China Backpedaling On Fintech?

Fintech has burst onto the scene in the past decade to challenge the status quo of the banking industry. While many companies have begun to pose serious threats to traditional banks, other fintech startups have relied upon suspect business models and reckless lending and spending.

The Chinese government is now struggling with the duality of the fintech revolution. Bloomberg reported that about 1,000 Chinese fintech companies have gone under in recent years.

Recent government action suggests that China is recognizing the dangers of letting the fintech industry run wild. In addition to pushing back against crowdfunding businesses with loose lending standards, the government has suspended the registration of any new companies with the word “finance” in the name of the business. Some online lenders are even being forced out of their storefront locations by the government.

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At the same time that China is cracking down on reckless fintech companies, it also seems to recognize the huge positive potential of the industry as well. The nation’s Internet Plus Circulation action plan includes initiatives to boost infrastructure for third-party payment services run by companies such as Alibaba Group Holding Ltd BABA and Tencent.

There’s no questioning the potential of financial technology when applied responsibly. Alibaba’s Alipay platform already handles three times the payment volume of U.S. rival Paypal Holdings Inc PYPL. Unfortunately, the Chinese government’s task of paving the way for the good fintech companies while also preventing the bad ones from running the financial industry into the ground will continue to be a delicate balancing act.

Disclosure: The author is long BABA.