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Key lessons for policymakers from China’s financial inclusion experience

Jennifer Chien's picture

Woman with child in People’s Square in Yanting, China
Over the past 15 years, China has emerged as one of the world’s financial inclusion success stories. While much attention has been paid to the rapid innovation and massive scaling of Chinese fintech companies, China’s successes in financial inclusion reach beyond fintech. Account ownership has increased significantly and is now on par with that of other G-20 countries. One of the largest agent banking networks in the world has been established. And a robust financial infrastructure has been developed that underpins these successes.
 
So what can policymakers in other countries learn from China’s experience? While China is in some ways a unique environment, there are still valuable lessons to be learned from both its successes as well as its remaining challenges.
 
A new report released last week -– Toward Universal Financial Inclusion in China: Models, Challenges, and Global Lessons - provides a wealth of data and information about the various initiatives and efforts that have contributed to China’s advances in financial inclusion. The report, which was jointly written by the People’s Bank of China and the World Bank Group, also outlines remaining challenges and distills lessons for policymakers in other countries.

From these lessons, we wanted to highlight three critical areas that are fundamental to addressing financial inclusion in all countries:
(1) agent-based models
(2) fintech and digital financial services
(3) the role of government in financial inclusion
 
Agent-Based Models: Reach and Sustainability
 
Reaching underserved consumers in remote and rural areas in a cost-effective manner is a major obstacle to financial inclusion for most countries. China addressed this obstacle by facilitating the establishment of one of the largest agent banking networks in the world, via a combination of enabling regulation, subsidies, directives to providers, and funneling the distribution of social transfers through bank cards. By the end of 2016, these efforts had resulted in the establishment of 983,400 agent-based service points, covering more than 90% of administrative villages across China.
 
Yet China’s model requires adjustment if it is to facilitate long-term and sustainable financial inclusion. Many agent-based service points have low traffic and provide a limited range of services. The Chinese experience highlights the need to consider sustainability and commercial viability when expanding access points. Further steps are needed to allow for the development of more sustainable and innovative agent-based business models.
 
Fintech and Digital Financial Services: Risks and Rewards
 
China’s fintech industry has grown rapidly to reach millions of new consumers with a range of digital financial products and services. One of the key factors behind the success of digital finance in China was the regulatory space provided for innovations in digital finance. Chinese regulators allowed for entry of innovative new providers, products, and business models, such as the use of online, network-based business models integrating financial services into existing e-commerce or social media platforms (e.g. Alipay, Tenpay, Ant Financial).
 
The Chinese experience demonstrates both the risks and the rewards of this approach. Hundreds of millions of consumers now have access to innovative, low-cost, and easily accessible digital financial products and services more tailored to the needs of retail consumers. But instances of fraud by fintech companies have also caused harm to consumers, particularly in the peer-to-peer (P2P) lending industry. Striking the right balance between allowing for innovation and managing risks is the critical task for any policymaker seeking to encourage digital financial inclusion.
 
Of course, this is easier said than done. But new “test and learn” approaches such as the use of regulatory sandboxes and more active monitoring of innovative providers and products hold promise. Similarly, there is improved understanding of what adaptations are needed to financial consumer protection frameworks to address the risks of digital finance.
 
Appropriate Role of Government: Promoter Versus Enabler
 
Finally, the Chinese experience illustrates the inherent tensions in determining what is the appropriate role of government in financial inclusion. At both the national and local level, the Chinese government has been extensively involved in supporting financial inclusion through a mix of both direct and indirect measures. While some efforts have achieved success, other efforts have had less impact or even had a distortive effect on the market.
 
China’s transition from the mindset of the government as “promoter” of financial inclusion to the government as an “enabler” has been uneven, a challenge found in many other countries as well. It is still a common misconception to view financial inclusion as promoting credit to the rural poor via subsidized approaches and preferential policies.
 
Policymakers in China have explicitly recognized the need to shift towards more market-based, commercially sustainable approaches to financial inclusion, as outlined in China’s Plan for Advancing the Development of Financial Inclusion (2016-2020). This shift will need to be accompanied by a corresponding recalibration of the appropriate role of government, with greater emphasis on improving the enabling environment and a more nuanced approach to identify those instances where direct measures are still warranted.

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