Yao Qian of the Central Bank: Electronic Banking from the Perspective of Digital Currency

Electronic banking is the product of the organic combination of information technology and financial business innovation, and is considered to be the most influential change in the banking industry since the 21st century. Driven by technological innovation, driven by user demand and catalyzed by effective competition, China's electronic banking business has made great progress. From the perspective of user volume growth, it has crossed the "tipping point" and entered the stage of rapid diffusion. The business model has also begun to develop from basic functions to in-depth application. With the gradual approach of legal digital currency, electronic banking business will face new opportunities and challenges. To this end, the industry, academia and regulators need to collaborate to promote the comprehensive transformation and upgrading of electronic banking under the principle of giving equal importance to regulation and innovation.

Development History of Electronic Banking

In 1998, the Basel Committee on Banking Supervision (BCBS) proposed that "electronic banking is a bank that provides retail and small-value products and services through electronic channels. These products and services include deposits and loans, account management, financial advisors, electronic account payments, and other electronic payment products and services such as electronic money." According to the relevant definition of the "Electronic Banking Business Management Measures" implemented by the China Banking Regulatory Commission on March 1, 2006, electronic banking refers to the banking services provided to customers by commercial banks and other banking financial institutions using communication channels or open networks open to the public, as well as private networks established by banks for specific self-service facilities or customers.

In the past 20 years, driven by the three major factors of technological innovation, user demand and effective competition, electronic banking has developed by leaps and bounds.

First, financial technology innovation is an important driving force for the development of electronic banking. Finance is an information-intensive service industry. Before the concept of electronic banking was formed, the banking industry began to widely use information technology to improve business efficiency, such as promoting electronic data interchange (EDI) technology and automatic teller machines (ATMs) in business processes. With the rapid development of information technology, the concept, model and role of electronic banking have also evolved - from primary telephone banking and PC banking to online banking and WAP banking. Electronic banking has gradually moved from the "backstage" to improve internal efficiency to the "frontstage" to integrate business collaboration and establish service channels; from channel services to business operation platforms for resource integration and product marketing. Today, electronic banking is no longer a simple electronicization of traditional banking business channels, but is more moving towards business model innovation based on Internet support.

Secondly, user demand is an important driving force for the development of electronic banking. The main problem faced by electronic banking in the early stages of development was not the bottleneck of technology supply, but the change in user demand behavior. Electronic banking has changed from a concept that was almost a dream 20 years ago to a reality that is currently widely used. The driving force of user demand is a key factor. The CFCA "2016 China Electronic Banking Survey Report" shows that among the permanent population aged 13 and above in cities at or above the prefecture level, the proportion of online banking users has reached 46%, and the proportion of mobile banking users has reached 42%. As the functional demands of Internet and mobile phone users for electronic banking become increasingly diversified, electronic banking services have gradually become more versatile, personalized, innovative, and diversified, covering all aspects such as inquiry and financial analysis, transfer payment, and investment and financial management.

In addition, effective competition is an important catalyst for the development of electronic banking. Competition in China's electronic banking products is not limited to the banking industry. With the rise of Internet finance, more and more non-financial institutions have begun to engage in electronic banking services by providing personalized payment, savings, lending and online financial services. Some non-financial institutions have also cooperated to apply for Internet banking qualifications and conduct Internet banking business trials. Competition objectively promotes the advancement of electronic banking products, but also puts pressure on traditional commercial banks.

Trends and Challenges

The rapid progress of big data, mobile Internet, cloud computing and artificial intelligence technologies has greatly expanded the innovation space of banking business models. Many problems that have hindered the full Internet development of banking business in the past are being gradually solved. For example, the latest achievements of biometric technology have made remote authentication and authorization processes more credible; the credit investigation model using big data analysis technology has made credit ratings and financial product pricing more accurate; the intelligent customer service system using artificial intelligence technology has made online customer service more customized than counter services; and blockchain technology, as the prototype of the next generation of cloud computing architecture, may also change the core accounting system of banks and change the information infrastructure architecture of electronic banks. Of course, while technological innovation improves overall efficiency, it will also bring new business risks. Therefore, it is crucial to evaluate the cost-benefit of applying technological innovation to model innovation. Overall, these paradigm changes driven by technology have posed new challenges to the strategic planning, technical strength, innovation ability and risk management capabilities of banking institutions.

Changes in user demand preferences will also put forward new requirements for innovation in electronic banking services. Research has found that the two years when the growth curve of my country's electronic banking business crossed the tipping point are also the turning point of China's entire digital economy. As the "post-90s" gradually form a new generation of consumer groups, generational changes have brought about changes in bank customer demand behavior. This generation of consumer subjects has grown up completely in the Internet era, and their preferences for bank service channels and financial service products will have some significant changes: first, the demand for electronic banking services is no longer just satisfied with the replacement of traditional bank branches, but has requirements for full online services and diversified services; second, after getting used to the Internet technology companies' focus on user experience, the expectation of electronic banking business experience will also increase; third, the business needs are more mobile, personalized and customized.

The rapid development of electronic banking has brought new challenges to the industrial structure and financial supervision. There is a classic saying on Quora, an American knowledge question-and-answer website: "Banks will be technology companies with banking licenses in the future." The competition and cooperation between financial technology companies and traditional commercial banks in electronic banking business will be the main line of change in the next stage of the industrial structure. New entrants in the industry, with their technological advantages and traffic entrances, have launched a full-scale attack in various business lines such as payment, savings, lending, insurance, and wealth management, causing financial institutions to lose customers, teams, and profits. However, it should also be noted that the practices of financial technology companies are still concentrated in platform-based businesses, data-rich businesses, and light-asset businesses. The professional capabilities and financial product strengths of banks still have competitive advantages. The strategies of banks to carry out electronic banking will change with the situation and gradually form a dislocated synergy with the related businesses of financial technology companies. In the process of industrial structure evolution, how to create a fair market environment and reserve space for innovation while preventing regulatory arbitrage is a topic that regulators should seriously study.

It is particularly noteworthy that the issuance and circulation of legal digital currency will greatly change the operation mode of the banking system and bring new opportunities for innovation in electronic banking business. The direct effect of the issuance of legal digital currency is to bring changes to the central bank's monetary management and retail payment system, and will further affect the operation of the banking and financial system. First of all, the preliminary definition of my country's current legal digital currency is part of M0, that is, it belongs to the category of cash. In fact, in the composition of the money supply of modern economies, M0 (banknotes and coins) accounts for only a small proportion, and most of the broad money volume remains in the commercial banking system in the form of deposits. The circulation management of cash currently follows the "central bank-commercial bank" binary model, but for commercial banks, cash circulation management has more public service attributes, which is similar to a "cost center". While the issuance of legal digital currency reduces the cost of cash circulation management of commercial banks, it also brings opportunities for commercial banks to provide digital currency derivative services based on electronic banking business. Digital currency wallets may become an important platform for the derivative of electronic banking services. In the future, the digital currency circulation management services of commercial banks will become a "profit center". Secondly, the circulation of legal digital currency may have an impact on commercial bank deposits, forcing banks to pay more attention to and rely more on electronic banking business innovation. Legal digital currency is a liability of the central bank and has a legally protected right to claim for money. When the conversion cost and transaction cost of digital currency have comparative advantages, it is possible that the public's preference for holding and demanding legal digital currency will increase, which may result in a reduction in the loanable funds of commercial banks and reduce the profitability of commercial banks' deposit and loan business. In addition, the current design of digital currency is divided into two types: "account-based" and "non-account-based", which can also be used in layers and try to coexist, which will undoubtedly have an impact on the existing account system of commercial banks. In the future, electronic banking business needs to explore how to combine with digital currency wallets, and design the layered and used problems of accounts and wallets in various payment circulation application scenarios to ensure the dominant position of intermediary businesses such as payment and clearing.

Coping strategies

The industry, regulators and academia need to work together. Scientifically assess the impact of Fintech on the innovation potential and risk structure of electronic banking, strengthen industry coordination of electronic banking development, and improve the overall development efficiency of the industry. It should be noted that, under the joint influence of technological innovation, demand preferences and industrial competition, electronic banking has entered an era of comprehensive transformation to digital banking. It is necessary to comprehensively examine the operation mode and business selection of digital banks under the Internet environment, further unify understanding, and strengthen technology investment and risk management. Banks should consider end-user needs more, integrate the technical features of "big, Internet of Things, cloud, and mobile" into the design of business scenarios and risk management, and especially seize the trend of digital inclusive finance.

Pay close attention to the systemic impact of the issuance and circulation of legal digital currency on the banking system. In the digital currency environment, the commercial banking system may shift from relying on "credit intermediaries" for profit to relying more on information intermediaries, payment and clearing and other intermediary businesses for profit, and all of these require further support from electronic banking. Electronic banking should conduct in-depth research on how to accelerate the pace of innovation in the digital currency environment, combine key business scenarios with digital currency, integrate resources, integrate channels, open up scenarios, build platforms, and actively participate in the construction of a digital currency circulation application ecosystem.

The industry needs to implement appropriate competition and cooperation strategies to promote the development of electronic banking business. Both traditional financial institutions and emerging financial technology companies should implement "parallel strategies". On the one hand, traditional financial institutions should continue to consolidate their competitive advantages, promote the application and transformation and upgrading of their own electronic banking products, and compete with "outside intruders" such as financial technology companies; on the other hand, they should give full play to their comparative advantages in system platforms and financial products, provide infrastructure and product supply services for these new industry competitors, and realize the "banking as a service" transformation. The strategy of emerging financial technology companies to get involved in electronic banking business should fully consider the changes in user group behavior preferences: on the one hand, they should use their technological advantages and channel advantages to propose innovative electronic banking solutions and provide them to people who are not covered by traditional banking business; on the other hand, they should replace the overly costly solutions of commercial banks in specific application fields, and gradually penetrate into the mainstream applications and mainstream customer groups of electronic banking.

Regulators should explore and formulate an innovative regulatory framework to promote innovation on the basis of compliance. For financial regulators, the current difficulty is how to grasp the balance between risk prevention and control and encouragement of innovation through innovation in regulatory concepts, and formulate appropriate regulatory tools and strategies accordingly. Recently, regulators and academia have also been discussing and exploring this issue and have achieved many results. my country can consider learning from the "Regulatory Sandbox" system and "Innovation Accelerator" mechanism recently established in the United Kingdom, Singapore and other countries to provide a moderate experimental and regulatory environment for market-oriented innovation of electronic banking business.