February 23, 2016
The year 2016 may not be the year of FinTech in China as we have discovered recently. While the government was giving a green financial light to FinTech, it certainly didn’t see the other side of the coin.
China, in particular Hong Kong, have long been one of the world’s premier financial hubs and one of the most forward-thinking markets with the highest innovation adoption rate of 29%. As a leader in fostering a competitive environment, China largely opened up its market for FinTech startups to disrupt the country’s e-commerce giants Baidu, Alibaba and Tencent that took advantage of the sector.
Excited about the opportunities in a massive consumer market, FinTech startups rushed to take a chance in the past few years. In 2016, however, the government seems to have changed its mind. The FinTech industry in China should get ready for a rough time as government corrective actions will force the consequence of spoiling the FinTech party. Banks, on the other hand, may have a big fest in 2016 and reassert their industry dominance.
In 2016, FinTech startups will witness mass consolidation and a massive failure. Low ROIs, new regulations and lack of sustainable business models will force a dramatic decline in China’s FinTech. The upcoming situation will certainly touch e-commerce giants as well, and probably not in a good way. Banks, on the contrary, will be granted an amazing opportunity to reclaim power and dominance over China’s consumer finances.
Among FinTech segments that will suffer over the course of 2016, there is an extremely important one with cracked foundation—P2P lending. Lending startups consolidate a significant amount of financial power as they have at least two great advantages over bank loans—better terms and transparency.
In the past, P2P lending has demonstrated its extreme international viability as it has been the most saturated and successful FinTech segment. In fact, it has been so successful that banks have rushed to finance the loans originated on P2P platforms and thus, outsourced their lending units.
However, the infinite growth had to bump on something and it happened in China. Imperial Investment, a Chinese P2P lender, is one of the examples of dark times P2P lending in China is getting into. According to The Economist, in January, the company has published four separate notices from police, employees and family pleading for its runaway founder to return.
The story of fleeing founders doesn’t end on Imperial Investment. At the end of 2015, nearly a third of all Chinese P2P lenders had run into difficulties like halted operations, disputes, frozen withdrawals or, as in the case of Imperial, fled bosses. As ridiculous as it may sound, 266 P2P bosses have fled over the past six months.
If we were to bring other examples, Ezubao would be another one. China’s biggest P2P lender, which has arranged loans worth $11 billion, is one of the firms with frozen accounts. Worse, Chinese police have arrested 21 people involved in the operation of Ezubao three weeks ago. The reason for such a drastic measure was an online scam with some $7.6 billion involving nearly 1 million investors. In fact, more than 95% of the projects on the online financing platform were declared to be fake.
The Ezubao case is a symptomatic one. It demonstrates the risks created by China's fast-growing $2.6-trillion wealth management product industry, as the Financial Times believes. Many products are sold through loosely regulated channels, including online financial investment platforms and privately run exchanges.
The other reason P2P lending in China is getting millions in trouble is that P2P lending itself tends to attract a risky segment and concentrate a high-risk portfolio of loans. Only those in need of quick money but not qualified for a bank loan are loading the loan pool of alternative lenders. As China is one of the most massive consumer markets, it is no wonder that lending has consolidated a huge bag of bad loans. In fact, as The Economist states, an outstanding P2P credit rose more than tenfold over the past two years, from 31 billion yuan at the start of 2014 to 439 billion yuan at the end of last year. Average lending rates, meanwhile, fell from nearly 20% to 12.5%.
Multiple Chinese news portals admit the dusk of P2P lending or, at least, a negative trend. The nation's online P2P lending sector is on the decline with the number of new platforms continuing to drop while the number of problematic sites is increasing. The data shows that there were 27 new P2P lending platforms in January, which is down by 61% from December.
If the situation doesn’t seem dramatic enough yet, there is more to add. In the beginning of January, the People's Bank of China has revoked the third-party payment license of Shanghai Changgou Co. Ltd. In fact, in the beginning of last year, China saw 194 problematic P2P lending platforms.
As the P2P lending drama rolls out in China, the government is looking for an appropriate response. So far, one of the responses was to revoke the license from internet businesses from financial companies (P2P lenders are among those). Another step was taken at the very end of December 2015, when the government proposed a draft of 12 restrictions to P2P platforms, prohibiting them from accepting public deposits, pooling investors’ money to fund their own projects, or providing any kind of guarantee for lenders.