Public Disclosure Authorized Toward Universal Financial Inclusion in China Models, Challenges, and Global Lessons Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 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. 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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