Internet Finance in China

The development of Internet Finance in China

Internet finance refers to the new business model of utilising the Internet and information communication technologies to accomplish a wide range of financial activities, such as third-party payment, online lending, direct sales of funds, crowdfunding, online insurance, and banking.

Information technology (IT) companies providing financial services, such as WeChat Pay, and traditional financial institutions applying IT to their more traditional services, such as the e-ICBC service of the Industrial and Commercial Bank of China (ICBC).

Internet finance has been operating in China for more than 10 years, most people regard the June 2013 launch of Yu’E Bao, an online sales platform for money market funds established by Alibaba’s Ant Financial Services, as the point from which the recent explosive development of Internet finance in China began. According to the Peking University Internet Finance Development Index (IFDI), since January 2014, Internet financial activities have been growing at around 100 percent a year.

Take P2P Lending & Crowdfunding as examples:

To address peer to peer lending, a 9-year-old industry, 2,235 platforms were in operation by the end of August. The cumulative total of these online lenders has now topped $385 billion. From January to the end of August, over $181 billion has been originated online – more than 2.5X the same period year prior. In August of 2016, there were up to 3.518 million lenders and 1.35 million borrowers

Internet finance in China comprise mainly 3 business lines, third-party payment platforms, online P2P lending and sales of investment products.

Third-party payment platforms

Online and mobile payment systems are involved in many aspects of people in China, people use these platforms to pay for their online shippings, utility bills, credit card bills, restaurants, convenience stores and so on. It is the largest and fastest growing segment of the internet finance market with an overall transaction value of £2.2tn in 2015

There are four main payment platform Alipay, Tenpay, Baidu Wallet, UnionPay, and according to iResearch Alipay and Tenpay together account for 68% of online payment transaction value and 89% mobile payment market.

P2P (individual & SME)

Where ordinary consumers cut out banks and lend directly to each other over online platforms. Those P2P lending can be distinguished in three aspects: 1.direct peer to peer lending or indirect lending, 2.use new financial technology based processes or more conventional way, 3. online or offline process. Lufax (estimated worth of £3.4bn), Renrendai (est. £1.23bn), and Yirendai (listed in US, market cap £467m) are the most competitive Chinese P2P platforms. Lufax is a subsidiary of China’s largest insurance provider, PingAn insurance. It has both direct peer-to-peer lending and large volume indirect lending businesses, in indirect lending funds are collected into a pool before being lent out to others and then assign credit to borrowers. Renrendai is a direct lending company with an online direct lending business, but mostly operates offline P2P lending with a loan amounts range from 3000RMB to 200,000RMB and loan terms from 3 months to 36 months. For a borrower who is registered online without a third-party referral from a loan company, the minimum loan amount is RMB3000 and the maximum is around RMB8,000–10,000. Borrowers are asked for their basic information, which is cross-verified and checked against RenRenDai’s credit rating model. RenRenDai has a bad-loan reserve fund that is managed by a third-party bank and is used for covering losses on investor principles.

Sales of investment products

The online investment market took off in June 2013 when the investment product Yu’E’Bao was launched by Alibaba through its online payment platform Alipay (now part of Ant Financial), and managed by Tian Hong Fund. Though Baidu, China’s top search engine launched Baifa and Tencent, another giant in chinese internet industry, launched Wechat wealth management product, Alibaba still dominates the market.

Successful examples

Probably not the first, but now China has one of the most developed internet financial system of the world. According to McKinsey, the market size of China’s internet finance sector is more than 12 trillion Renminbi (about USD$1.8 trillion) at the end of 2015. The result showed that third-party payments is in the dominant position of the sector, which made up 89.2% of the market. The corresponding divisions are wealth management and financing division, which all take 4.6% of the market share respectively and 1.5% of others, including insurance and direct banking. With 4 reasons summarised by McKinsey, Chinese internet finance is developing rapidly in recent years:

1. China has an open, supportive regulatory environment.

2. China has a highly developed e-commerce sector, with more than 30 percent of the Chinese population already using Internet payment systems

3. there is enormous latent demand for inclusive finance

4. The strong profitability of traditional banks has underwritten a strong trial-and-effort culture, facilitating aggressive investments in innovative digital services.

Now let’s take a look at the most successful part of Chinese internet finance-Third party payment. This market is now dominated by Alipay and WeChat, with some minor roles, such as Apple Pay and Union Pay. Alipay was used as a transaction intermediate tool for the biggest online shopping site Taobao. Thanks to the huge Chinese market, it overtook PayPal as the world’s largest mobile payment platform in 2013. In the 4th quarter of 2016, Alipay has recorded 54% of Chinese mobile payment market shares, which is the biggest of China and the world. In September 2017, it unveiled a facial recognition payment service.

WeChat, another mobile payment giant, is a Chinese social media app developed by Tencent with rich functions such as messaging, commerce and payment service. WeChat Pay is a build-in mobile payment service of the app and let its users able to perform mobile payment and send money to contacts, which derived lots of functions such as splitting bills. It also enables users to link their bank cards to the account to top-up account balance. Started from 2015, WeChat launched a series of city services including transportation booking, paying utilities and much more in 27 Chinese cities. From Tencent’s report, WeChat has overtaken Alipay at the quantities of active users in 2017. However, Alipay still remains the biggest player in Chinese mobile online payments with 54% share, comparing to WeChat with 37% respectively.

Internet Finance is a relatively new development in China for just over ten years and the spurt of its blossom merely started three years ago. According to the measuring index for internet finance developed by Peking University, the industry grew nearly four times within a year up till 2015 and valued at US$1.8 trillion. The launch of Yu’E Bao by Alibaba in June 2013 was marked as the starting point of the explosive era for Chinese internet finance.

Involving in various activities such as third-party payment, crowd-funding or peer to peer lending (P2P lending), internet finance players include technology companies and financial organizations that provide transboundary and innovative services. The general trajectory of internet finance development would be demonstrated by the typical cases of P2P lending and crowdfunding which are both the most explosive sectors form 2014. Both of these two sectors have experienced take-off from 2013 and shuffle in 2016 in terms of declining platform numbers and financing amount due to new government regulations. The industry indeed shakedown and consolidate from bubbles and scandals as only efficient and legitimate platforms will survive. For example, 11 crowdfunding platforms received venture capital from even Tencent in 2016 while the sector was undergoing strict scrutiny by the government. Some specific platforms failed such as crowdfunding for housing. However, under the supervision but encouragement of The Specific Rectification Work Plan for Internet Financial Risk issued by government, the dramatic growth is expected to continue. Although the public perceptions on internet finance is controversial, its development indeed fills the market niche of undersupplying of financial services for SMEs or low-income households who are difficult to receive services from traditional financial institutions. Moreover, the IT tools or big data technology used lower the costs, improve the information symmetry and financial efficiency.

The size, and rapid growth, of online lending in China has been spectacular. Yet the industry is poised for a period of consolidation as new regulations have been announced. The stronger more established platforms will survive. The government actions have already made impacts on the industry as the number of platforms declined year over year for the very first time.

Current legislations:

Anti-Money Laundering Law of People's Republic of China, transactions on online credit platforms that potentially threaten national financial stability should also be monitored and punished. Particularly when the speed and quantity of credit spread are much faster and higher, private P2P hence provides a servicescape for usurious loan providers. In 2016, China has announced the Interim Measures for Administration of the Business Activities of Network-based Lending Information Intermediary Agencies, which is pursuant to:

1. The General Principles of the Civil Law of the People's Republic of China,

2. The Company Law of the People's Republic of China

3. The Contract Law of the People's Republic of China and other relevant laws and regulations.

Dr. Yangdong from the Renmin University of China suggested that local commerce bureau (i.e. 地方金融监管部门) should take the responsibility to monitor the P2P credit platform, particularly when the these platforms exceed the boundary of being a private company. However, digital finance complicates the process as the mobility is much quicker.

HOW CAN ILLEGAL P2P PLATFORMS BE MONITORED?

In the Interim Measures, if a victim initiates legal proceedings, it is legally-binding for police to open a case of investigation. In addition to these measures, other laws can be applied when monitoring these activities. For example, criminal laws are also applied if the lender does not have a certified licenses. In the case of naked loan, lenders may be charged with the invasion of privacy, or the crime of spreading obscene objects through the Civil Law. Mr. Zhenghung, a lawyer from Beijing, added that even if the victims commit to naked loans voluntarily, lenders are also subjected the legal charged under the civil law. Moreover, (usurious) loans that have an interest rate higher than 36% is declared ineffective based on the explanation made by the Supreme People’s Court.

However, Dr. Yang also highlighted that being a new model of credit lending in the whole world, it would definitely be harder to monitor compare to traditional credit lending facilities. Besides, the Chinese financial market itself is already complicated, adding new forms of financial facility complicate the process of monitoring even more. Moreover, the yihang sanhui financial monitoring system (i.e. a multi-line, vertical system that separates the monitoring process by 3 financial industries, respectively banking, insurance and securities) also poses coordination problems.

Reported in the financial times, China was preparing to further tighten regulation of online consumer lending as part of its strategies on deleveraging. Undoubtedly, this also brings greater protection from rapid growth of consumer lending via online P2P platform. China shows its commitment by setting up a commitment involving central bank and related departments to tackle problems specifically created from internet finance. However, whilst legislations protect the rights of borrowers, consumers’ consciousness remains the key to protect themselves from becoming a victim.