Transformations Deeply in Need: P2P Industry in China

From the Perspective of Risk and Compliance

Since 2015, China’s peer to peer (P2P) financial industry has experienced a rapid development while the risk of its industry has also started a comprehensive outbreak. Due to the lack of supervision, a lot of non-reliable platform rise in P2P industry, which caused certain loss of money and pulled down the credibility and reputation of the P2P industry overall in the minds of investors. Especially at the beginning of this year, platforms with the volume of hundreds of billions such as Ezubao (e租宝), WealthROLI (中晋资产), KuaiLu group (快鹿集团), Rower p2p (融宜宝) and so on, shows difficulty for the transaction section, some even went bankrupt due to a lack a strategy. Nowadays P2P financial industry is dying out, those online platforms that connect borrowers with lenders has been plagued by mismanagement and fraud. The banking regulator of China said in the last December that more than 1000 lenders, or about 30% of the platforms, were found to have problems. However, a large part of bankrupt P2P finance platforms are fake P2P platforms, with a flood of fraud cases from China’s thriving internet finance sector. “It is Not Easy to be Abscond with Money”《卷款跑路没那么容易了》published on April 9th on People’s Daily clearly pointed out: the real P2P platform is the information intermediary platform between borrowers and investors without the receipt and payment of funds and investment business, namely the pool of funds business. Therefore, not all Internet financial companies are P2P platforms. It cannot be called P2P if the company was not in accordance with the above characteristics, especially for the capital pool business. Therefore, P2P compliance risk management is particularly important.

P2P Industry in China: Transaction volume still rise

P2P financial industry seems to be experiencing a low tide, but the recent online lending transaction data shows the opposite. According to “Monthly Report of P2P Online Lending in March 2016” issued by Online Lending House, the online lending industry realized 136.40 billion yuan of the overall volume, rose by 20.70% in February, which was 2.77 times of the volume in March 2015. P2P financial products’ liquidity and return rate are relatively higher than other conservative financial products. For example, the profit rate of Wealth Evolution (人人贷) is about 11% with periods mainly from three months, six months and twelve months. The periods of Duijin (堆金网) are basically the same at yields on 10% – 15%. The two platforms also support the transfer of bonds, therefore greatly improving the investor’s liquidity. Comprehensive speaking, P2P financial management is still a good choice for investors. Meanwhile, promotional activities including celebrity endorsements and media advertisements by companies involved in the above businesses are also banned.

Rigid payment becomes dilemma choice of P2P platform

In 2015, ten ministries and commissions jointly issued “Guiding Opinions on Promoting the Healthy Development of Internet Finance” to further clarify the Information intermediary position and attributes of P2P platform, rather than the credit intermediary. Therefore, in the case of bank trust fund held by third party banks and prohibiting the establishment of internal pools of capital and risk reserve, the biggest problem P2P agencies will face is the borrower defaulting risk. Rigid payment is no longer the responsibility of the P2P platform, and the lender is bound to fall into panic redemption and distrust, this will become the inevitable dilemma of P2P platform. According to these risks and problems, the P2P platform after fierce competition to survive, will pay more attention to the borrower’s performance, and will innovatively introduced other warranties which dispel the lender’s concerns and in compliance with regulatory requirements, such as non-related party guarantee, performance guarantee insurance and transfer of non-performing loans of assets.

Operation risk and moral hazard of P2P platforms

In the fierce competition, there are false claims, self-financing, non-paid transactions etc. in many P2P platforms in order to complete the performance pressure. When the repayment begins and extends, this kind of customers highly tends to become overdue and lost, resulting in the loss of confidence from the customers. In measuring the risk of P2P platform, operational risks, especially moral hazard has become the biggest problem in the P2P industry beyond credit risk. In this situation, it is only by strengthening laws and regulations, that those platforms would strengthen the self-discipline and customers’ education. Law and regulations are supposed to strengthen management and enhance the responsiveness to operational risk prevention and compliance consciousness of the P2P platform managers and practitioners. As the central government and local authorities roll out their unprecedented clean-up campaign, companies in this sector are suffering the worst time – regardless of whether they are good or bad, or run with integrity or backed by swindlers. Since mid-April 2016, a number of government departments under the State Council has started a rectification within a one-year program to clean up the internet finance industry.

The information security of P2P online lending cannot be ignored

With the accelerated expansion of the P2P platform, at the same time, investors scale is in a rapid expansion, P2P platform is easy to master with a large number of users’  personal information, such as its identity card number, its home address, its telephone number, its credit card number and other essential information. P2P platform should strengthen the construction of information security while in the pursuit of rapid development.

With the ongoing public exposition of similar fraud cases, these old tricks are losing their appeal as people are becoming more and more skeptical towards these platforms that flourished overnight, promising guaranteed investment returns above 10%.

For existing companies, local regulators, particularly the administrations for industry and commerce, a government organ responsible for business registration, and local police have been looking into business models, shareholder structures, and financial positions. But the real problem is the lack of clear industry guidelines or laws regulating entry barriers to the industry by clarifying what can be done or not.

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