to smallest include province, city, county, town, and village. According to the 2016 21.  China Statistical Yearbook, China comprises 334 prefectures/cities, 2,850 counties, and 39,789 towns. According to PBOC’s Overall Developments of Payment Services in Rural Areas (2015), in China’s rural areas, the average population per county is approximately 420,000; the average population per town is approximately 28,700; and the average population per village is approximately 900. According to Tsai (2006), less than 1 percent of bank loans in 2005–2006 went to private enterprises. 22.  The financial sector is overseen by one central bank (the People’s Bank of China [PBOC]) and three specialized regulatory and 23.  supervisory authorities: China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), and China Insurance Regulatory Commission (CIRC). The Ministry of Finance (MoF) is also actively involved in various fiscal policies to support financial inclusion. 66   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons   The relevant survey questions refer to “cash subsidies for agricultural production” (reported by 28 percent of all households and 24.  56 percent of rural households), “welfare grants” (4 and 6 percent), “one child incentives” (3 and 2 percent), “five guarantee grants” (1 and 2 percent), “pensions” (1 and 1 percent), “relief subsidies” (1 and 1 percent), “food subsidies” (2 and 4 percent), and “afforestation grant” (3 and 5 percent). 25. PBOC (2016). Source: Ningbo Central Sub-branch, PBOC. 26.  The payment service providers with business licenses that facilitate bank card transaction services to designated entities (and 27.  network) merchants and complete the fund settlement. PBOC (2011); PBOC (2014). 28.  Shangyitong refers to a kind of upgraded and transformed telephone-based device into which the card reader and related 29.  equipment are integrated, and to which PSBC customers’ debit cards are linked, allowing customers to bank easily and conveniently, including making balance inquiries, real-time transfers and bill payments and so on. It is extensively used in the agent-based service points of PSBC. In this report, bank cards refer to both credit cards and debit cards. This section focuses specifically on debit cards. 30.  As noted in chapter 3, estimates of account ownership in China vary. PBOC estimates that over 90 percent of adults own an 31.  account. Regardless, it is clear that significant increases in account ownership have been achieved over the past few years. 32. PBOC. These principles included (1) tailoring measures to local conditions, (2) preventing moral hazard, and (3) creating positive 33.  incentives. The Internet’s extraordinary potential for selling conventional insurance is illustrated by one second-tier insurer that recently 34.  opened a virtual shop in WeChat. After only three months in operation, the shop was selling RMB 3 million (US$450,000) in new motor premiums a day. 35. Source: CIRC. The minimum registered capital for a VTB (established and operates at the town level), RMCC (established and operates at the 36.  administrative village level), and MCC is RMB 1 million, RMB 100,000, and RMB 5 million (US$150,000, US$1+5,000, and US$750,000) , respectively. In comparison, the minimum registered capital of a nationwide commercial bank is no less than RMB 1 billion (US$150 million) and the minimum registered capital of a municipal commercial bank is no less than RMB 100 million (US$15 million). The Administrative Rules for the Earmarked Funding for Financial Inclusion (MoF, 2016). 37.  See Implementation Rules of CBRC for Administrative Licensing Items for Rural Small and Medium Financial Institutions, CBRC 38.  (2016) [Regulation 3]. The “Big Five” banks refer to the Agricultural Bank of China, the Bank of Communications, the China Constructions Bank, the 39.  Industrial and Commercial Bank of China, and Bank of China. Zhang Rui and others (2015). 40.  Definitions for digital finance, Internet finance, and fintech, and how these terms relate to one another, are discussed in section 41.  1.2. According to the Administrative Rules for Network Payment of Nonbank Payment Institutions released by PBOC in 2015, 42.  “network payment” refers a payee or drawee initiating payment instructions remotely through the public network information system by utilizing computer, mobile terminals, or other electronic equipment with payment institutions providing money transfer services between them, and there is no interaction between the electronic equipment of the payee and the exclusive equipment of the drawee. Traditional financial service providers also provide mobile payments (as discussed in section 4.1.4.1) and, to a lesser extent, so do 43.  the three major telecom operators (China Telecom, China Mobile, and China Unicom). Administration Rules on Payment Services of Non-Financial Institutions (PBOC, 2010 [Regulation 2]) and Implementation 44.  Measures of the Administration Rules on Payment Services of Non-Financial Institutions (PBOC, 2010 [Regulation 17]). 45. PBOC. Worth noting is a key difference between the innovative payment products previously described and those that have developed 46.  in some other countries. Alipay and similar products operate via traditional bank accounts rather than by creating new accounts and e-money issuance, as mobile network operators have done in other economies. As such, an Alipay transaction remains integrated with a prudentially licensed and supervised financial institution, which may have facilitated the ability to have a relatively long “wait and see” period. 47.  https://qz.com/613384/over-8-billion-red-envelopes-were-sent-over-wechat-during-chinese-new-year/. CBRC and others (2016). 48.  Wangdai Zhijia (www.wdzj.com/news/yanjiu/51827.html) operates a Chinese P2P online lending portal. 49.  Wangdai Zhijia (http://www.wdzj.com/news/baogao/25555.html). 50.  51. Wangdai Zhijia. “26 on trial over China P2P fraud” http://www.chinadaily.com.cn/business/2017-04/28/content_29125729.htm 52.  China’s Financial Inclusion Experience    67 These include absorbing public savings, establishing capital pools, providing guarantees and commitments for guaranteed 53.  principal and interest, selling financial products, and carrying out credit assignment in such forms as asset securitization. 54. NIFA. Similar types of partnerships and service arrangements are also emerging between fintech companies and traditional financial 55.  service providers, such as fintech companies working with traditional banks to provide credit scores (e.g., Ant Financial’s Sesame Credit) or to improve creditworthiness assessments and risk management systems (e.g., Netease Financial). At present, Alipay’s customers are asked to pay fees for transferring funds from a payment account to any bank accounts, but 56.  with a free annual limit of RMB 20,000 (US$300), provided the transfers do not exceed the annual limit, in which case the customer would have to pay fees for the transfer. Howerer, Alipay’s customers do not have to pay fees for transfers from a payment account to another payment account via smartphone. For further discussion on the principles that should be carefully considered and balanced with respect to digital finance, see the 57.  G-20’s High-Level Principles on Digital Financial Inclusion, described in box 6.1. 1 mu = 0.06667 hectares. 58.  59. IFC, China. The relevant survey questions refers to “cash subsidies for agricultural production” (reported by 28 percent of all households and 60.  56 percent of rural households), “welfare grants” (4 and 6 percent), “one child incentives” (3 and 2 percent), “five guarantee grants” (1 and 2 percent), “pensions” (1 and 1 percent), “relief subsidies” (1 and 1 percent), “food subsidies” (2 and 4 percent), and “afforestation grant” (3 and 5 percent). 61. PBOC. 62. http://news.xinhuanet.com/money/2016-12/29/c_1120215186.htm. 63. http://www.zzg.org.cn/zhtbd5658/cyzdjxs/shgg/201709/t20170930_667541.html. 5 REMAINING FINANCIAL INCLUSION CHALLENGES IN CHINA AND THE WAY FORWARD Despite China’s impressive progress in expanding financial areas and that financial service providers operating in inclusion in recent years, significant challenges remain. these areas must be heavily subsidized. The reality is more These challenges must be addressed for China to achieve nuanced. Yet in China, numerous stakeholders still main- its financial inclusion objectives and to leverage financial tain a simplistic view of financial inclusion and do not fully inclusion to support complementary economic and social comprehend the nuances of financial inclusion as development goals. This chapter summarizes six key re- described in chapter 2, or as outlined in China’s Plan for maining challenges for financial inclusion in China. China’s Advancing the Development of Financial Inclusion. Plan for Advancing the Development of Financial Inclusion Going forward, government authorities who drive and (2016–2020) addresses many of these challenges. coordinate China’s financial inclusion agenda must ensure that a comprehensive conceptualization of financial inclu- sion is understood and practiced at all levels of govern- ACHIEVING AN EVOLVED AND WIDELY 5.1  ment and across all public and private stakeholders. This ACCEPTED CONCEPTUALIZATION OF may be particularly true with respect to subnational FINANCIAL INCLUSION authorities who do not benefit from access and exposure to global forums and resources. A broad shift in the con- Although the concept of financial inclusion has become ceptualization of financial inclusion is necessary to outline increasingly popularized in China, significant variations a vision for achieving full financial inclusion in China and to remain in its definition and practice across and within evolve government practices and policies to address the Chinese government agencies, local and national author- remaining challenges to achieve such a vision. This vision ities, financial service providers, and nongovernmental should clearly articulate what pursuing market-based, organizations, often with counterproductive results. Mis- commercially sustainable approaches to financial inclu- understandings about financial inclusion have negatively sion means in practice, and it should ensure that this com- influenced the strategies deployed to promote financial mon understanding is implemented across all levels of inclusion to date and have played a role in compromising government, with improved coordination and communi- the innovative capacity and incentives of financial service cation to allow harmonized, consistent approaches. providers and the overall dynamism of the financial sector. Financial inclusion and digital finance must also be rec- For many in China, financial inclusion remains synony- ognized as separate concepts. Digital finance—including mous with credit subsidies, directed lending, and charita- as practiced by fintech companies—is not the automatic ble activities. Many stakeholders also believe that only a equivalent of financial inclusion. Rather, digital finance is narrow range of financial products are relevant to financial the combination of innovative technologies applied to the inclusion (e.g., credit) and fail to consider the diverse set of financial sector, while financial inclusion combines specific products underserved segments need or the appropriate business models and design of financial products and ser- design of available products. Furthermore, some believe vices intended to serve underserved population segments. that no demand for financial services exists in underserved Digital technologies can be used to further financial inclu-   69 70   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons sion, but they are an approach and not the objective itself. ers raises questions of interference and issues of However, many fintech companies in China currently mismanagement. Overall, this approach fails to lay the advertise themselves as “financial inclusion” institutions, a groundwork for long-term, sustainable financial inclusion. notion that many in the general public consequently share. Therefore, one key challenge for Chinese authorities In reality, several fintech companies operate businesses going forward is the need to think clearly and strategically that have little to do with financial inclusion. While many about the appropriate role of government, the appropri- financial products offered by fintech companies may serve ate mix of direct and indirect public sector measures, and a legitimate consumer need, such products do not mean- the interplay between the public and private sectors. The ingfully expand access for unserved and underserved con- public sector alone cannot drive financial inclusion, at least sumer segments. As discussed in chapter 4, some fintech not beyond a certain point and not on a long-term, sus- companies also infringe upon the interests of consumers tainable basis. The private sector must play a critical role through fraud and questionable business practices. This and do so based on market principles and via viable busi- not only undermines the industry’s reputation, but also ness models for positive impacts of financial inclusion to negatively affects the general understanding of financial be sustainable. This new thinking is reflected in Plan for inclusion. Advancing the Development of Financial Inclusion (2016– 2020), which highlights commercial sustainability as one of its core guiding principles. As basic metrics of financial  ECALIBRATING THE ROLE OF 5.2 R inclusion such as access to transaction accounts are GOVERNMENT achieved and Chinese markets evolve, a shift in focus is required toward more market-based approaches and pri- As this report clearly shows, extensive and active govern- vate sector–driven efforts, particularly to encourage inno- ment support for financial inclusion has been a hallmark of vation and competition in providing a broader range of the Chinese experience. National and local governments appropriate financial products and services and to ensure have used a mixture of direct and indirect interventions to scalability. The entry and subsequent successes of fintech spur financial inclusion, including a wide range of policies, companies—in China and elsewhere—show the potential regulations, and promotional measures. These govern- impact of this approach. Continuing down the path toward ment efforts have achieved considerable levels of success marketization is critical to fostering a dynamic and innova- along certain metrics. As noted in chapter 3, high levels of tive financial sector, which in turn is a key enabler of finan- account ownership have been obtained in China. Absolute cial inclusion. numbers of access points have increased in rural areas, and The public sector still has a critical, meaningful role to greater numbers of SME units are present within banks. play. However, the role of government should not (and After the broad economic reforms of the late 1970s cannot) be to “mandate” commercial sustainability. and early 1980s, China has continued to promote the pro- Rather, the appropriate role of government is to develop cess of marketization, including in the financial sector. an enabling environment for financial inclusion—including However, China’s economy and financial sector still retain the overall policy and coordination framework, legal and many features of emerging and public sector–dominated regulatory environment, and supporting financial and economies. Sustainability of the business models many information and communication technology (ICT) infra- financial service providers use to advance financial inclu- structure—and to correct market failures where they exist, sion efforts has been a perennial concern, limiting the so that providers can serve the underserved in a commer- potential for ongoing viability and further expansion. For cially viable manner. A legal and regulatory framework example, as noted previously, a nontrivial share of agent- that provides clear market participation rules and estab- based service points are dormant or have limited traffic. lishes a fair, open, and level playing field for market partic- Similarly, the extent to which SME units in banks have ipants, considering relevant risks and supervisory capacity, translated into greater access to finance for underserved is a critical function of the government, as noted in the SMEs is unclear. High levels of state intervention in state- G-20 High-Level Principles for Digital Financial Inclusion. owned commercial banks or state-influenced financial ser- Chinese authorities should also continue to prioritize the vice providers also discourage competition and development of credit infrastructure, payments infrastruc- innovation, as these providers are often inefficiently run ture, ICT infrastructure, and data infrastructure to support and do not operate on market-based principles, while financial inclusion. The government must also continue to having a distortive effect on the market. Highly subsidized play a key role in protecting and educating consumers products such as credit or insurance products can have a and ensuring the soundness and integrity of the financial similarly distortive and chilling effect over the long term. system as a whole. Finally, government efforts to Finally, administrative intervention by some local govern- strengthen the rule of law by improving law enforcement ments in the routine operations of financial service provid- efficiency, cracking down on improper and illegal financial Remaining Financial Inclusion Challenges in China and the Way Forward   71 activities, and protecting the legitimate rights and inter- depth of financial services for the underserved. To this ests of creditors and debtors can contribute meaningfully end, the plan proposes to carry out explorations in the to long-term and sustainable financial inclusion. following three areas: (1) encouraging financial service Careful thought should be given to those particular cir- providers to innovate with respect to financial products cumstances where a more direct public sector role is war- and services, (2) enhancing the capacity of financial ser- ranted. In such cases, the public sector role should be vice providers to use technology, and (3) leveraging the clearly articulated and delimited, with an exit strategy useful role of the Internet in promoting the development where appropriate. For example, expanding financial of financial inclusion. inclusion to reach the final stretches of the last mile is one The experience of establishing broad agent networks instance that may require more direct government involve- in China provides an instructive example. As described in ment. But in such cases, sophistication is required to direct section 4.1.1, due to high prioritization and strong sup- government assistance in a productive and minimally dis- port from financial sector authorities (including subsidiz- tortive manner (such as integrating with social safety net ing set-up costs in some provinces), initial successes have payments) to target appropriate individuals and clearly been achieved on a significant scale in terms of expand- articulate the gap in needs and the intended impact. ing the network of agents in rural areas across China utiliz- ing POS terminals for transactional services. The next stage to achieving long-term financial inclusion is now EVOLVING BUSINESS MODELS AND 5.3  determining how these agent-based service points can be PRACTICES TO ACHIEVE COMMERCIAL reoriented to operate in a more sustainable manner and SUSTAINABILITY be more fully leveraged for financial inclusion purposes (i.e., moving from rural cash withdrawal points to fully Commercial sustainability is not only a foundation for sus- fledged, multifunctional agents). Such a shift in thinking tainable financial inclusion but also a basic condition for requires reconsidering the business models of agent maintaining the overall financial system’s efficiency and operations and analyzing the actual needs, demands, and soundness. However, significant barriers remain in achiev- behaviors of rural consumers to ensure that market-driven, ing commercial sustainability for many providers in China. sustainable models are developed. For example, reforms In remote or rural areas with small populations, low could allow for a broader range of services to be provided per-capita income, undiversified economies, and under- by certain agent-based service points, encourage greater developed infrastructure, financial service providers may optimization in the placement of agents, integrate the struggle to operate profitably. In urban areas, financial ser- other payment needs of merchants and users into digital vice providers also face such problems as information payment products, and loosen caps on agent fees and asymmetry, lack of pledges or mortgages, incomplete daily transaction limits. credit data, and high transaction costs. For its part, the government should reconsider prac- Improving commercial sustainability requires a cultural tices that disincentivize the achievement of commercial and business model shift by some financial service provid- sustainability, such as excessive, poorly targeted, and/or ers toward market-driven innovation and customer cen- open-ended subsidies and tax reductions/exemptions, tricity. Financial service providers’ corporate governance, targets for directed lending, and interference in gover- internal management systems, and product design and nance and management. As discussed previously, the delivery approaches must adapt and innovate to achieve government must also reorient its focus to developing the commercial sustainability and compete with new market overall enabling environment for financial inclusion. entrants. Chapter 4 includes several examples of tradi- Aspects of the legal and regulatory framework that hinder tional financial service providers leveraging new technolo- the achievement of commercial sustainability should also gies and adapting to a more dynamic and competitive be reformed, for example with respect to ownership and marketplace, to the benefit of financial inclusion. More of geographic restrictions imposed on microcredit compa- this trend is required to achieve operational efficiency, nies (MCCs) and village and township banks (VTBs). improved customer service, better product and service offerings for the underserved, and more conducive deliv- ery channels to a broader range of customers. The suc- MANAGING RISKS ASSOCIATED WITH 5.4  cess of various financial products and services now offered DIGITAL FINANCE via digital means by new market entrants clearly illustrates that traditionally underserved segments can be served Achieving long-term and sustainable financial inclusion profitably. Indeed, the Plan for Advancing the Develop- requires innovation, particularly to fully leverage digital ment of Financial Inclusion attaches great importance to technologies. Yet digital finance models carry significant the use of technology for expanding the breadth and risks. The 2016 Global Partnership for Financial Inclusion 72   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons (GPFI) white paper64 points out that the evolving risk land- must be equipped with expertise and knowledge about scape for financial inclusion reflects characteristics that are new providers, products, and business models, and suffi- inherent to digital finance: (1) new providers and new cient staffing and resources will be required, including combinations of providers, (2) digital technology, (3) use leveraging digital tools for supervision. In this regard, of agents as a primary interface with customers, (4) new supervisors can also leverage digital technologies to mon- products and services and their bundling, and (5) the pro- itor and manage risks via “regtech,” which Chinese file of financially excluded and underserved customers. authorities are already exploring. For example, modern The implications of these risk characteristics are wide reporting platforms can improve the scope, frequency, and varied. Operational risk is heightened due to the use accuracy, and granularity of data provided to financial sec- of digital technologies, mass scale, and the possibility of tor supervisors, allowing them to monitor the market in large system failures. Consumer risk is heighted due to near real time. Strong and active coordination among concerns such as possible loss or abuse of client informa- supervisory bodies, including outside the financial sector, tion or lack of disclosure regarding the practices of new will also be necessary to reduce overlaps, gaps, and inef- business models. All such risks are further heightened ficiencies—the value of coordination in balancing innova- when regulation lags significantly behind and does not tion and risk is highlighted in the G-20 High-Level constrain irresponsible market practices—factors that are Principles for Digital Financial Inclusion. Learning from particularly relevant for new fintech companies, which other countries and international bodies that are dealing often operate under still-evolving legal and regulatory with similar issues in this fast-moving space will be critical. frameworks. Indeed, at their core, fintech companies per- form the basic functions of finance and therefore have risks common to traditional providers, including liquidity STRENGTHENING NEW-TYPE RURAL 5.5  risk, settlement risk, operational risk, money laundering FINANCIAL SERVICE PROVIDERS and terrorist financing risks, and consumer protection risks. However, many fintech companies have distinct VTBs and MCCs were established in China as new-type characteristics that heighten or expand these common rural financial service providers with the specific objective risks and in some instances generate new risks. China’s of improving financial inclusion in rural areas. As described experience with the peer-to-peer (P2P) industry highlights in section 4.2, though these providers have achieved a these risks and the consequences if such risks are not well certain degree of success—within each provider type, understood and actively managed (the Ezubao case is a high-performing providers can be found—significant notable example, as discussed in section 4.3). The impli- improvements are needed in the operations, governance, cations of these risks of course extend beyond financial and regulatory environment for such providers to better inclusion. They affect the overall safety, soundness, and realize their potential to contribute to financial inclusion. integrity of the financial system and the degree to which For example, major problems VTBs face include high consumers are protected. Of course, providers can also operational and management costs and limited innova- use digital technologies to reduce risks, for example to tion. Major problems MCCs face include a narrow range reduce information asymmetries in lending decisions. of funding sources, high costs, and heavy tax burdens. An Regulatory authorities in China, as elsewhere, there- urgent need also exists to enhance MCCs’ risk manage- fore confront the challenge of balancing the dual objec- ment capacity. Recent years’ practices suggest a severe tives of creating an enabling environment for innovation neglect of risk controls by MCCs seeking to achieve short- while monitoring and managing risks. Indeed, China’s term profits. For example, MCCs have lent large amounts own Plan for Advancing the Development of Financial in loans to steel and iron, trade, and coal enterprises, all of Inclusion emphasizes the need to effectively manage risks whose operations are heavily subject to impacts of the in the financial system. Addressing this challenge requires economic cycle. Both VTBs and MCCs face other regula- evolution in supervisory approaches and capacities. The tory constraints to their operations, resulting in low mar- clarification of regulatory and supervisory responsibilities gins and challenges to sustainable growth. in the 2015 Guidelines on Promoting Sound Develop- Various reforms would be beneficial to improve the ment of Internet Finance was an important first step in this development of VTBs. Fostering more independent gov- regard. The 2016 Implementation Plan for the Special ernance by reducing excessive intervention and control by Campaign to Address Risks of Internet-based Finance was sponsoring banks is necessary and will allow VTBs to more another critical development toward managing risks asso- fully leverage their comparative advantages of operational ciated with financial sector innovation (see box 4.6). More efficiency and flexibility. More flexible capital sources for work remains to establish a comprehensive legal and reg- VTBs should also be permitted. For example, where cer- ulatory framework that reflects the new or heightened tain conditions are met, private capital should be allowed risks posed by digital finance. In addition, supervisors to establish VTBs as the main investors. Multiple VTBs Remaining Financial Inclusion Challenges in China and the Way Forward   73 could also form linkages in the same geographic areas to sizes the need to “support and evaluate programs that achieve efficiencies of scale in management costs. Regula- enhance digital and financial literacy in light of the unique tory reforms may be needed to enable such actions. characteristics, advantages, and risks of digital financial With regard to MCCs, the following reform options services and channels.” should be considered: (1) define the role and purpose of A 2017 PBOC survey revealed that Chinese consumers MCCs more clearly and incorporate this purpose into perform well in some aspects.65 For example, they view high-level institutional documents; (2) review the legal and financial consumer education positively and tend to be regulatory framework to remove barriers to MCC opera- rational in consumption, savings, and credit; families often tions, such as increasing the permitted percentage of have expenditure plans; consumer behavior on loan appli- external financing, providing more flexible leverage ratios cations and credit card repayment is reasonable; and con- for qualified MCCs, and allowing for expanded operations sumers usually know how to get financial knowledge and beyond a single county’s boundaries; (3) establish greater how to resolve financial disputes. consistency across provinces with regard to the regulatory However, the 2017 survey revealed less satisfactory and supervisory framework for MCCs, in particular aspects, including relatively low risk awareness among addressing those localities where high entry barriers are consumers, lack of execution on family expenditure plans, imposed; (4) undertake efforts to enhance MCCs’ risk con- and insufficient understanding and usage of contracts and trol capacities; (5) leverage tax policies to incentivize statements of financial products. The overall level of finan- MCCs to serve target sectors and populations; and (6) cial knowledge is relatively low, and a significant imbal- conduct ratings of MCCs for financial inclusion objectives ance exists between rural and urban areas and among and allow those MCCs that obtain higher ratings to trans- different regions. Relatedly, in some regions, a poor credit form into VTBs. These reforms can help to increase MCC’s culture exists among enterprises, individuals, and even commercial sustainability and allow them to further con- local governments, with some parties having a low regard tribute to reaching the underserved. for commercial credit or the financial obligation that it In addition, new-type rural financial service providers entails. In addition, financial consumers’ lack of knowl- should better leverage digital technologies. With the edge about digital technologies discourages them from development of telecom infrastructure, improvements in using digital financial services or leaves them vulnerable rural financial infrastructure, and rapid dissemination of to inappropriate products and services, undermining their smartphones in rural areas, digital technologies have pen- self-interest and leading to problems and risks in the etrated into all economic and social sectors. Such expan- development of digital finance. sion in ICT infrastructure should be better utilized by Effective financial consumer education can facilitate the new-type rural financial service providers to reach custom- development of financial inclusion. To achieve this objec- ers via new models and faster, lower-cost channels. To tive, financial literacy surveys conducted on a regular and achieve further development, new-type rural financial ser- long-term basis can help establish and monitor the knowl- vice providers should also leverage digital technologies in edge level of consumers and their behavioral changes. By management, product research and development, mar- identifying the weaknesses in financial knowledge and keting, customer service, and other fields. behaviors of consumers, these surveys can also help to inform the design and improve the effectiveness of finan- cial education activities. Such activities should focus on IMPROVING THE FINANCIAL CAPABILITY 5.6  conveying the basic financial knowledge needed in daily OF CONSUMERS life, tailored for various types of consumers, to ensure that consumers obtain financial knowledge compatible with The financial literacy and financial capability of consumers their needs, behavioral characteristics, and existing knowl- is a critical supporting element of financial inclusion. It is edge levels. Educational efforts should also help guide particularly important given the increasingly digital nature consumers in how to correctly use financial knowledge and of finance, which requires additional capabilities for con- how to conduct self-appraisal of risks and select suitable sumers to successfully identify, take up, and use appropri- financial products according to their own risk-bearing ate financial products and services. Principle 6 of the G-20 capacity and the risk characteristics of relevant products. High-Level Principles for Digital Financial Inclusion empha- NOTES GPFI (2016). 64.  This survey comprehensively reflects the financial literacy status of existing Chinese consumers from multiple angles such as 65.  attitudes, behaviors, financial knowledge, and financial skills (PBOC, 2017). 6 GLOBAL LESSONS AND IMPLICATIONS FOR POLICYMAKERS The preceding chapters of this report have traced approaches, policymakers in other countries that seek to China’s path to financial inclusion and highlighted remain- emulate China’s successes should assess the degree to ing challenges. This chapter aims to distill six significant which the cultural, political, and economic factors in their and globally relevant lessons from China’s financial inclu- own countries facilitate the models that have proven suc- sion experience to guide other countries in meeting their cessful in China; adapt these lessons from China appropri- own financial inclusion objectives. China’s multifaceted ately for their own context; and seek to uncover where experience with financial inclusion provides a wealth of other opportunities may lie within the unique characteris- lessons concerning such globally relevant issues as reach- tics of their own environments. ing the last mile, allowing regulatory space for digital innovation, moving toward a market-based and sustain- able approach, leveraging financial infrastructure, and 6.1 REACHING THE LAST MILE determining the appropriate role of government in enabling financial inclusion. Large-scale, policy-driven initiatives, including improving A caveat to keep in mind regarding the following les- financial infrastructure, expanding rural branch networks sons: progress and successes achieved in reaching full and access points, and digitalizing large-scale recurrent financial inclusion necessarily reflect each country’s payment streams, can enable and drive substantial and unique culture, political economy, and development meaningful progress toward reaching last-mile segments context. Lessons from any one country’s experience must with basic transaction accounts and access points, but therefore be considered in the context of these factors. further efforts are needed to achieve sustainable and For example, China’s savings culture has been an import- long-term financial inclusion. ant driver of high account penetration. Similarly, the suc- cess of nontraditional financial service providers in China As noted in previous chapters, one of China’s most prom- is closely linked to the structure of China’s financial mar- inent and undeniable success stories has been the high kets in the early 2000s, which created significant levels of financial access achieved, both in terms of physi- “pent-up” demand for financial products and services cal access to financial services and in terms of uptake of among the general population. China’s progress in transaction accounts. As of 2014, account penetration in reaching the last mile also cannot be separated from the China stood at 79 percent, higher than most developing active role and function of the government in Chinese countries and even higher than the G-20 average of 76 society. And finally, China’s impressive track record of percent.66 This high level of financial access to under- economic growth and poverty alleviation in recent served population segments can be attributed to a com- decades is important context for analyzing the latest bination of various factors, in particular complementary gains in financial inclusion. and sustained government policies that together have Therefore, just as China has pursued its own path to enabled and driven significant increases in physical access financial inclusion through a mix of global and domestic and uptake of transaction accounts.   75 76   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons The Chinese government has invested substantially in type rural financial service providers have not reached sig- expanding and improving China’s financial infrastructure, nificant scale. It is also questionable whether commercial particularly the retail payment systems (further discussed banks’ current efforts to operate in rural areas, including in section 6.2). In addition, the People’s Bank of China via special sub-branches, are commercially viable, and (PBOC) has encouraged and facilitated the establishment hence sustainable over the long term. Therefore, while of one of the widest point-of-sale (POS)–enabled interop- impressive physical access has been achieved via poli- erable agent networks in the world in absolute numbers, cy-driven efforts, it is less clear how fully sustainable such significantly increasing the number of physical access results are and how far financial inclusion can evolve mov- points for rural and underserved populations in villages ing forward. across China. Legal reforms have allowed the establish- The Chinese experience suggests that achieving sus- ment of new-type rural financial service providers such as tainable, long-term levels of financial inclusion for the last microcredit companies (MCCs) and village and township mile requires a carefully strategic and nuanced approach, banks (VTBs), and banks have been encouraged to estab- in addition to multipronged efforts that fully leverage vari- lish special sub-branches in rural areas. Preferential pru- ous government roles. In some ways, the last mile can be dential rules have been used to encourage lending by considered a heterogeneous group with different sets of financial service providers to rural areas. Government needs and obstacles. What does reaching the last mile transfers have also been consciously leveraged as a driver mean? Some underserved segments in remote and rural for financial inclusion.67 Social transfers for programs ben- areas are commercially active, whether formally or infor- efiting rural and agricultural households (i.e., agricultural mally, and have unmet needs for various financial products subsidies, rural pension insurance, rural medical insur- and services. They therefore need appropriately designed ance, etc.) must typically be received via cards linked to and tailored financial products and services, beyond sim- free bank accounts. Such efforts to digitize social transfers ple physical access and basic transaction accounts, and from cash to payment cards have been deliberate and can presumably be served sustainably via low-cost, inno- large scale in nature, with the policy objectives of incentiv- vative methods. Achieving financial inclusion for such con- izing account opening for providers and encouraging sumers will require moving beyond account ownership account ownership for all subsidy recipients. In 2016, and access points that provide transactional services to more than two billion transfer payments (totaling RMB achieving similar results in meeting the needs for financial 499 billion [US$75 billion]) were disbursed to recipients’ products such as credit and insurance. However, other bank accounts and debit cards from rural pension insur- segments of the last mile may be so remote and excluded ance and rural medical insurance schemes and subsidies that serving them may not be commercially viable without for rural households.68 targeted government intervention, or they may have other The Chinese experience demonstrates that the cumu- basic livelihood needs that supersede the need for finan- lative and synergistic effect of these various government cial products and services. Better understanding the policies can enable the growth of extensive physical nuances within the last mile and designing appropriate branch networks and access points in rural and under- policy initiatives for these nuances will be important. served areas and incentivize and facilitate account open- ing on a large scale. A multipronged approach such as the one taken in China is clearly necessary to tackle such a INVESTING IN FINANCIAL 6.2  fundamental issue as reaching the last mile. Chinese poli- INFRASTRUCTURE cies have successfully harnessed the power of the various roles government can play (e.g., via infrastructure, incen- Efforts to expand and improve financial infrastructure— tives, regulation, direct intervention, and moral suasion) to particularly for credit and payments—can significantly increase financial inclusion via account ownership in rural improve access, usage, and quality of financial services and remote areas. by individuals and micro and small enterprises (MSEs). However, the Chinese experience also highlights cer- tain intractable challenges common to policymakers While the products and services nontraditional financial across the world when trying to reach the so-called “last service providers offer have garnered significant atten- mile.” One key challenge relates to sustainability and tion in China in recent years, the role of traditional finan- commercial viability (also discussed in chapter 5). Whether cial infrastructure development in expanding access, the model of agent-based service points can become a usage, and quality of financial services in China cannot more fully fledged, commercially viable operation is an be understated. Financial infrastructure—the set of insti- open question. Similarly, many rural credit cooperatives tutions that enable financial intermediation—covers (RCCs) are constrained by governance issues, while new- credit infrastructure (including credit reporting, secured Global Lessons and Implications for Policymakers   77 transactions, and insolvency systems) and payment sys- reduced barriers to access for basic financial products for tems infrastructure.69,70 all adults. Relatively widespread Internet and mobile net- Several developments have contributed to strengthen- works have allowed hundreds of millions of consumers to ing the scope and quality of China’s credit infrastructure, use Internet-based digital financial services. including a core legal framework and registry system for China’s experiences demonstrate that establishing a secured transactions that was established in the mid- robust and comprehensive financial infrastructure ecosys- 2000s, credit reporting regulation and guidelines issued tem is an effective and critical role of government in since 2000, the 2006 Enterprise Bankruptcy Law, and the enabling financial inclusion. Indeed, China’s experience in 2007 Property Law (see section 4.4). Recent empirical this area was key to informing Principle 4 of the G-20 High studies have validated China’s investment in credit infra- Level Principles for Digital Financial Inclusion (see box structure, finding a clear relationship between financial 6.1). While efforts to intervene directly in financial markets infrastructure and financial inclusion. In one 2010 study, can generate distortions and fiscal stress, investments in researchers collaborated with a large domestic bank to financial infrastructure that enable competition, innova- study how the introduction of credit information sharing tion, and overall financial sector efficiency provide wide- via a public credit registry system affects bank lending spread positive benefits across providers and products decisions. The researchers found that borrowers whose and are arguably a more efficient, appropriate, and creditworthiness assessment included information from other institutions via the registry received higher levels of credit as compared with borrowers with information derived only from the lending bank itself.71 BOX 6.1 China has also made significant progress toward the The G20 High-Level Principles for Digital development of a comprehensive and robust national Financial Inclusion payments system infrastructure. These efforts to improve the reach, efficiency, and safety of China’s national pay- In 2016, the Global Partnership for Financial Inclusion (GPFI), under ments system have enabled improvements in interopera- the presidency of PBOC, proposed digital financial inclusion as the bility and competition and are also a key factor in the key topic for the year. The GPFI subsequently established the Digital significant expansion and diversification of physical access Financial Inclusion Technical Team comprising experts from nine points throughout China, including commercial bank international organizations to draft the G20 High-Level Principles for branches, sub-branches, agents, new-type rural financial Digital Financial Inclusion (referred to hereafter as HLPs). In Septem- service provider branches (e.g., VTBs and MCCs), ATMs, ber 2016, G20 leaders at the Hangzhou Summit officially approved and retail POS terminals. From the consumer perspective, the HLPs, which serve as the first international high-level guidelines the result is a wider range of available products (e.g., in the field of digital financial inclusion. The HLPs include 66 actions debit cards and digital payments) with increasingly diverse spanning eight principles to guide and advise national authorities applications and a steady reduction in direct and indirect and relevant stakeholders in the development of digital financial costs (e.g., cost of transportation) associated with the inclusion. The principles are as follows: uptake and use of payment products, particularly noncash payment instruments. From the provider perspective, 1) Promote a digital approach to financial inclusion, expanding the national payments system into rural areas 2) Balance innovation and risk to achieve digital financial inclusion, has provided a more viable business case for supporting 3) Provide an enabling and proportionate legal and regulatory new business models and products to service such areas, framework for digital financial inclusion, including nonbank digital payment providers, online-to- offline linkages, and adjacent financial products and ser- 4) Expand the digital financial services infrastructure ecosystem, vices built off of payment services. The underlying 5) Establish responsible digital financial practices to protect con- payment systems infrastructure has also enabled the sumers, large-scale shift of government-to-person (G2P) payments 6) Strengthen digital financial literacy and awareness, to electronic instruments, bringing millions of Chinese adults into the formal financial system. 7) Facilitate customer identification for digital financial services, and The development of information and communication 8) Track digital financial inclusion progress. technology (ICT) infrastructure has also helped improve access, usage, and quality of financial services in China. A complete description of these principles and related actions are Specifically, the national ID system has reduced the costs available at http://www.gpfi.org/publications/g20-high-level- of customer due diligence efforts and, with a national ID principles-digital-financial-inclusion. sufficient to open a basic savings account, has significantly 78   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons impactful use of government resources for supporting user ratings, and revenue growth to better understand sustainable, long-term financial inclusion. customers’ financial behaviors and needs, enabling Ant Financial to better manage risks and provide targeted products, and to access Alipay balances in the case of late 6.3 LEVERAGING ONLINE NETWORKS payment or default for consumers within the Alipay eco- system. Such advantages allow these fintech companies Online, network-based business models (e.g., e-com- to provide their financial products at greater convenience merce and social networks) can facilitate the design and and speed, at lower cost, and at a larger scale due to the delivery of innovative financial services by leveraging aforementioned factors. network effects, technology, economies of scale, big Tencent’s WeChat is China’s largest social networking data, and cross-subsidization opportunities. platform with more than 800 million users. In 2013, WeChat users gained direct access to Tenpay, Tencent’s Most financial service providers are established with the digital payment product, which allows users to send and explicit objective of offering payments, savings, credit, or receive payments, withdraw money to bank accounts, insurance products to individuals and/or firms. Yet as etc. The integration of a payments tool into a social Internet-based companies enhance the breadth and media platform has proved to be a massively successful depth of commercial and social networks, a new model model that allows users to blend social and financial has emerged that integrates financial service provision interactions, including sending “gifts” or remittances. within existing online ecosystems. China’s path to digital For example, more than eight billion “red envelopes” financial inclusion exemplifies this model. Alibaba and were sent via Tenpay during the 2016 Spring Festival, up Tencent—established as an e-commerce platform and from 20 million in 2014.73 social network platform, respectively—now both operate While these models have demonstrated the significant as major players in the financial services market in China.72 opportunity to offer complementary financial products These online, network-based companies have several and services to consumers within existing Internet-based comparative advantages to other financial service provid- commercial and social ecosystems, consumers outside ers, including: such networks—often disproportionately the poor, rural, and elderly—may gain limited or no financial inclusion • Ability to access large, existing customer networks and benefits from such models. Thus it is worth noting that the existing customer relationships instantly; primary role of these particular business models may be to • Ability to leverage big data produced via commercial deepen levels of financial inclusion by providing addi- or social interactions to inform product design and tional and/or improved financial products and services to delivery and reduce information asymmetries (e.g., for those with some existing degree of financial access, rather creditworthiness assessments); than broaden levels of financial inclusion by reaching last- mile consumers. In addition, such complementary ser- • Ability to realize low transaction costs and efficient vices may not necessarily address all the unmet needs of delivery by leveraging existing digital infrastructure consumers. The policy implication is that this model is not (e.g., cloud computing services and databases) and a silver bullet to achieve comprehensive financial inclusion digital delivery channels; and for all and must be complemented with other business • Ability to take advantage of synergies between core models and deliberate policy and regulatory efforts to commercial/social interactions and financial services reach last-mile consumer segments. (e.g., facilitation of commercial interactions and “gift- ing” culture). ENABLING MARKET ENTRY AND 6.4  For example, Ant Financial’s suite of financial products— INNOVATION including Alipay, Yuebao, Ant Check Later, and MYbank— arose from the Alibaba e-commerce platforms. Alibaba’s A “wait and see” regulatory approach can help foster first foray into financial products was Alipay, developed to initial development of new digital finance models, but facilitate transactions between buyers and sellers on Tao- must be accompanied by active monitoring that leads to bao. In essence, Alipay integrates a financial service into a the timely development of a regulatory framework that commercial network, taking advantage of the conve- addresses the attendant risks of digital finance. nience (for the consumer) and economies of scale (for the provider and the consumer) of housing both services Most policymakers and regulators seek to achieve a bal- within the same platform. Yuebao, Ant Check Later, and ance between fostering innovation and financial inclusion MYbank similarly leverage the comparative advantage of and providing the necessary regulation and supervision to having access to a huge supply of digital transaction data, Global Lessons and Implications for Policymakers   79 ensure financial stability, financial integrity, and responsi- dates of different financial sector authorities and notes ble market conduct by providers. In practice, this may several areas where additional regulation is required, mean permitting new providers, products, services, or including related to reserve fund management, informa- business models to enter the market in the absence of a tion security, anti-money laundering, and disclosure and well-defined regulatory framework, thereby allowing inno- transparency.76 Similarly, a special multiagency campaign vations to achieve scale and granting national authorities was launched in April 2016 to address the risks of fintech time to develop a regulatory approach that achieves these and to promote the healthy and orderly development of multiple policy objectives and reflects actual market fintech, with clear standards established. dynamics and risks. Of course, the monitoring and management of risks The Chinese experience demonstrates both the merits that emerge with new providers, products, and technol- of this approach and the associated risks. Recent growth ogy merit significant consideration. The “wait and see” in China’s fintech industry has been driven by nontradi- approach taken with the peer-to-peer (P2P) industry, for tional providers (e.g., e-commerce companies, social net- example, was not without costs. It has been reported work companies, crowd-sourcing platforms, Internet-only that at least one million investors have lost money banks, and credit scoring services) that, largely operating through fraudulent P2P service providers in China. This in the absence of a specific and relevant regulatory frame- experience serves as a useful reminder that the risks of work, were able to more easily enter the market with inno- digital finance (particularly related to financial security, vative products and delivery models and, in some cases, fraud, and consumer protection) must be closely moni- achieve massive scale.74 By contrast, traditional providers tored. The challenges of risk monitoring and manage- were somewhat more constrained by the parameters of ment are constant and remain a significant challenge for existing regulatory frameworks and the incentive (or disin- China, as discussed in chapter 5. centive) structure of existing market dynamics. The out- Other countries seeking to achieve China’s level of come of this “wait and see” approach—a large, dynamic, success in fostering a thriving fintech industry that is con- and competitive fintech industry—suggests that this ducive to greater financial inclusion may benefit from pur- approach can be beneficial in achieving the policy objec- suing a more deliberate “test and learn” approach to tive of enabling financial innovation, although it raises nontraditional providers and products, as opposed to a potential concerns and considerations for other policy- “wait and see” approach. China’s experience suggests a makers considering a similar approach given noted inci- possible segmentation into three phases: (1) active mon- dences of fraud and misconduct among certain players in itoring of new, unregulated providers, including along the fintech industry. dimensions of scale, stability risks, integrity risks, and As a result, policymakers in China have now moved consumer protection risks; (2) issuance of high-level prin- from the “wait and see” approach toward establishing a ciples or risk warnings to guide market development; and more comprehensive regulatory framework for new pro- (3) issuance of a specific regulatory framework, covering viders and products to ensure the long-term integrity and responsible authorities and licensing procedures, pru- stability of the financial system and adequate protections dential requirements, regulations for financial consumer for consumers. The Government of China’s 2015 Guide- protection, and supervisory powers, responsibilities, and lines on Promoting Sound Development of Internet functions. Key considerations will be the active monitor- Finance—coming after several fintech companies had ing of risks and appropriate timing of the issuance of already reached massive scale—represents a significant high-level principles and/or regulation, as moving to step in the development of a comprehensive regulatory these stages should not be unduly delayed if risks are framework for fintech and an important evolution past the observed in the market. piecemeal, “wait and see” approach taken up to that Financial sector authorities may also wish to consider a point.75 The Guidelines specifically encourages the devel- “regulatory sandbox” approach, which provides more opment of existing and new types of digital financial ser- structure than the “test and learn” approach while still vices, but emphasizes that these services should be providing the flexibility for innovation. The “regulatory limited to small-value transactions. It also encourages sandbox” approach allows for the launch and testing of more partnerships between fintech companies and tradi- new technologies into a market under waived or modified tional financial service providers, as such innovative part- regulations but with clear guidelines in place, including nerships also pose significant opportunities to achieve specific parameters on number of customers or the bal- greater financial inclusion by combining the power and ance or value of products and services being tested and efficiencies of fintech and digital finance with the existing specialized monitoring and reporting requirements. The operational and compliance structure, client relationships, testing may continue for a certain period of time (e.g., six and physical networks of traditional service providers. to 12 months), at which time financial sector authorities Importantly, the Guidelines clarifies the regulatory man- may develop rules based on assessed risks.77 80   Toward Universal Financial Inclusion in China  |  Models, Challenges, and Global Lessons Regardless of approach, the specific regulatory frame- experimentation and innovation at local levels, which are work that ultimately develops should directly address risks specifically needed for areas that experience significant identified with new innovations, while accounting for the market failures (such as more remote and rural areas). In heterogeneity of digital finance models. China’s experi- many cases, the “pilot” status grants programs a certain ence demonstrates the value of a regulatory approach degree of policy or regulatory expediency and flexibility. that promotes innovation, while also highlighting the Therefore, policy pilots can be useful instruments to test need to actively monitor and promptly address risks. The remedies that address constraints in policy and regulatory ultimate aim is to create an environment that is fair and frameworks. balanced for all stakeholders and proportional to the dis- However, the top-down approach to certain policy tinct stability, integrity, and consumer protection risks that pilots that involve new business models (i.e., agent-based fintech companies and digital finance pose. models) or institutional types (i.e., MCCs) also highlights the need for authorities to ensure that promoting such ini- tiatives does not ignore the need for long-term commercial 6.5 INNOVATING WITH POLICY PILOTS sustainability. Preferably, pilots should prove their potential for long-term viability before mass expansion. In this Pilots can be a useful tool for governments to test and regard, authorities should have in mind an exit strategy for scale policies and initiatives for financial inclusion, as policy pilots and anticipate that further experimentation long as the promotion of such pilot programs aligns and adjustment may be needed in the post-pilot stage to with the principles of long-term fiscal and commercial enable long-term success. sustainability. As noted throughout this report, various Chinese govern- 6.6 PROTECTING CONSUMERS ment authorities, including PBOC, CBRC, China Insurance Regulatory Commission (CIRC), Ministry of Finance (MoF), Ensuring that consumers are treated fairly and have and local governments, have employed policy pilots— access to transparently provided products and services government-initiated small-scale explorative pilot pro- and redress mechanisms is a critical policymaker function grams—to introduce new practices and models to that must accompany increased financial inclusion and advance financial inclusion. The Chinese experience is keep pace with both financial innovation and financial characterized by many policy pilot programs, initially deepening. shepherded by a set of provisional policies with stated objectives and regulatory parameters. As pilots were Financial consumer protection is a critical complement to rolled out, the provisional policies were reviewed and increased financial inclusion. Consumers often face imbal- adjusted, and where pilot programs were successful, the ances of power, information, and resources in comparison provisional measures were formalized as official policy to financial service providers. Such imbalances are further and rolled out nationally. The 2005 MCC pilot program is exacerbated in the case of previously underserved or one example. Drawing lessons from previous bank-based unserved customers entering the formal financial sector poverty alleviation and nongovernmental organization for the first time. Financial consumer protection frame- (NGO)–led microcredit programs, national authorities works are intended to address these imbalances and pro- piloted a new institutional structure (MCCs) as a strategy tect consumers, ensuring that the benefits of financial to develop the microfinance market and increase compe- inclusion are realized while also contributing to the tition in the financial sector, given the obstacles posed by broader safety and soundness of the financial system. the existing banking legal and regulatory framework. This Since the global financial crisis, policymakers around model was later adapted and embedded into the national the world have focused much greater attention on financial regulatory framework. The development and subsequent consumer protection, and China is no exception. In recent scale-up of agent networks for rural cash withdrawal ser- years, Chinese policymakers have taken important steps to vices and G2P digitization also followed the pilot lay the groundwork for a strengthened financial consumer approach, launching first in a few provinces and later protection framework. Regulations and directives have being further adapted and implemented nationwide. been issued covering key aspects of consumer protection, The Chinese experience shows that policy pilots can such as disclosure, business conduct, and dispute resolu- offer unique opportunities for financial sector authorities to tion, and financial consumer protection divisions have “learn by doing” and balance risk management with policy been established within various financial sector authorities. entrepreneurship. Further, policy pilots can be politically The China experience illustrates the critical need for appealing. The small scale and the trial nature of policy such efforts to continually evolve to keep pace with finan- pilots can lower perceived risks and further encourage cial deepening and financial innovation. Gaps remain in Global Lessons and Implications for Policymakers   81 establishing a comprehensive framework for financial con- ened consumer protection risks. These risks are illustrated sumer protection in China, including the absence of a by the problems experienced with P2P lenders running financial sector–specific consumer protection law; the need away with investors’ funds, or everyday retail investors los- to improve proactive supervisory activities, such as ing their savings in financial management products due to increased market monitoring and data analyses; the lack of not fully understanding these products and/or having strong enforcement measures; and the need for improved such products mis-sold to them. The Chinese experience coordination across financial consumer protection supervi- serves as a useful reminder that existing frameworks must sors, particularly with respect to cross-product and cross- be fleshed out and strengthened to ensure that they prop- market issues. erly cover the risks associated with digital finance, whether The potential vulnerabilities that arise from these gaps relating to digital delivery, data protection and privacy, are magnified by the speed and scale with which everyday limited digital financial capability from the consumer side, consumers are entering the formal financial sector in tailored disclosure requirements for innovative products China and engaging with innovative new digital financial and associated risks, or new types of providers or partner- products and providers—all good things from a financial ship arrangements that may not fit neatly within existing inclusion perspective, but accompanied by new or height- regulatory ambits. NOTES Percent of adults (age 15+) reporting ownership of a transaction account, as indicated by Global Findex. See previous discussion 66.  in chapters 3 and 4 regarding other estimates of account ownership in China. CPMI (2016) provides further description of the drivers and enablers of financial inclusion from a payments and transactions 67.  account perspective. 68. PBOC. Key elements of a robust credit infrastructure include credit reporting systems, a secured transactions framework, and the 69.  insolvency regime. On the payments side, interbank systems for retail electronic fund transfers, a payment card processing platform, and a large-value interbank settlement system are critical. China’s approach to expanding financial inclusion through investments in financial infrastructure broadly aligns with a major 70.  finding from the Global Financial Development Report 2014: Financial Inclusion (World Bank, 2014), which notes, “Policy recommendations to support a more financial diverse landscape encompass . . . strengthening financial and lending infrastructure, including commercial laws, bankruptcy laws, and contract enforcement.” Cheng and Degryse (2010). 71.  This model is related to but distinct from fintech companies, which are generally founded as start-ups with the objective of using 72.  technology to disrupt incumbent financial service providers. The model discussed here relates to the integration of financial service business lines into already established Internet-based social and commercial network companies. “Over 8 billion “red envelopes” were sent over WeChat during Chinese New Year”, https://qz.com/613384/over-8-billion-red- 73.  envelopes-were-sent-over-wechat-during-chinese-new-year/. Much of the explicit regulatory actions relevant to digital finance prior to 2014 was directed at traditional providers of financial 74.  services, including the 2006 Rules on the Administration of Electronic Banking and Guidelines on E-banking Security Evaluation issued by the China Banking Regulatory Commission (CBRC). PBOC and nine other ministries and commissions (2015). 75.  For example, PBOC is responsible for the regulation and supervision of Internet payment services, while CBRC is responsible 76.  for the regulation and supervision of online lending services, and China Securities Regulatory Commission is responsible for regulating and supervising equity crowd-funding activities and online fund sales services. Such an approach has been used in Malaysia, Singapore, and the United Kingdom, among others. 77.  REFERENCES Analysys. 2016. “China’s Third-Party Payment in the Fourth Quarter of 2016.” Access at https://www. analysys.cn/analysis/22/detail/1000702/. Banerjee, A., E. Dufo, R. Glennerster, and C. Kinnan. 2013. “The Miracle of Microfinance? Evidence from a Randomized Evaluation.” CEPR Discussion Papers 9437. Center for Economic Policy. Access at http://cepr. org/active/publications/discussion_papers/dp.php?dpno=9437. Bruhn, M., and I. 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