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【Li Jianjun】searching costs, network effects and the channel value of inclusive finance

作者:     日期:2016-01-19    来源:

The channel value of searching costs, network effects and inclusive finance, a paper cooperated by professor Li Jianjun and Dr. Wang De, was published on the 12th edition of International Financial Research in 2015.

Since 2012, the internet finance has emerged quickly. The P2P net loan platform, B2B electronic business or B2C net loan platform provide small and micro loan service for small and micro economies including consumers, medium and small enterprises, individual seller and rural electronic business entrepreneurs ranging from consumption to supply-chain. However, whether the net loan platform has addressed the problem on financial service for small and micro economies effectively and whether it has the channel value of inclusive finance or not? Based on information economics and searching theory, this paper compares and analyzes the channel value of commercial banks and the inclusive finance of net loan platform starting from two basic theories, namely searching costs and network effects.

In current China, the concentration in the banking system is relatively high, and the credit rationing system makes it hard for small and micro economies to get bank finance services which match their needs. Because of the restrictions on bank credit rationing, market finance outside banks becomes an important finance channel for them. As the market finance needs growing quickly, other market finance outside banks also develops quickly, embodying as the quick growth of financing volume outside banks and the diversification of financing channels.

For small and micro economies, the difficulty of financing pattern outside banks represents as the opacity of market interest rate pricing and the choice of financing channels. Compared with bank credit market, because of the lack of discrimination system such as the complete collateral rules in banks, most financing models outside banks select the interest rates as screaming method; because of the lack of apparent trading platform and the interest rate pricing system is not transparent, there are many factors hindering trades in the market. At the same time, the financing model outside banks is diversified but the supply of money is limited, embodying the region segmentation of the market, the diversity of organizational forms and the friction in the financing process, which forces small and micro economies to make more trade-offs to find a proper financing model. The matching degree and the searching efficiency for supply and demander of money differ a lot, which results in higher financing cost and higher interest rate in the market.

The searching cost and network effect advantages of internet loan platform. The first problem comes to small and micro economies in the process of market financing is cost. Because the market in reality is not complete, economies should search to make a deal. The searching cost, on the one hand, is a set of steps including information accumulation, site inspection, trade negotiation and goal adjustment to find better interest rate; on the other hand, is the process of capital verification to lower the risk to meet the demands. The searching cost is an important factor in choosing financing channels besides interest rate. At the same time, small and micro economies will take the accessibility to financing channel into consideration. When the cost is almost the same, small and micro economies will take the financing channel which they have easier access to. The accessibility to financing channel is the network effect. The internet loan platform could make full use of the data analysis outcome in the background of bid data in the internet, which could improve pertinency of the loan service product, follow up the financing demanders and reduce the searching cost in the process of financing effectively. The internet loan platform make vast search in different investment projects taking advantage of the quickness of the internet. Once a profit project is found, it could be shared with other investors. The internet loan platform has scale economy in searching projects, which changes the law of diminishing returns in traditional economics. There is apparent margin profit increasing in the internet loan platform, on the one hand, the margin cost of the internet is decreasing, which means that as the internet users increasing, the average and margin cost is decreasing. The average cost of internet information is decreasing as the internet users increasing, and thus the margin cost, however, the profit is increasing as the users increasing; the larger the scale of the internet is, the larger the total and margin profit is. On the other hand, the internet is cumulative value-added, which means that the investment on internet could not only get the normal returns but also the cumulative return on cumulative information.

In the traditional financial service market, the bank loan commonly provides service for enterprises in the region but nearly provides loans for enterprises in other regions. Financing is affected largely by the number of branches of banks in the region and the location will affect the volume of bank financing directly. This situation is attributed to the simple region distinctions and the improper risk management system. The connection between suppliers and demanders of money relies on banks, and the network effect is low, which could not meet the financing demands of small and micro economies. The vastness of the internet enables that the internet loan platform will not be limited by the location. The internet loan platform change the traditional bank financing pattern thanks to its accessibility and network externality.

The searching cost and network effects both have effects on the financing behavior. The lower the searching cost is and the larger the network effects are, the higher the value of the financing channel is. The internet loan platform, which is an important provider of inclusive finance service, has both of these two advantages, and it has higher channel value in provide loans for small and micro economies. Making specification for the development of internet loan platform and improving the transparency of it, which is very important to the construction of the inclusive finance.