FinTech-Bank Partnership in China’s Credit Market: Models, Risks and Regulatory Responses

Abstract

China is one of the pioneers in developing innovative models for credit business through a partnership between FinTech firms and traditional financial institutions such as banks. There are two main business models of FinTech-bank partnership, namely the loan facilitation model and the co-lending model. While this partnership brings many benefits, it has significant risks, including outsourcing risks, monopolistic practices, data protection, algorithmic bias, and financial systemic risk. This paper critically examines the Chinese regulatory responses to those risks with a focus on the outsourcing issue. Drawing upon the experiences of some overseas jurisdictions, including the US, the UK, the Netherlands, Luxembourg and Switzerland, this paper makes relevant suggestions for improving the Chinese regulation. China is advised to adopt a staged and differentiated approach to regulate FinTech-bank partnership. The first step is to establish a regulatory sandbox for FinTech firms to test their innovative activities, and, depending on the specific circumstances, an umbrella entity mechanism could also be introduced. Further, a sophisticated licensing regime can be established to set out differentiated rules for FinTech firms according to the nature and extent of the FinTech-Bank partnership, thus addressing the problem of regulatory arbitrage.