The Impact of Internet Finance on Macroeconomy

Name: Professor`s name: Course Code: Date: The Impact of Internet Finance on Macroeconomy Internet finance has been a key driver of the economy in several countries, especially in developing and developed nations. The key impediment to the adoption of internet finance to some of the developing and undeveloped countries emanates from poor internet infrastructure and unreliable electric grid to support it. Without proper electric grid then the internet infrastructure would be nearly useless. However, the countries with relatively stable and higher penetration of electric grid in their rural areas coupled with relatively good internet infrastructure are prime candidates for internet finance exploitation. Internet finance has become a key supplement to the traditional banking services because of governmental regulations and other related issues which have prevented traditional financial institutions from being able to reach a wider client base. For example, credit services offered by banks in the traditional system necessitated collateral or guarantees. On the other hand, internet financiers do not depend on guarantees and collateral, but on statistical models to evaluate the client’s creditworthinessCITATION Lia14 \l 1033 (Xiaozhong). Internet finance has prompted the evolution of financial services, and it is shaping macroeconomic policies, macroeconomic trends and has birthed a new sophisticated relationship with the economy. Influence of internet finance to macroeconomic Internet finance has had a huge impact on SMEs. Most SMEs have been grappling with accessing credit because of their lack of collateral. They have been experiencing slow growth and expansion. Internet finance has changed this trend, and more SMEs can access funds at a moment’s notice through internet finance. There are some internet finance companies which have majored and tailored their products to appeal to SMEs at ‘SME-friendly’ terms. Since most SMEs are either family, partner or individually owned, the individuals who run the business can also access quick funds from their smartphones to pump into their business for expansion. Concisely, it has empowered the individuals who own business to access funds easily and inject it into their businesses rather than following a tedious process of applying to banks or other financial institutions who take relatively longer to approve their loans. Thus, they have become a handy and convenient solution to SMEs to access funds to continue with their operations. In other cases, internet finance has become a way to pool funds to start businesses. Peer to peer lending and financial services has become a convenient way to pool resources to start a business. For instance, several people come together to pool funds to start their project. Online versions of crowdfunding have also been developed and have been used to start business or projects that affect the macroeconomic environment of a country. Macroeconomically, internet finance has also helped to reduce unemployment directly and indirectly. The firms whose business model is centered on offering credit services through applications directly employ people hence reducing unemployment. These firms have experienced a steep growth curve, and they continue to employ more people in different capacities such as product development, application designers and creators, marketers, etc. Additionally, these firms also offer employment to other people through outsourcing some services such as branding, transport, etc. Thus, these firms have significantly aided in reducing unemployment in every country where internet finance has taken root. Additionally, through financing entrepreneurs, internet finance firms have indirectly made a great impact on reducing unemployment by financially supporting them in their entrepreneurial activities. They help reduce poverty in the long run. According to CITATION XnI17 \l 1033 (Iraki), ‘economists from MIT and Georgetown University, found that M-Pesa (mobile money system operating in Kenya) has lifted 194,000 Kenyan households or 2 percent of Kenyan households out of extreme poverty.’ this shows the macroeconomic impact of fintech firms. Internet finance also greatly affects GDP. In countries with deeper penetration of internet finance, it contributes significantly to the GDP. In 2016, internet finance was estimated to account for 7% of the GDP of the people’s republic of China along with 4-5% in the United States, Germany, and Japan CITATION Pet16 \l 1033 (Drysdale, Armstrong and Ascione). China has been investing heavily in internet finance, especially through fintech company which owns WeChatPay and Alipay. These are just two of the internet financiers in the country, and they have been widely adopted; hence their 7% contribution to the economy is warranted. The internet finance technology helped reach the unbanked and brought them onboard enabling them to transact across these platforms and integrating their products to the economy. Macroeconomic trends seem to be gravitating towards bypassing the traditional banking system and their relatively inflexible approaches to banking. The issue of giving collateral and a lengthy process of applying to get finances is outdated and ineffective. The success of credit financiers has proven that a statistical model to give loans is a valid approach towards evaluating the creditworthiness of a borrower. For example, ‘Alibaba monitors and evaluates online transactions to identify commercial opportunities and then offers loans to small business through Alipay’ CITATION Aus19 \l 1033 (Australian Government Treasury). This level of flexibility and reliability for SMEs to access credit helps them grow faster than when they needed to file paperwork and wait for credit approval and disbursement with traditional financial institutions. Though these statistical models are far from perfect, they can be perfected and adapted to instigate change in the traditional banking operation to mirror the needs of the new generation and changes in the public psychology. Internet finance and macroeconomic policy Bec...