The concept behind P2P (peer-to-peer) lending or online lending is very compelling—to connect borrowers, whether they are individuals or companies, with lenders, saving the profits that have been harvested by big banks and credit card companies. It seems a win-win deal for all parties involved: the loan borrowers get lower interests, the investors have a higher return and the platform enjoys a service fee.
The idea became popular when it was first proposed around a decade ago. The then fast-growing sector fostered a series of unicorns. US P2P pioneer Lending Club was valued at $5.4 billion in its 2014 IPO and its peer Prosper was valued by private investors as worth $1.9 billion in its prime. Although a few years later than its foreign counterparts, Chinese P2P platforms have grown rapidly with leaders in the sector such as Hexindai who has gone public, and the likes of Lufax and Dianrong poised for an IPO.
But running the appealing concept in the real world is a whole lot more complicated when facing rising default risks and profitability problems. The P2P industry soon hit that point where doubt and genuine concern outweigh whatever goodwill its novelty once attracted. Large chunks of the once-up-comers were wiped off the map and some of them went bankrupt.
Government regulation is among the most discussed topics in the sector. At a leading fintech event LendIt Fintech held on September 6 at Shanghai’s Pudong District, Chief Executive Officer of Lending Club, Scott Sanborn, highlighted the difference between Chinese and US regulatory framework and his view of China’s P2P industry.
The regulatory environment in China and the US is dramatically different, Sanborn pointed out.
“In the US, there’s not a specific regulatory framework for our business model. We are fitting into the existing regulations, which existed to protect the lending side as well as the investment side. It’s not a perfect fit,” he said. “As a result, there are not many platforms like us in the US. But in China, things were essentially open, which brings an incredible number of up to 6,000 online platforms. That’s two pretty different approaches.”
China’s online lending industry has seen rapid growth since 2007 which hasn’t been very much regulated. The government stepped in to harness the hot market with rigid rectifications plans in June, but the move has propelled a break-out of compliance issues resulting in the collapse of P2P platforms. The number of defaulted platforms surged from 13 in May to 163 in July. The situation in the US is different.
“Some of the things were taken quite seriously in Washington, such as what price you charge, who are you lending to, race, age and gender of the users,” said Sanborn. “All of these questions will be asked at the very beginning of a business. Some platforms that are just getting started could get a penalty so the government is sending a very clear message that you need to take it seriously when doing P2P business.”
To some extent, the increase of P2P complaints in China can also be contributed to the weaker risk awareness among Chinese individual investors as compared with their US counterparts.
“In the US, the investors are very aware of the fact that loans, like any other investments, have risks,” Sanborn explained. “The interest of the loan goes to the investors, so in turn, they could face the risks involved. When we just launched, it was very difficult to convince people to invest in loans they have no track of and that sounds pretty scary. What we did was to offer a large amount of data list for investors to assess these risks.”
“China has a stronger ‘Want-It-All’ mentality to money, relative to retail investors elsewhere,” a research published in 2016 by Bernstein pointed out. “Our respondents appear to want risk-free yet high yields on WMP, equity, and bond investments.”
Sanborn believes the prospects of China’s P2P market are still quite exciting, but clear regulation is definitely the most fundamental part for the industry.
“What I see here in China is a pretty exciting picture because the county hasn’t been burdened by many of the legacy products,” Sanborn said. “The business system that we have in the US was predominantly built over credit cards. The challenge has been clearly the validation of the P2P model. Clear regulations or clear communication is vital for services institutions, banks, and investors.”
When asked about China expansion plans, Scott responded briefly that they “have no plans to expand to China in the short term.” The answer is no surprise given Lending Club’s current problems and the dramatically different market situation.
On its path to combine technology and financial services, China has witnessed many debates on high-sounding terms such as Fintech, TechFin, and Web Tech since 2016. Even experts in the sector find it difficult to draw the line between these terms. But for Sanborn, Lending Club is clear about how the company identifies itself.
“We are a tech company providing financial service. We use this vision from the beginning of our business,” he noted.