China's Internet Finance Platforms Shake Up the Financial Sector

China's internet finance sector has encountered numerous obstacles in its short history. But its problems have been part of a broad diversification of the financial sector that has already made a contribution to the real economy. Internet financing has played a crucial role in stimulating consumption and private investment. It has also helped ease the financing problems of medium and small size enterprises,which have long complained of their inability to win funding from the traditional banking system. China's online lending sector has been praised by regulators for its strategic significance in improving China's financial system,filling the credit gap left by banks,and supporting enterprises push ahead with much-needed innovation. China's internet finance sector will also spur new developments along with the reforms planned by China's economic strategists.

Consolidation

The number of financing platforms,which collect funds from investors,reached a peak of 2,612 in the end of 2015,but the growth phase quickly came to a halt. By the end of June 2016,246 of these platforms had shut down. In 2016,the number of platforms which stopped working declined month after month,and the closures topped 30 in one month alone. Many of those still in business have been struggling. According to some estimates,only 10% of the problem platforms had ceased operation in 2015 and the figure reached 50% at the end of June 2016.

Some of the better performing platforms,such as Credit Ease,Firstp2p.com,Lu.com,Diaorong.com,and Ppdai.com,were thriving during the hard times as others fell by the wayside. Dianrong.com,for example,chose to launch a campaign in major cities such as Beijing,Shanghai and Guangzhou highlighting its reliability as many firms withdrew from the sector.

As of this writing,there were 111 platforms with funds of over 100 million yuan and six of those had more than 500 million yuan. There is no minimum registered capital in the field and even with more capital there is no guarantee of staying power. But the growing size of some of these platforms is a sign of a healthier environment. Overall,the outlook for the online lending platforms appears promising despite the culling of weaker players.

Wealth Management

Before 2015,the business of China's network lending platforms was focused on making loans to individuals and small and medium size enterprises. Due to shortcomings in risk controls and credit history data,more platforms were employing a combination of online and offline business methods. Credit applications were processed online but credit checks were made offline. Since 2015,the business has expanded beyond lending to include comprehensive wealth management,consumer financing,leasing,supply chain finance,stock allocation and other services.

Supply chain finance is a form of direct financing that serves the real economy. By 2020 it is estimated that China's supply chain financing business could reach around 15 trillion yuan. At the moment,a typical business model in supply chain financing is to linked to commercial factoring. When the supplier needs to collect payment,it transfers a payment bill to factoring companies in return for financing. The network loan platform provides needed operating funds to the factoring companies. The factoring companies collect payment on the outstanding bill and then make payment to the network loan investors. The cooperation between the network loan platforms and the factoring companies saves the cost of developing programs on the lending end of the platforms. Another model for the network loan industry is to collaborate with listed companies,providing financing services and loans backed by accounts receivable.

In some cases the bigger platform operators taken market share in the wealth management sector from traditional financial institutions. From July to December 2015,a new trend began to emerge in the internet financing industry; many financial platforms started calling themselves "one-stop wealth management platforms," "comprehensive wealth management platforms",or "wealth management specialists." After gathering a large number of users,they focused on off