Fintech in China: What’s Behind the Boom?

From Cliff Sheng & Jasper Yip at Brink:

“Over the past half decade, we have witnessed phenomenal growth in the Chinese fintech industry. 2013 is widely recognized as the onset of the boom. Since then, major segments of the fintech market have, on average, doubled or even tripled every year. For example, the outstanding loan balance for online peer-to-peer lending platforms surged from 31 billion yuan in January 2014 to 856 billion yuan three years later. The explosive growth in China’s fintech sector is further characterized by its relatively short maturity curve. For example, it took four years for peer-to-peer transaction volume to exceed $5 billion in the U.S., while it took only two years in China. Lufax, a Chinese peer-to-peer lending platform founded in 2011, reached an annual loan origination amount of 9 billion yuan in just two years, compared to five years for Lending Club, the biggest peer-to-peer lending company in the U.S.”

With SMEs representing an underdeveloped segment in a bank dominated environment in China, Fintech players have leveraged on the Internet boom to mend the holes created by traditional financial services. The stringent regulatory framework recently imposed by the Chinese government has prohibited Fintech players from exploiting loopholes in the system. By utilising big data analytics computation as well as algorithmic learning capabilities, leading Fintech players are able to adopt these technologies to better understand the market, automate operations and reduce labour costs.

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Why security is king in P2P lending

From Stuart Law at FT Advisor:

“The Peer to Peer (P2P) lending market has risen from zero, around 10 years ago, to an outstanding investment level of more than £8.7bn of loans in the UK alone. Investors of all shapes and sizes are continuing to flock to the market, attracted by the prospect of a fair, risk-adjusted return on their capital and to beat the low rates offered from traditional sources. In fact, you’ll find what differentiates the various players in the market is how they deal with loan security. There are two key aspects to be examined in detail: 1) Pre-approval of loan: The checks put in place to ensure that high-quality loans are approved, where the loan can be afforded by the borrower but still recoverable in case one day it is not. 2) Post-approval of loan: The measures put in place to deal with loans defaulting and the recovery of capital in that situation.  ”

In the emerging market of peer-to-peer lending, it’s essential to present a security of funds and return for players in this market to attract investment. Investors concern more of their risk-adjusted return from an essential mean-variance analysis. Instead of focusing on promoting fancy and attractive conceptual terms, P2P lending providers need to show their effort in managing the risk exposure as for investors’ unit return of investment, as well as great management for dealing with repayments of loan. Capital Match is the largest player in Singapore the P2P Lending market with over $40 million origination, and it’s continuously offering investment invoice financing/PO financing options of good quality to help its investors have healthy growth of their portfolio.
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