Are online small lenders here to stay?
Greg Au-Yeung says the world's much changed since the internet bubble of two decades ago
In China, a group of internet-savvy people are making real money in the virtual world: welcome to the brave new world of person-to-person lending.
There are limited investment options on the mainland: the market value of products like equities and mutual funds has dropped since last year; only the wealthy can afford the limited array of emerging wealth management products, while entering the property market also requires a substantial investment.
Person-to-person lending cuts out the intermediary. The 2008 financial crisis contributed in part to the industry's growth, and people can borrow money more cheaply than through banks. Zopa in the UK was a pioneer in the field. The mainland's first such lender, CreditEase, was launched in 2006.
According to an unofficial source, there are an estimated 100 such Chinese lenders in operation, with projected total outstanding loans this year of 18 billion yuan (HK$22 billion).
The attraction of this market is its relatively low entry barrier. As it is unregulated, an enterprise can be set up under an IT or consultant company with just a few million yuan.
In the person-to-person market, the minimum investment is 50 yuan, with maximum investor yield of about 20 per cent. It appeals to many investors. In contrast to the stock markets' high-frequency trading and complex instruments, it provides a straightforward matching platform for lenders and borrowers searching for the right terms (price, risk, duration).
This industry is now flourishing, with an estimated annual compound growth rate of 225 per cent. But is the business here to stay?
The general view of the banking industry is that it is not yet a threat to their business, for several reasons. First, the market is still relatively tiny. Second, the cost of funding from banks is low, so there is no reason for them to lower their leverage for this new market. In China, banks are already profitable and unconcerned about breaking new ground.
It's worth noting that 20 years ago, when internet start-ups swamped Silicon Valley, then Wall Street, the new business models were scrutinised and the notion of cyberspace overtaking bricks and mortar challenged. But the world has changed a lot since then. Technological innovation has redefined the way we live, work and play.
It also now allows new competitors to enter the financial market at warp speed, without the traditional entry barriers. Person-to-person lending may seem primitive and immature now. But what about in five years' time? And a decade from now, who will you be your lender of choice?
