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China's Online Lending Industry Is Very Close to Maturity

  Aug 15, 2017  

Spurred by constant technological progress, the internet financial services industry continues to develop quickly. As the most representative and mature business model, the P2P industry is very close to maturity.

The maturity is reflected by three achievements: strict regulation on acquiring capital; marketization of capital pricing; and transparency of capital-asset matching.

The above three achievements were not reached until August 2016. These were achieved in just 12 months. The miracle came due to the strong self-sterilizing capacity of the market as well as the regulatory enforcement capability of China's monetary authorities.

With the release of the Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions (hereinafter referred to as "the Interim Measures") on Aug. 24, 2016, the online lending industry, which had encountered significant setbacks, started to embrace regulation.

The online lending industry was demonized because of many security incidents that occurred before the regulations. However, the Interim Measures confirmed the legitimacy of the P2P industry as part of the financial system, and identified its business scope and boundaries. The upper financing and trading limits reinforced the principle of small and distributed financing. More importantly, it raised the entrance bar for this industry and helped create a market environment of benign competition.

During the past year, the internet financial services industry has developed three new characteristics. One, financial integration. Two, financial inclusion. And three, intelligent technology.

The internet financial services industry has been known as a disruptor to the traditional financial services industry. However, during the past year, new internet finance and traditional finance have been gradually integrated in the terms of regulations, business models, and interest rates. The disruptor became a partner.

In recent days, China's central bank has been trying to include the internet financial services industry into the macro-regulation framework. What it has done, including the initiative of establishing a fintech commission, is aimed at strengthening the planning of, and coordination with, the fintech industry. Obviously, the regulatory authority has been trying to maintain financial market stability and use internet finance to improve the efficiency of economic entities. This can be regarded as the integration within regulatory systems.

In the first half year of 2017, the most eye-catching event was the cooperation and partnership among the top four state-owned banks and the top four internet companies, which was regarded as a powerful combination. The key driver for such a partnership was that fintech will enhance the traditional financial services industry's capacity in channels, data, and technology. Thus, it will help improve the efficiency and security of the traditional financial services industry. By forging such a partnership, the internet financial services industry also benefits from the new relationship with the traditional financial services industry. The relationship has changed from sole competition to competition and cooperation at the same time. It is reasonably believed that such cooperation will occur among more institutions in different areas. This is the integration of different business models.

With the release of regulatory policies, the increasing compliance of online lending industry, and decreasing irrationality, the impact of the market interest rate on the returns of the online industry are stronger. In early June this year, there were long-term interest rates lower than short-term interest rates. Meanwhile, the short-term interest rates of government bonds and financial products increased. The interest rates of the new finance market represented by P2P industry started to follow the trend with the benchmark interest rate determined by China's monetary policies. All of the changes signal that the online lending industry has become an important part of the financial system. Keeping a close eye on the online lending interest rate and its changes would be helpful for the regulatory authorities to observe the changes in the macro economy and use it to improve the liquidity of China's financial market. This is the integration of market interest rates.

The integration of new and traditional financial services industries will open a new chapter in the reforms of the entire financial system.

The online lending platform has shouldered the responsibility of financial inclusion since its birth. To ensure the platforms fulfil their responsibilities, the Interim Measures give clear instructions in this regard. It sets the upper limit of 200,000 yuan for individuals and 1 million yuan for institutions. By setting the upper limit, the online lending platforms mainly serve people with a relatively small amount of money and fulfill the responsibilities of financial inclusion. Under the background of financial deleveraging and increasing regulation of internet finance, large-scale trading has been made impossible for online lending businesses by the regulatory authorities due to high financial risks. Since July of this year, the large-scale trading between online lending platforms and financial exchanges has been forbidden. It signals that large-volume trading would never be available on online lending platforms. The key function of the online lending industry is to fill in the blank areas in the financial system and serve people with small or minimum capital. By doing this, small and medium enterprises, as well as individuals, will have easier access to financing resources, and financial inclusion can be achieved by online lending industry.

The main P2P platforms have shifted their focus to technology from business expansion during the past year.

The main reason is that competition within the industry has been shifting from business expansion to technological innovation. It has been well acknowledged that, if the companies want to stand out, they need to improve their business models, facilitate the innovation of financial products, and increase financial resource allocation efficiency through the internet, big data, cloud computing, and other technologies. AI and machine learning have been applied to risk control, such as fighting against fraud. The online lending industry has made significant achievements in business development, technological innovation, and regulations. All of these progresses are enabling the internet financial industry to enter a new era of intelligence. The capability to apply technological intelligence to the industry has become an important standard for assessing the competitiveness of online lending platforms.

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