Three myths of the internet finance
Recently, three statements are very popular in China: "the internet finance is a cheap alternative to outlets of financial institutions", "there is no internet finance in the United States", "China enjoys a better internet finance than the United States"; however, these statements are totally nonsense.
In the first wave of the internet development, the internet finance went on the “online discount broker” mode, through which investors did their transactions with discounted commissions. Thus, "discount channel" seemed to become a standard business mode of the internet finance for a very long time. Even today, a large number of traditional financial institutions in China, including brokerage firms and banks, are still confined to the "discount channel", regarding that the internet finance is the “cheap alternative to the outlets”.
Is that really so? In fact, the PayPal appeared a long time ago is the first impressive mode to break away from the "discount channel". At present, we classify it in the "third party payment". PayPal was bought by eBay with 1.5 billion dollars and accounted for only 8% of the market value of eBay at that time, while today PayPal contributed a net profit of nearly 40% of eBay. It develops three times faster than the physical trading. And China's PayPal is the "Alipay", which contributes hundreds of billions of dollars to the Alibaba Company.
“The third party payment” is the first step which the internet finance breaks away from the traditional financial world. Yet this step is far from completed. Currently, the profit mode of the third party payment is still the traditional "commission fees" mode. And sometimes "interest margin" mode may also be included for the profit. Here we take "Alipay" to explain "interest margin": adding the "Alipay", three parties involved in a contract instead of two parties and "Alipay" gets interest margin through the retention periods of advance payments.
Both the "commission fees" mode and the "interest margin" mode of the third party payment contribute a little to the traditional finance, so they were despised by the traditional financial elite. This was changed by the birth of Ripple - it enables secure, instant and nearly free global financial transactions of any size with no chargebacks. We can see that its competitiveness is to provide a more efficient "matching" service. There are three cornerstones that make the internet finance different from and go beyond the traditional finance. The rapid improvement of matching efficiency and exponential decline of matching cost are one of the cornerstones. The importance of high matching efficiency to the internet finance is similar with the improved searching engine to internet.
The second cornerstone of the internet finance is the risk management. The cores of risk management in traditional finance are measurement and processing. Measurement for traditional credit risk is very rough. And there are only three measures to manage risks: preparing risk provisions, requiring mortgage and paying deposit reserves required by regulators. As a result, the cost for interest is very high. Traditional insurance is no better in managing risks. In the insurance premiums which are paid by the users, the main part is the transaction fees.
Let’s take a look at how internet giants play.
Google is subverting and rewriting the entire insurance industry.
As we all know, Google has been engaged in driverless cars. On May 8, 2012, Google's driverless car got the driving license issued in Nevada. The technological support is to collect and do intelligent processing of the sensor information at 750 megabytes per second, that is to say “the driverless = 750M / s data collection and processing”. This is the big data. According to the estimates made by GM's Alan Tauber, similar autopilot system will be seen in any car by 2020. This means that the car-insurance industry will be redefined. Every vehicle's insurance will be different and will be only one tenths of the current price.
Google's ambition is far more than this. The driverless car is only a small trial for Google to redefine the insurance industry. Google is producing and collecting nearly all the data associated with human life trough Google glasses, its wearable devices and its open platform. In Google's blueprint, the data generated by an individual each day will be the same with the sum of all the existing information data in the world today. This means that, in the ocean of the formatted data, the traditional life insurance industry will be completely disorganized and life insurance will be a fraction of current life insurance, while health insurance will get explosive growth and will have a more competitive price.
Amazon has the opportunity to become the world's major producer of CDS. CDS will be the main means of managing the default risk of internet finance. According to its understanding and processing ability of the transaction data, Amazon has a full grasp of credit default probability of its upstream supply chain, so it is a piece of cake for Amazon to create a dynamic CDS for suppliers. In China, Alibaba and JD.com, Inc. have a similar capability.
Amazon is very close to the level of building a dynamic CDS for its core consumers. This is the E-commerce in the true sense as each individual is entitled to the capability to issue the bond. For consumers, this means that his consuming ability gets rapid improvements; for sellers, this means that they can implement the personalized pricing to goods; for the production side, this means that many products and services which are disappearing due to cost or pricing can relive.
For the entire internet industry, as the ability to identify massive defaults and price risks rises to the core assets, the entire E-commerce industry will be more concentrated. The complementary assets of core assets or the underlying assets which can add value to the core assets also have the opportunity to be re-priced and re-assembled, for example, the social networks which are able to provide default information have a large probability of being integrated, therefore, the value of social networks will be revalued.
Also, there are industries that will take hits. With the dramatically reduced cost of credit measurement and default probability measurement, people can get loans without mortgage and get rid of their balance sheet constraints. This will greatly hit the traditional commercial banks.
The third cornerstone of the internet finance is the infinite split of the trading unit. "Can the minimum credit unit be 1 dollar?" This is not a fairy tale; in fact, "peer-to-peer lending" has reduced the minimum unit to 25 dollars.
Human-computer interaction and interactions between people have a rapid increase in intensity. The cost for computing capability and communication capability decreases exponentially, with a total capacity increasing exponentially. The combination of these make the smallest unit of single credit and single equity financing can be reduced to a dollar, and even to a cent! This means that the diversification of risk will become a reality and the related transaction costs can be greatly reduced. Also, this means the maximization of the opportunity to choose portfolio will become a reality and the transaction costs due to the high threshold can be near to the minimum.
With the advancement of matching technology and matching facilities, the accumulation of matching assets and combination with real-time big data, many traditional listed companies will not need the traditional stock market as an intermediary and can easily complete operations like financing, distributing bonus. This means that the traditional security market goes to disintermediation.
In summary, due to the construction of internet finance-related facilities for the next generation and the rapid accumulation of related assets, first, the asymmetry of information can be greatly reduced and the market's integrity can be improved; second, the financial elite's rent is deprived and the transaction costs of the whole market can be reduced; third, the ability for small business owners and individuals to raise fund gets a revolutionary improvement. The following great changes will happen in sales including services and physical goods, many service projects which are difficult to make a price and to transact in the market traditionally can enter the market, the richness of the human material production will also go to a higher level and the production system of the whole society will have a subversive reform.
