Pros and Cons of Internet Finance
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Pros and Cons of Internet Finance
Introduction
Alternatively known as digital finance, Internet finance represents a novel business model based on web and other information communication technologies and electronic systems. It completes a wide range of financial activities, such as online banking, insurance, securities, lending, direct sales, and third-party payments (Shen & Huang, 2016; Su, 2017). It encompasses all financial entities (intermediaries, markets, banks, stock exchanges, and insurance and securities companies) supported by Internet technologies (Ping et al., 2017; Xie et al., 2016). Internet finance has expanded the scope of feasible transactions. It has reduced cost and information asymmetries and increased efficiency in risk management and risk-based pricing, among other benefits (Shen & Huang, 2016). Despite its advantages, Internet finance also has some disadvantages.
Pros
Internet finance conveniently provides a vast range of funding sources. Thus, it is not constrained to conventional financial lenders but also includes private capital accessible to everyone without time and space limitations (Ping et al., 2017). Moreover, SMEs can submit their loan applications provided that they subscribe to a fixed network platform and use the port to participate in the credit check (Zhang & Sun, 2017). Furthermore, information processing is less costly and quicker with the Internet than traditional financial models because search engines and social networks can retrieve, filter, and sort information (Ping et al., 2017; Zhang & Sun, 2017). Therefore, credit and other banking operations are highly efficient and low-cost as they transpire electronically rather than manually.ÿ
As a form of online lending, Internet finance adds economic value to SMEs and boosts their growth. It intensifies the competition for corporate lending in a market with few new entrants, especially after the 2008 financial crisis (Ping et al., 2017). At the same time, the absence of public information regarding SMEs? performance makes it challenging to evaluate their creditworthiness (Zhang & Sun, 2017). In this regard, the intensification of rivalry among lenders could yield innovative solutions to SMEs? problems with information asymmetries and alleviate their financial strain (Zhang & Sun, 2017). Consequently, SMEs are no longer restricted to securing financing from community banks and inefficient government funding programs.
ÿ ÿ ÿ ÿ ÿ ÿInternet finance accelerates resource allocation. This core function of the conventional banking industry entails mobilizing savings and maximizing investments through efficient funds distribution (Ping et al., 2017). Internet finance speeds up resource distribution by directly linking the demand and supply sides, eliminating the need for a financial intermediary, such as commercial banks (Ping et al., 2017). Internet finance is also a feasible way of reducing systemic risk because SMEs and other companies that rely solely on capital from bank loans and other traditional sources are increasingly vulnerable to bankruptcy during financial crises (Zhang & Sun, 2017). SMEs, in particular, have primarily been financially linked to community banks and, consequently, when these institutions begin to fail, their clients are greatly jeopardized (Zhang & Sun, 2017). However, they can enjoy diversified lending options with Internet finance and decrease their exposure to financial risks.
Cons
ÿ ÿ ÿ ÿ ÿ ÿInternet finance is subject to the norms regulating the online business space. Examples in the U. S. are the Equal Credit Opportunity Act, which forbids lenders from discriminating borrowers on any basis, and the Federal Trade Commission Act, which prohibits deceptive or unjust lending practicesÿ(Xie et al., 2016). Regulatory rules and legislation compensate for the ineffective monitoring of Internet finance, which could potentially expose SMEs to the constraints and risks of using the web, such as data leakages, viral attacks, connectivity problems and downtimes, and cybersecurity threats like fraudsters posing as lenders or borrowers (Shen & Huang, 2016; Su, 2017; Ping et al., 2017). Unfortunately, online business lending, including Internet financing, is not yet well-developed as most providers of such services emerged during the past decade (Shen & Huang, 2016; Zhang & Sun, 2017). For this reason, it is currently not a universal means of financing for SMEs worldwide.
ÿ ÿ ÿ ÿ ÿ ÿThe global reach of the Internet makes it possible to avail financing across national borders. The varying regulations between nations and across regions undermine the accessibility of online business loans (Su, 2017). Data co