Analysis of the P2P Market in China After the Regulatory Crackdown

p2p lending China

China is the second largest economy in the world with a GDP of $11.8 trillion, and it’s the home to many mega banks and lenders. Like the US, savers investing in bank deposits were not getting good enough returns and small borrowers were being crowded out of the formal lending system by big corporations. P2P […]

p2p lending China

China is the second largest economy in the world with a GDP of $11.8 trillion, and it’s the home to many mega banks and lenders. Like the US, savers investing in bank deposits were not getting good enough returns and small borrowers were being crowded out of the formal lending system by big corporations. P2P lending looked like the perfect solution; it cut out the middlemen and democratized borrowing. As a result, China rapidly became the largest P2P market in the world. But the explosive growth of the P2P market in recent years has exposed the gulf of problems that have been plaguing the online lending market in China.

Numbers don’t lie

According to Beijing Bureau of Financial Work, nine out of 10 P2P lending platforms will find it difficult to survive 2017 once the government fully rolls out its stiff regulatory supervisions. Only 500 (approx 10%) P2P companies out of the total 4,856 across the country are expected to remain in operation after this year, according to the same report.

Chinese regulators have introduced tougher requirements for P2P lenders to stay in business. Every P2P lender now needs to appoint a custodian bank and needs to provide a full disclosure of the use of deposits. There are other variables like risk management, shareholder credibility, and the scale of business in play, as well. A lender not passing the review will eventually have to liquidate.

Raison d’être

In the beginning of 2016, Ezubao was one of the largest P2P lending platforms in the country. It was launched in 2014, but because it offered a lucrative rate of return (9%-15%) it quickly managed to attract a lot of investors. The company was actually running a Ponzi scheme and scammed 900,000 investors out of over $7.6 billion. It was the biggest Ponzi scheme in Chinese financial history. Reports said 95% of all listed borrowers were fraudulent. Such a massive fraud obviously woke up the regulators, and they came cracking down on the entire industry.

Fall of the giant: Hongling Capital

Hongling Capital was founded in 2009; it was one of the earliest and biggest P2P lending platforms in China. The pioneer P2P lending platform, once considered a benchmark in the industry, declared it will exit the online lending business and pay off investors by selling collateral properties. Though Hongling Capital was the largest P2P platform in terms of trade volume, the platform has barely made any profits. In 2016, the platform lost 183 million Yuan ($27.4 million).

Hongling Capital was established to provide small and medium enterprises easy access to capital, something they were not able to get from traditional banks and financial institutions. But it was its “guarantee of principal and interest” which set the platform apart from its contemporaries.

“Big Loan Model”

Another bet that went wrong for Hongling Capital was its “Big Loan Model.” Projects which required financing over 100 million CNY were considered “Big Loans” and Hongling matched the investor money with big projects. Considering that the majority of these projects had been rejected by traditional banks and were subprime meant it was a risky proposition from the get-go. The company, for example, granted 50 million Yuan in loans to China Huishan Dairy Holding. The company defaulted on its debt in late March. Loans like these were a major reason for Hongling Capital’s deep troubles.

The platform now has over 20 billion Yuan ($3 billion) assets to settle, which includes 5 billion Yuan ($750 million) of non-performing assets and 800 million Yuan ($120 million) of bad debts. As of August, Hongling Capital has 1.85 million investors, and the accumulated trade volume is 274.7 billion Yuan ($41 billion).

Regulation by Chinese Banking Regulatory Commission (CBRC)

In August 2016, CBRC released “Interim Measures for the Management of Business Activities of Internet Lending Information Agencies.” The report clearly stated “on a single platform, the personal borrowing balance shall not exceed 200,000, and the enterprise shall not exceed one million” and “p2p platform must not provide vouching or principal and interest warranty for investors.”

This regulation hit the two cornerstones of Hongling- guaranteed payments and big loan models and rendered the company’s business model obsolete.

The online lending industry knows there are more restrictions to follow. People’s Bank of China and 17 other regulatory authorities issued a notice in July stating: “Effective measures must be taken to ensure that the number of internet financial entities and the scale of business operation are cut down.”

This goes to show that there is a concerted effort by the regulators to curb the P2P lending sector and ensure that all non-serious and fraud actors are removed from the ecosystem

Conclusion

Well, it is clear that Ezubao is not the only bad apple in the system. There are hundreds of P2P lenders which have evaporated in thin air and the existing regulations will lead to a major shakeup. Though this might be detrimental in the short term, it was necessary for the survival of the industry in the long run. Now investors will understand the risks facing them while investing in such schemes, and would be focused on collaborating with only compliant P2P lenders. It will force platforms to re-look at their business models and ensure sustainability is given precedence over growth.

Author:

Written by Heena Dhir.

Monday April 17 2017, Daily News Digest

Monday April 17 2017, Daily News Digest

News Comments Today’s main news: Republicans propose drastic overhaul of CFPB.  BOE chief sees no need for tougher FinTech regulation. CBRC assistant chair reported ‘out of contact’. Today’s main analysis: Transparency remains a sticking point for online lenders. The India FinTech Market Map. Today’s thought-provoking articles: How this FinTech CEO plans to prosper. Interview with Scott Sanborn. International regtechs […]

Monday April 17 2017, Daily News Digest

News Comments

United States

  • Republicans propose drastic overhaul of CFPB, Dodd-Frank. GP:” This is just a proposal and it will likely change a lot by the time, if and when, it gets adopted into law. In all cases, the theme here seems to be more control and less power for the agencies.”  AT: “We saw this one coming. I didn’t expect a name change, but I think that’s interesting, especially the use of the word ‘opportunity,’ which puzzles me. Why would a regulatory agency include that word in its name? Another thing I find interesting is the deputy director holding the job at the will of the president, which I expected. However, it makes the agency serve at the whim of the winds of the political climate, like all other executive agencies. What makes that interesting is it goes against the initial conception of the agency, which was intended to be independent of the chief executive. I’m not saying it’s right or wrong, good or bad either way, but we can expect the Democrats to fight this hard.”
  • How this FinTech CEO plans to prosper in 2017. GP:”The key is customer satisfaction, which itself relies on a good product, fair pricing, ease of use whom themselves depend on the cost of financing, employee satisfaction, technology quality and an infinite list of other items.”
  • Transparency remains a sticking point for online lenders. GP:”This is very interesting data. If the online lenders build a reputation of being expensive, regardless if it’s true or not, it will hurt their customer acquisition costs significantly. This has to be fought and this perception is very dangerous. In general consumers, especially opinion leaders, are not stupid. I think a good way to fight for transparency and to fight the high rate and unfavorable terms opinion is by actually releasing actual verifiable data that offers more transparency and demonstrates the rate and term points. ” AT: “It’s important that online lenders not simply claim to be transparent. Most consumers, millennials, in particular, are well aware that technology is not inherently transparent. It can be used to set up walls of opaqueness as easily as see-through curtains, or blinds. If you’re going to call yourself ‘transparent’, you’ve got to be transparent.”
  • Chatting P2P marketplaces with LendingClub’s CEO. GP:” Lending Club is really turning into a large company, run as a large company, on values and brand and letting every department alone to do what they can with controls in place. I am curious how it will defer from a large bank in two or three years.” AT: “Scott Sandborn shares some interesting insights into marketplace lending in general and LendingClub in particular.”

United Kingdom

  • BOE chief sees no need for tougher FinTech regulation. GP:”I am pleasantly surprised, and once again I understand how the UK, despite being a small market, continues to be the point of reference in finance in the entire world and has been for hundreds of years. I am yet to see a single US regulator who says even once: there is no need for more regulation.” AT: “This is a sign of maturity. In the U.S., when legacy institutions sense up-and-coming competitors, the first thing they want to do is use regulation as a protectionist scheme. Competition is good–for the goose and the gander.”
  • Researcher showcases unauthorized NFC payments with cloned Android device. AT: “This is interesting. We must all understand there’s no such thing as fail-safe security in the cyber world. Every device is a potential entry point for bad actors. In fact, every app on every device is a potential entryway for hackers and other bad actors. The key goal for security experts is to stay ahead of them. This hole needs to be plugged quickly.”

European Union

International

China

India

Asia

MENA

Africa

News Summary

United States

Republicans propose drastic overhaul of Dodd-Frank and CFPB (Housingwire), Rated: AAA

According to the summary of bill changes, the original CHOICE Act would restructure the FHFA and OCC as bipartisan commissions. The FDIC would be reorganized as a bipartisan commission with all five commissioners appointed by the president, and both the Comptroller of the Currency and the CFPB director would be removed from the FDIC board. Also, NCUA board of directors would be increased from three members to five.

The new CHOICE Act 2.0 cuts a lot of those proposed changes, and instead, the FHFA director would be removable at will by the president, with no changes to the current law regarding OCC and NCUA. The FDIC structure would stay the same as proposed in CHOICE 1.0.

The original CHOICE Act replaced the director of the CFPB with a Consumer Financial Opportunity Commission, a bipartisan independent Commission serving staggered terms.

Instead, in the newest version, the Consumer Financial Protection Bureau would be changed to the Consumer Financial Opportunity Agency, an executive agency with a sole director removable at will. The deputy director would also be appointed and removed by the president.

While the original CHOICE Act established a CFPB Credit Union Advisory Council, the updated one removed it because the bill eliminates mandatory CFPB advisory committees.

How This FinTech CEO Plans To Prosper In 2017 (Forbes), Rated: AAA

Along with FinTech industry guru Ron Suber, Prosper’s president, Kimball is intent on growing loan volumes, offering lower average rates compared to traditional lenders, delivering higher returns to investors and returning Prosper to profitability.

Prosper, which is the original online peer-to-peer marketplace, has originated over $9 billion in consumer loans over the past decade.

Since being appointed CEO of Prosper Marketplace late last year, Kimball has stepped outside his former financial role as Prosper’s CFO to take on a more operational-driven strategy.

David Kimball: Ultimately, the long-term success of platforms will be dependent on their ability to deliver a great product and a consistent experience. The success of the partnerships will depend on the ability for the two companies to communicate and understand each other (language, transparency, and culture), and it will depend on how well objectives remain compatible.

David Kimball: Last year, the industry did a lot to lay the foundation for a successful 2017, and we’re seeing that work pay off. The [recently announced loan purchase deal] gives us the funding stability we need to continue to grow, while at the same time giving us some great long-term partners that are invested in our business and its success.

David Kimball: A successful CFO is one who partners with the business instead of playing the finance sheriff. That requires a willingness to understand the business, to think holistically, to work with peers who jointly own the results. The CFO is the finance subject matter expert, but should be able to consider other disciplines, just as a CTO should be able to understand the financial implications of engineering decisions.

As CEO, I continue to think holistically and I now have an opportunity to flex into other areas of the business.

Transparency remains a sticking point for online lenders (Tearsheet), Rated: AAA

A small business credit survey by the Federal Reserve Bank of New York found 46 percent customer satisfaction at online lenders like Lending Club and OnDeck Capital with a 19 percent rate of dissatisfied customers – compared with large banks’ 61 percent of customers who indicated they were satisfied with their small business loan process and 15 percent of whom expressed dissatisfaction. Almost half of all customers specified that their dissatisfaction came from a “lack of transparency.”

Online lending customers are also dissatisfied with higher interest rates and unfavorable repayment terms, two common issues for the growing industry, which continues to have a higher cost of capital and for customer acquisitions.

Chatting P2P marketplaces with LendingClub CEO, Scott Sanborn (Simple Innovative Change), Rated: AAA

CL: The LendingClub story is a fascinating one and one that I’ve followed from the early days. So how does it feel to sit here and realize that so much of what is here today and the proliferation of all these different lending platforms is really because of this company and this team and what you have been able to build?

SB: I think it is exciting. It’s very gratifying to see how the initial idea has gained traction and how that has spawned new players who are bringing new energy and new ideas to different segments of the market. I think the clearest benefit is looking at how much value we’ve driven to consumers and investors.

For example, the personal loan market was actually shrinking when we first started. It shrank like 57% from 2007 to 2010, and yet we were still able to giveCL: There’s this great photo from the day of the IPO back in 2014 in which you can see just how elated you were. At the time you were the CMO and it was a very happy day, but when you stepped into the CEO role recently it wasn’t necessarily under the happiest of conditions. So, how have you handled the ups and downs of being a part of the Lending Club team, and how are do you lead the team through these challenging periods?

CL: That’s the answer you want to hear, by all means. Since becoming CEO at LendingClub, what have you learned about your own management style and how are you navigating the transition to this role?

SB: So much is swirling and changing in real-time, which means you need to keep everyone in the loop. In those early days after I stepped into the CEO role, I can’t tell you how many times we pulled all 1,500 employees together and marched them across the street to a hotel, to fit them into one room and explain, “Here’s what’s happening. Here’s what we know. Here’s what comes next.” That was certainly critical.

Lastly, we have focused tirelessly on assembling the right team. When a business is growing 80% to 100% a year for so many years it’s hard for the organization to keep up, and this was an opportunity to say, “Okay, new reality. Let’s look at what the right foundation is for the next decade of Lending Club.”

CL: One of the other reasons that I wanted to speak with you is because I often speak with seed and series A Fintech startups that’ll eventually face the challenges of being a larger organization if successful. So, what do you think are the challenges associated with trying to be an innovator while also being a larger organization?

SB: Literally, I left that conversation, and sat down with several team members in a room and said, “Okay, what are our values?” It was remarkably easy, actually, to identify what our values were. We put those down on paper and we revisit them, probably annually, maybe every 18 months or so and say, “Do they still resonate? Are they still right for this stage of the company?” Essentially all of our initial values have remained intact and we’ve added one or two as we’ve grown to reflect the new stage of the company.

Since then we have remained crisp on what our values are, and we have made sure we’re hiring to those values, and that our performance reviews reflect those values as well. That’s how you keep the essence of a company and that integrity of the company as you grow. The reality is, as you get bigger and layers get introduced and processes get introduced maintaining that value system will help the company stay, essentially, intact and stay functioning well.

CL: As we look to the vision of the future loan markets, do you think that startups will increasingly become the sourcing mechanisms of loans with financial institutions acting more as the wholesale banking providers?

SB: I think we’re not done seeing the different types of models that could emerge and how they could participate, and I think that’s part of what’s exciting. Not all of them will be great ideas, and not all of them will work, but some will.

If you look at our model, banks provide between a quarter and 30% of our funding and they have a very low cost of capital. When you combine their low cost of capital with our low operating cost it allows us to give, especially that super-prime customer, an incredible value that they couldn’t get at these institutions directly.

United Kingdom

Bank of England Chief Sees No Need for Tougher Fintech Regulation (Corporate Counsel), Rated: AAA

Fintech could pose a threat to traditional banks in the United Kingdom, according to Bank of England Governor Mark Carney. But that doesn’t mean he thinks they should be subject to tougher regulation.

The Bank of England created a New Bank Start-up Unit last year, which advises companies trying to become new banks. Carney said in his speech that four mobile banks have been authorized as a result of the new division.

Some of the questions that he said need to be answered, moving forward are: “Which fintech activities constitute traditional banking activities by another name and should be regulated as such? How could developments change the safety and soundness of existing regulated firms? How could developments change potential macroeconomic and macrofinancial dynamics including disruptions to systemically important markets? And what could be the implications for the level of cyber and operational risks faced by regulated firms and the financial system as a whole?”

Researcher Showcases Unauthorized NFC Payments With Cloned Android Device (The Merkle), Rated: A

While this concept sounds ridiculous to most people, they should not underestimate the power of root malware on Android devices. By using this type of malicious software, it is possible to abuse the host card emulation protocol. Google introduced this feature in Android 4,4, as it allows for NFC payments by keeping the Android device next to a payment terminal. Unfortunately, it appears this protocol can also be used to make fraudulent purchases.

Thankfully, this exploit has been discovered by a security researcher who notified both Google and all of the applications he successfully “abused” about this vulnerability.

European Union

Aegon Leaves Legacy Behind With Ohpen’s Cloud Finserv Platform (Forbes), Rated: A

Ohpen, a banking technology company based in Amsterdam,has announced that it will partner with Aegon to develop a new platform for Aegon’s Dutch services, from banking to investments. It will also support multiple labels including Aegon’s Knab (bank spelled backwards) an entirely digital bank.

Aegon, a global financial conglomerate whose American holdings include Pimco, will replace multiple individual systems for pensions, savings, current accounts and wealth management with a single Ohpen platform running in the cloud on Amazon Web Services (AWS). Aegon will plug into Ohpen’s platform through a flexible, 100% API-based interface.

Multiple companies under one corporate umbrella do many of the same things and have their own infrastructure and staff. Ohpen lets them merge all those activities onto a single cloud-based back end and then put an API on top so any application or Web site can get to it.

International

Keeping the banks honest: meet the regtech rule-obeyers (Wired UK), Rated: AAA

Under mounting pressure to become more transparent and accountable, banks and financial institutions are turning to regtech: technology that automates regulatory compliance.

London-based FundApps alerts financial institutions when regulations change, and gives them software to help compliance. Launched in 2010, it covers 88 jurisdictions.

Legislation in Europe requires companies to “know your customer” to make sure they’re not money laundering. That’s what Trulioo does.

Qumram records, retains and allows on-demand replays of digital activity across web, social and mobile.

US accounting rules require banks to store historical loan data to predict future repayment. “This is what we help them do,” says Vivek Subramanyam, CEO of Fintellix. Launched in 2006, it recently launched a website targeting US community banks and credit unions that are grappling with accounting regulations.

KYC3 (“Know Your Customer, Counterparty and Competition”) automates due diligence, so companies can screen potential clients.

How the World’s Richest Companies Can Help Its Poorest Citizens (Time), Rated: AAA

From Kenya and Tanzania, to Jordan and Peru, digital technology and simple mobile phones are opening up opportunities for millions of people by helping them to safely save and manage their money.

From Kenya and Tanzania, to Jordan and Peru, digital technology and simple mobile phones are opening up opportunities for millions of people by helping them to safely save and manage their money.

Four of the world’s largest telco system manufacturers — Sweden’s Ericsson, China’s Huawei, Canada’s Telepin and India’s Mahindra Comviva — have put aside their fierce competition and agreed to collaborate, not out of altruism but in order to better compete. Announced at the Innovate Finance Global Summit in partnership with the Bill & Melinda Gates Foundation, who works to bring competitors together to meaningfully address financial inclusion for the poor, these companies are developing a set of “application programming interfaces,” or in plain English, ways of making computers talk to each other. These APIs will create open-source standards for the development of digital financial services that are automatically compatible with each other, lowering costs for providers and increasing the utility of digital financial services for customers overall.

By governing how different digital accounts send and receive money, the APIs can be the basis for a new “internet of payments,” across which individuals, banks, merchants, employers, and governments seamlessly transact. The APIs are still under development, but when they’re complete they will be released as a global public good, available to anyone who wants to invent.

AI In Fintech: 100+ Companies Using AI Algorithms To Improve The Fin Services Industry (CB Insights), Rated: B

Funding to AI startups reached record highs in 2016 and applications for artificial intelligence technologies exist across nearly the entire spectrum of business. Highlighted here are the top 100 AI startups selected by CB Insights operating across numerous industry verticals.

China

Assistant chairman of China Banking Regulatory Commission, Yang Jiacai, reported to be ‘out of contact’ (SCMP), Rated: AAA

Fifty-six-year-old Yang Jiacai, assistant chairman of the China Banking Regulatory Commission (CBRC) was reported to be “out of contact” since Tuesday, April 11, by Chinese media Caixin and Caijing.

Caixin reported Yang had transferred all his responsibilities to his colleague, the commission’s vice-chairman Cao Yu.

Yang made his last public appearance a week ago during a press conference for the CBRC, during which he introduced some heavy-handed regulatory moves planned by the commission.

Podcast 97: Yihan Fang of Yirendai (Lend Academy), Rated: AAA

In this podcast you will learn:

  • The origins of Yirendai and how it was incubated inside CreditEase.
  • When and why Yirendai was spun-off from CreditEase.
  • Some background on all the divisions inside CreditEase.
  • The typical borrower who comes to Yirendai for a loan.
  • How Yirendai has broken new ground in China.
  • The different channels they use to obtain borrowers.
  • The typical size, rate and term of their consumer loans.
  • How these borrowers use their loan proceeds.
  • How Yirendai differentiates themselves from their competitors.
  • Who the typical investors are who participate on their platform.
  • The average amount each of their 200,000 investors deploy on their platform.
  • How their investor product works and details of their risk protection fund.
  • How their business model works as far as revenue.
  • A breakdown of their institutional investor interest.
  • Why they decided to do an IPO in New York rather than Shanghai or Hong Kong.
  • The impact of the new marketplace lending regulations in China.
  • Yihan’s perspective on the fraud that has happened in China.
  • Details of their new Yirendai Enabling Platform that they launched at LendIt.
  • What areas Yirendai will focus on in the coming years.

China is Cracking Down on Unscrupulous Financial Services (Crowdfund Insider), Rated: A

In a series of reports, ChinaNews is pointing to the increasing scrutiny of the Chinese government regarding financial fraud and over-all malpractice.

Now the China Banking Regulatory Commission has published measures to address risks in the financial and banking sectors. According to ChinaNews, CBRC highlighted 10 areas for improving risk control in both traditional and internet finance – which includes peer to peer lending.

All of this is taking place with the back-drop of Xian Junbo, Chairman of China Insurance Regulatory Commission (CIRC), being placed under investigation for “disciplinary violations.” He will be the most senior government financial regulator to be investigated in several years.

WeiyangX Fintech Review (Crowdfund Insider), Rated: A

Big Data Company Wecash raised $ 80 million in series C funding led by China Merchants Capital, Fore Bright Capital and SIG. Two new investors – Dongfang Hongdao Asset Management and Lingfeng Capital joined the existing investors in this round.

On April 10, China Banking Regulatory Commission released “Guidelines on risk prevention and control in banking industry” to make the P2P online lending market standard by perfecting the in-out mechanisms, paying more attention to the supervision and perfecting the governance of online lending companies.

According to the PwC Global FinTech Survey China Summary 2017 released on April 6, the three main areas to be disrupted by FinTech in China over the next five years will be consumer banking, investment & wealth management, and fund transfers & payments. E-retailers, large technology companies and financial institutions will be the biggest sources of disruption.

Compared with developed countries, the market-penetration level of auto finance in China is much lower. However, it also indicates that China has a tremendous room to develop and grow.

US

Australia

China

Market-penetration

80% – 85%

70%

Less than 30%

On April 6, second-hand car online trading platform Souche closed on $180 million in Series D Funding led by Warburg Pincus. Other participants in the round included VMS Investment Group, ClearVue Partners, Haitong International, CreditEase and Morningside Capital. Notably, Souche just finished Series C Funding led by Ant Financial in the last November. In the past five months, Souche has raised a total of $280 million.

 

India

The India Fintech Market Map: 72 Startups Working Across Lending, Payments, Insurance & Banking (CB Insights), Rated: AAA

Looking at Indian fintech specifically, funding to private companies in the sector boomed from about $175M in 2014 to a high of $2B in 2015 (buoyed by mega-rounds to Paytm) and then slid to $530M in 2016. Still, 2016′s total funding was more than 200% higher than total funding in 2014. A host of global corporations and their venture arms have entered the fray, eager to reach India’s mostly unbanked population and profit from the country’s tech-friendly regulatory environment.

‘Free’ credit reports from fintech portals (livemint), Rated: A

Apart from bureaus, online financial marketplaces are also offering free credit scores and reports. These reports are not counted against the free reports you can get from credit bureaus directly.

On the four fintech platforms we went to, it took no more than a few minutes to log on, authorise the fintech to access our credit report, and get it on the screen or in email. And it was also simpler to get a report here than from a bureau’s website.

On Bankbazaar, we got the report on its website and in email. Paisabazaar displays the report on its website. Both sites provided reports from Experian Credit Information Co. of India Pvt. Ltd.

FinTech: To Regulate Or Not To Regulate? Former RBI Deputy Governor R Gandhi Explains (Bloomberg Quint), Rated: A

In lending, peer-to-peer lenders and online SME (small and medium enterprises) lenders are targeting clients considered too risky by banks. They claim to use technologies that can assess credit worthiness in smarter ways than the traditional income statements used by banks. In payments, wallet companies have taken the lead in retail payments forcing banks to up their game.

One gripe that banks have is that these fintech firms are getting away unregulated, which gives them a lot more flexibility in how they do business.

That’s true for now, said R Gandhi, former deputy governor of the Reserve Bank of India (RBI) who retired after a 37-year stint at the central bank earlier this month. The dilemma for the regulator is to decide when to regulate and how to regulate so as to ensure that innovative business models get a fair chance, Gandhi explained in an interview with BloombergQuint on Tuesday.

Is India ready for Peer-to-Peer lending industry? (Faircent), Rated: A

What we are trying to do is to create a P2P (Peer to peer) lending industry. Fundamentally we are providing an alternative to banking and other financial institutions.

Karun: Investors whom we call lenders can get returns up to 18% to 20% per annum which is much better than other options today. As a borrower you can avail unsecured loans at much cheaper interest rates. What we feel is that the banks make huge margins in terms of the rates that they offering customers on their savings and the rates they are lending it out to people at, in the form of loans. By reducing the margin, with Faircent as the match maker, we are able to pass value to both sides of the table, to borrowers as well as lenders.

Karun: We are purely a digital entity.   We are trying to use technology so that there is minimal offline intervention.

We’ve done a lot of marketing technology interventions, like we have a CRM which is built on top of our platform, which is a custom made CRM. We have integrated it with our lead gen channels. We have an email marketing platform using which we nurture our customers and also do promotional activities with potential customers. We have done a lot of work in trying to become Omni-channel. Three main channels which we use are email, SMS and Voice.

Karun: We are using a lot of the off- the- shelf products. But the challenge for us is really how do we integrate them with our platform. So hence we have to be much more careful about which option we choose. We are using Octane and Amazon for email. Octane is basically a mix of email and SMS which we are predominantly using for marketing.

Karun: Yes, we have a mobile app which is available on the Android and iOS platform. Right now, our focus has been more to enable our customers to access our platform on the mobile device. So for example if there is an investor who wants to invest in loans on the fly he can do it using our app. At present we’re not really focused on the app to acquire more borrowers or acquire more investors and lenders.

Razorpay plans overseas foray (The Hindu Business Line), Rated: B

Razorpay, a payment gateway solution provider focused on online merchants, plans to go international. It is looking to enter South East Asia and West Asia markets in 2018-19, Harshil Mathur, co-founder, has said.

The fintech startup, which started its journey in mid-2014, is in talks with local and global (banking) players in these markets, Mathur said.

Razorpay, which had raised Series A funding of $11.5 million, is not worried about funding for the next two years, according to Mathur.

Asia

ORIX Launches New Online Lending Business for Japanese Small Businesses (Orix), Rated: AAA

ORIX Corporation (“ORIX”) and Yayoi Co., Ltd. (“Yayoi”), an ORIX Group company, announced today that they are launching a new online lending business, a new FinTech service utilizing accounting big data and proprietary Artificial Intelligence (AI) based credit model.

The business will provide Internet-based lending to small businesses in Japan. A new credit model is under development, utilizing ORIX’s credit expertise, Yayoi’s accounting big data, and cutting edge AI technology by ORIX’s partner company, d.a.t. Inc. Most existing credit models in the market to date relied solely on static data such as financial reports; by utilizing dynamic data, such as day-to-day journal data and other transactional data, the new credit model is expected to offer much better predictive power than before.

ALT plans to start offering lending services on a trial basis to the approximately 600,000 companies, who are existing users of Yayoi’s online services1 in October 2017. Customers will be able to apply online, during which process they grant permission to access their accounting data.

According to a survey of 7,609 Yayoi customers, 85.0% of small corporations have a need for short-term financing, but 36.5% of those have been shying away from obtaining traditional loans, due in part to the excessive amount of time and efforts required for approval of short-term financing. With respect to sole proprietors, just 16.4% of them have obtained short-term traditional loans. Utilizing online lending can reduce complex administrative procedures, including the need to submit financial reports and other paperwork and to visit financial institutions in person, and can also shorten the time needed to obtain much needed cash, making simpler, more flexible financing possible.

AN INDONESIAN peer to peer (P2P) lending startup, KoinWorks is supporting small and medium enterprises (SME) and education by launching an art exhibition, ARTificial Intelligence which will run from April 13 to April 30 at Pacific Place, Jakarta.

Benedicto also says that KoinWorks mainly focuses on SMEs that conduct their sales and marketing activities online. He also believes that by connecting SMEs to lenders, it will bring benefits to both sides.

Benefits for lenders are through net gained interest from their investment which can be up to 19.8% annually depending on the risk level. The service also fulfils social needs by helping businesses to grow.

Users may invest in KoinWorks with a minimum deposit of US$7.50 (100,000 rupiah). The funding will be deposited in real-time at a virtual bank account. Users only need to scan and upload information from their identity card, fill in the form, and deposit the money.

LendIt China Event, Lang Di Fintech, Updates on PitchIt Competition (Crowdfund Insider), Rated: A

LendIt, the global lending and Fintech conference, has announced the official launch of the Asian edition of their Fintech startup competition, PitchIt, in association with JadeValue, a Shanghai-based Fintech incubator. The competition is for all early stage Fintech startups in Asia-Pacific.

PitchIt will take place at the Lang Di Fintech conference, China’s largest global Fintech conference in Shanghai in July.

The 8 Finalists Will Receive:

  • Opportunity to secure investment and partners by meeting investors
  • Have your pitch heard by the international fintech community in front of an audience of international and local attendees across APAC.
  • Gain valuable exposure through global PR
  • Up to $1,000 for travel to Lang Di Fintech
  • Year-round exposure through press and brand visibility and the chance to gain mentorship from Global VCs on pitching and product positioning prior to the event.

The Winner Will Receive:

  • Mentorship, co-working space for 6 months and guaranteed investment of $150,000 from JadeValue
  • 2 free passes to LendIt USA 2018, roundtrip airfare and accommodations
  • Curated meetings for investment purposes in the US during LendIt USA 2018 (April, 2018, San Francisco)
  • Complimentary sponsorship at LendIt USA 2018
MENA

The future of digital money (Gulf News), Rated: A

At a time when the consumer relationship with cash is more virtualiser and abstract, and where use of physical cash continues to decline in many markets, the next phase of digital money offers undiscovered potential for a new period of expansive growth in transactions, beyond the limits of national borders.

The region’s e-commerce marketplace is thriving too, but it depends more on cash on delivery than on electronic payments. At the same time, a relatively low share of adults have bank accounts, while mobile money accounts have had limited success. That could be about to change. New Fintech entrants are playing their part in helping drive payment digitisation.

Furthermore, developments in payments technology are making it easier for us all to transact. Egypt’s Payfort recently has successfully helped smaller merchants accept electronic payments, and offers instalment payment options to help merchants improve sales. We’re also seeing global providers such as Apple Pay, Google Pay becoming more active in the region after a slow start and more global players are coming, for example Samsung, with Samsung Pay about to deploy payment services that are promising to be easier, faster and more secure using your Samsung smart phone.

Africa

VoguePay Wins Best Fintech Startup Award (This Day Live), Rated: B

VoguePay.com, a secure payment gateway has won the “Best Fintech Startup” at the 6th edition of the Cashless Africa Awards 2017, organised by Mobile Money Africa in Lagos recently.

Authors:

George Popescu
Allen Taylor

China Issues Online Lending Rules – Panic Ensues

China Issues Online Lending Rules – Panic Ensues

After nearly eight months since the original draft was first issued, the China Banking Regulatory Commission (“CBRC”) announced the official rules for the online lending industry on August 24, 2016. The unveiling came accompanied with a few policy curveballs that few industry participants were expecting. Titled as the “Interim Guidelines” (indicating there could be more […]

China Issues Online Lending Rules – Panic Ensues

After nearly eight months since the original draft was first issued, the China Banking Regulatory Commission (“CBRC”) announced the official rules for the online lending industry on August 24, 2016. The unveiling came accompanied with a few policy curveballs that few industry participants were expecting. Titled as the “Interim Guidelines” (indicating there could be more permanent policies few years down the road), certain media has hailed the newborn policies as the strictest ever in the history of online lending. However, not much has changed between the draft and final versions with one major exception: borrowers are now subject to a borrowing limit for loans on a single platform as well as across platforms.

Public reactions from industry participants were all positive and supportive as one must never (ever) publicly denounce Chinese policies. Privately, many managers are scrambling to make sense of the new rules while lamenting that regulators have dealt a death blow to the online lending industry.

Rules to Reduce Risk and Police Paperwork

When Chinese media began circulating rumors of borrowing limits in the days leading up to the official CBRC announcement, many dismissed the reports simply as a rumor. Imagine the disbelief as the policies now confirm that “natural persons may only carry a loan balance of up to RMB 200,000 on a single platform and no more than RMB 1 million across multiple platforms. While legal representatives of organizations and other legal entities may only borrow up to RMB 1 million on a single platform and no more than RMB 5 million across multiple platforms.”

In the press conference held by the CBRC, the following official response offers the following explanation for the motivation behind the borrowing limits:

“To better protect lenders’ rights and to reduce the moral hazard risk of lending platforms, we want to limit the concentration risk in loans and work in conjunction with the applicable laws and filing standards for illegal fund-raising cases”

The first part of the statement is easy enough to understand, regulators want to forcibly reduce overexposure to large loans as a moral hazard problem does exist in that platforms are incentivized to make bulky loans as it saves them origination costs and helps them generate larger volumes, while lenders ultimately bear the higher risk from overburdened borrowers. The latter part of the statement, however, is trickier to explain and rationalize.

According to the relevant rules issued by the Supreme People’s Procuratorate and the Ministry of Public Security, the threshold to establish and prosecute a criminal case for illegal fundraising is RMB 200,000 for individuals and RMB 1 million for organizations. What this means is that if someone illegally fundraises any amount below these thresholds, they will not be prosecuted on a criminal basis and would instead undertake a civil procedure. Therefore the logic here, as one Chinese industry blogger mused, seems to be that all borrowers on lending platforms are now deemed to be fundraising illegally and to protect these borrowers and platforms from criminal prosecution, regulators are enforcing loan limits that match exactly with the criminal case thresholds. In this sense, regulators are attempting to protect lending platforms from being implicated as facilitators in criminal fundraising cases. In addition, drawing a clear line for lending platforms will likely reduce the case load for police departments as platform compliance with the limits would lower the likelihood of criminal cases being filed by lenders. Since the Ministry of Public Security is one of the joint authors of these rules, it has been rumored that they pushed hard for the loan limits so that they can reduce police paperwork from criminal fundraising complaints. This rumor is unverified and highly speculative, of course.

Alternative Policy Proposal

Allow me to digress here as I would like to propose my own solutions to the issues that regulators pointed to as motivation for implementing the loan limits. If regulators are concerned about concentration risk in large loans, a more direct solution to protect lenders would be to mandate an investment limit per loan, thus forcing lenders to diversify their loan portfolio. Using diversification to reduce risk is frequently advertised to lenders by top lending platforms in both China and the US and should address the regulators’ concern for investor protection. However, if regulators are more focused on the moral hazard of originating large loans that benefit platforms and increase the risk to lenders, I think there is an even bigger moral hazard issue that should be addressed first.

Fees.

Many Chinese lending platforms collect an outrageous amount of origination fees from the borrower. Examining a certain NYSE listed Chinese lending platform’s latest annual financials, one can find an average fee rate of 20%+ being charged to the borrowers. With these fee rates, the resulting cost to the borrower can soar close to 40% APR, a rate of return that even small time loan sharks will find attractive.

The classic moral hazard issue here is clear: platforms can overburden borrowers and increase default risk to lenders by collecting high fees that benefit their own financial performance. Even worse, with a poor disclosure from the platform, lenders are often only aware of the interest paid to them by the borrower without knowing about the additional fees that borrowers have to pay to the platform.

To resolve this moral hazard problem, I suggest that regulators seriously consider implementing limits on platform fees for borrowers or set a cap on overall borrowing costs. If not, then regulators should at least mandate detailed disclosure of fees on a per loan basis to reduce the information asymmetry between lenders and platforms on borrowing costs for loans.

Although there are existing private lending laws in China regulating the interest rate that lenders can charge borrowers, there are no regulations on the overall borrowing cost inclusive of all fees. Certain platforms have publicly justified the use of this legal loophole to continue to issue high-interest loans under the guise of platform fees. Eventually and hopefully, in one form or another, there must be policies to control fees charged by all types of regulated lending institutions. Otherwise, such irresponsible lending practices will pose a significant risk to China’s financial sector.

Issues with Enforcement

The main issue with enforcing the loan limits is that China has a severely underdeveloped credit rating system and it is often very difficult to verify a borrower’s debt burden while underwriting a new loan. Regulators and platforms would not only have difficulty in determining the debt situation of a borrower across multiple lending platforms, it will also be challenging determine whether the borrower has outstanding loans across a variety of banks, financial institutions, or individual lenders. Perhaps the new policies would further encourage the industry or other government bodies to develop systems to monitor and share credit information of borrowers.

To further complicate enforcement of the rules, loopholes exist for platforms to circumvent the new policies. Institutions can register multiple entities using different legal representatives and spread out loans across these entities within the policy limits. After all, the “Interim Guidelines” does not stipulate limits on aggregate online loans taken out by related entities with different legal representatives. Similarly, individuals can use spouses, relatives, and friends to borrow on their behalf and the individual as the ultimate user of the funds can serve as the guarantor. The policies were most likely designed with this loopholes in mind as regulators do want to provide some leeway for platforms to operate. Ultimately, it would be up to the local financial regulators tasked with enforcement on how they want to apply the rule within their jurisdiction. Strict interpretation and enforcement on a regional level would most likely induce platforms to migrate their place of registration to jurisdictions that have a more lax interpretation of the rules. Thus it would be unlikely for local financial regulators to introduce very strict rules considering the potential detrimental effects on economic activity and tax revenues resulting from platforms migrating to other regions.

Potential Fallout

The borrowing limits would mainly impact Chinese platforms on two levels.

First, there are a few leading platforms in China that have been focused on originating large loans to enterprises of RMB tens and hundreds of millions. These platforms would have to make a drastic adjustment over the 12 month compliance period to reduce their portfolio concentration in these large loans and source borrowers whose capital needs fall within the policy limits. Similarly, companies that have been relying on these large P2P loans will have to find a way to adjust to the new policies or find new financing channels that can satisfy their capital needs. If these companies cannot be successfully weaned off P2P loans, we could witness a wave of defaults and platform collapses at a sizable scale within the year.

On another front, competition will increase for platforms acquiring borrowers that have capital needs that fall within the policy limits. The rise in demand for these small loan borrowers may further drive decreases in the costs of borrowing provided that the supply of credit holds steady. This shift in market dynamics would be very beneficial to borrowers as many still face extremely high all-inclusive costs on loans from P2P platforms in the range of 30 – 40% APR ( a majority of the cost coming from fees collected by the platforms). However, it would be interesting to see if platforms would choose to pass on the discounted rates to the lenders or cut into their own margins in order to maintain a healthy lender base and supply of capital.

The Thirteen Commandments

A list of forbidden activities remain in the announced regulations but in a few adjustments to the original list of 12 items outlined in the draft rules, the final policies now outline the following 13 forbidden activities for online lending platforms:

  1. Use the platform for self-financing or for financing of related parties
  2. Directly or indirectly accept and manage lender funds
  3. Provide guarantees to lenders or promise guaranteed returns on principal and interest
  4. Beyond the approved internet, telecom, and other electronic channels advertise or recommend loan investments to lenders through physical locations managed by the platform or third parties authorized by the platform
  5. Directly make loans to borrowers, unless stated otherwise by applicable laws and regulations
  6. Structure loans into investment products with liquidity timing that differs from the original loan term
  7. Sell self-managed wealth management or other financial products to accumulate funds or broker bank wealth management products, mutual funds, insurance annuities, or trust products and other financial products
  8. Conduct securitization like businesses or facilitate the secondary sale and transfer of packaged assets, securitized assets, trust products, or fund interests
  9. Collaborate with other investment or brokerage businesses to bundle, sell or broker investment products, unless stated otherwise by applicable laws and regulations
  10. Provide false loan information or exaggerate return expectations; concealing investment risk; use biased language or other fraudulent methods to engage in false advertising or marketing; fabricate and disseminate false or incomplete information to damage the business reputation of another or to mislead borrowers or lenders
  11. Facilitate loans for the purpose of making investments in the stock market, futures contracts, structured products or other high-risk investments
  12. Provide equity crowdfunding services
  13. Other activities are forbidden by applicable laws and regulations

The notable addition to this list is rule number 8 that forbids securitization-like services and the secondary sale and transfer of certain assets. It is unclear on what exactly this rule is trying to restrict, but many have interpreted this as an attempt to prevent lending platforms from selling more complicated financial products that are typically controlled by the securities regulator. However, due to the use of Chinese terminology here, a more conservative interpretation of the rule suggests that platforms are not allowed to provide a secondary market for the lenders to trade loans and gain liquidity. Contrary to the US market where a third party provides the secondary loan trading market, the majority of Chinese platforms operate their own secondary market often integrated with the lending platform. Further clarification from the central regulators as well as local regulators will be needed in order to precisely identify the forbidden secondary transfer activities and ultimately, how they will be enforced.

Other Bits

The rest of the new policies remain largely unchanged from the original draft for public opinion. There are a few administrative requirements such as registering with the local financial regulator, updating the business license to include “online lending information intermediary” in the scope of business description, and obtaining an Internet Content Provider license. These tasks may actually be very difficult for platforms to complete as some local government departments have shut the door on processing these requests in fear of inadvertently enabling a platform to conduct fraudulent activity.

The Interim Guidelines also touch upon important policies regarding customer funds custodianship and disclosure standards but deferred details to separate rules that will follow.

Loose Ends – More Regulations to Come

The CBRC Interim Guidelines are just the beginning to a series of applicable laws and regulations for the online lending industry. We can expect more policies and details on the following topics in the near future.

Bank custodianship for customer funds – a draft for public opinion has been circulated by the media in August but I have yet to locate the official copy released on CBRC website. Since I’m unable to confirm the source of the media released copy, I will decline to comment in detail for now. However, it looks like banks will have to step up and provide custodianship for lending platforms. Licensed payment platforms and other third parties would most likely be cut out of the game entirely.

Disclosure standards – the Interim Guidelines outline several pieces of information for disclosure to the public including loan details and performance, platform’s operational performance, audit reports, legal opinions, etc. Detailed disclosure requirements will be covered in a separate set of rules.

Guidelines for local regulators – as platforms are required to register with local financial regulators, the procedural requirements will need to be clarified by the central government. In addition, the current policies stated that local financial regulators will also be required to rate and classify platforms on file, thus a set of rules is expected for the rating process as well.

Regional policies – as provincial governments can make their own detailed rules based on the Interim Guidelines and file with the CBRC, we can also expect to see a variety of regional policies to be released in the near future.

Non-Depository Lending Organization Rules – a draft for public opinion on this topic was issued mid-August prior to the online lending rules. The final policies here will likely have an effect on the activities of lending platforms.

Although the arrival of the Interim Guidelines has finally granted a sense of legitimacy for the online lending industry, new questions have been raised and old questions remain unanswered. However, as with many other nascent industries, regulation for online lending will be a continuous and ever evolving process. We can expect platforms to quickly adapt to the current policies as well as expect many new policies and guidelines from various governing bodies (both local and central) in the months and years to come.

Author:

Spencer Li

About the author: Spencer Li is based in Beijing, China. He is the VP of Product of Fincera. He oversees and manages product development and marketing of a web-based small business lending platform (CeraVest), a closed-loop B2B payment app (CeraPay), and automotive e-commerce platforms. For more information, please visit the corporate website at www.fincera.net.