The Theory of Internet Finance CF40（互联网金融CF40理论）.pdf

∗ The Theory of Internet Finance Xie Ping, Zou Chuanwei China Investment Corporation, Beijing, China Abstract: Internet based technologies, such as mobile payments, social networks, search engines and cloud computation, will lead to a paradigm shift in financial sector. Beside indirect financing via commercial banks and direct financing through security markets, a third way to conduct financial activities will emerge, which we call “internet finance”. This paper presents a detailed analysis of payment, information processing and resource allocation under internet finance. Key words: internet finance, mobile payments, social networks, search engines, cloud computation 1. Introduction The basic function of financial sector is to intermediate funds between those in need of money and those with extra money. However, financial intermediaries don’t exist in the classic version of general equilibrium theory (Mas-Colell et al., 1995). Mishkin (1995) suggests two reasons why financial intermediaries do exist in the real world. First, financial intermediaries have special technologies and economy of scale to reduce transaction costs. Second, financial intermediaries are professional in information processing, thus alleviating adverse selection and moral hazard caused by information asymmetry. Traditionally, there are two types of financial intermediaries, commercial banks (indirect financing) and security markets (direct financing). They play an important role in resource allocation and promote economic growth, but also incur huge costs. Internet based technologies, such as mobile payments,