(File photo)

The banking industry in China is undergoing a fundamental shift as traditional banks are challenged by internet and AI fin-tech firms, Chinese economists pointed out at a recent summit.

Addressing the Future Financial Innovation Summit on May 26, Yang Yanqing, director of the CBN Research Institute, said that technology, as the most important force pushing for change in the world today, is gradually wielding greater and greater influence on the country’s financial industry. The summit was held jointly by CBN Research Institute, Future Forum and Xiamen International Bank in Beijing.

Fin-tech firms are becoming shadow banks, posing an increasingly powerful force in the banking industry. They have in turn prompted a revolution among traditional banks, Yang noted.

Zhu Min, chairman of the National Institute of Financial Research at Tsinghua University, said at the summit that the internet-plus era of the past few years has made it easier access for fin-tech firms to serve a vast number of clients at a rapid pace that far surpasses that of traditional banks.

According to Zhu, the cost of human labor has been cut significantly thanks to the internet, which additionally offers an astronomical database compared to ordinary banks. The rise of AI technology has worsened the situation for traditional banks, as AI can provide more information on a client’s bank account, trading record and behavioral and biometric data. This information serves to control risk in a particularly effective way.

These extra services go beyond the capacity of a traditional bank, upgrading information and wreaking a fundamental change on the banking industry ecology, noted Zhu, also a deputy managing director of the International Monetary Fund.

In fact, Chinese fin-tech companies have already made biometric analysis a common practice, as almost all financial apps use fingerprint recognition for payments, and some also use voice or facial recognition.

Chen Long, chief strategy officer of Alipay, offered as an example at the summit that his company received 8 million customer support calls during last year’s Double-11 shopping holiday on Nov. 11.

“If all the calls had been handled by humans, it would have required tens of thousands of people, but 97.5 percent of the consultations were fielded by AI,” he explained. Similarly, Alipay has offered small loans to more than 6 million small enterprises and startups in the past six years. On average, the loans are less than 30,000 RMB each.

“It was done according to 3-1-0. That is, it takes three minutes to submit the application and you can get the loan in one second with zero human labor. An online banker can ‘meet’ with tens of thousands of applicants in a day, which is impossible for traditional bankers,” Chen added.

However, comparison between data on payment and clearing services for traditional banks and non-bank financial institutions shows a huge gap in the capital pool, where traditional banks still hold an advantage.

Data revealed at the summit showed that commercial banks dealt with over 2 quadrillion RMB in online payment in 2016, while the non-bank sector saw less than 55 trillion RMB. However, data did suggest a much higher growth rate in the non-bank sector (120 percent) than for commercial banks (less than 4 percent).

At the same time, traditional banks are actively responding to the challenge by integrating new technology into their operations, such as online banking services. Some are also trying to compete in the e-commerce market, such as the Industrial and Commercial Bank of China, whose e-commerce platform has become China’s third largest.

“With the development of internet and AI, the future holds huge potential for all financial institutions, both fin-tech firms and traditional banks. The competition will be open, fair and transparent,” Zhu said.

As the industry evolves, Professor Gao Xiqing at Tsinghua University School of Law pointed out that regulations supervise the innovation-led financial market, but it is common for innovative minds to go beyond the current policy, thereby forming a development circle.

Gao, also the former president of China Investment Corporation, emphasized that the financial market is the most active force working to integrate all resources at the core of the modern economic system. He suggested that regulators supervise the market with a negatives list instead of an overall regulatory watch of the whole industry, so as to leave more space for financial innovation.