Fintoism China Internet Finance P2P Lending

3 key lessons learned from China’s internet finance boom and semi-collapse

China has attempted to experiment with internet finance in recent years. Despite noting initial successes, this business model has also created plenty of problems. Several lessons can be learned from this approach, as the future of internet lending still looks bright.

Regulation Before the Boom

One has to commend China from trying this different business model. More specifically, the government wanted to spur consumers to invest in private companies. An interesting take on peer-to-peer lending, especially due to the internet finance aspect. The plan seemed to work out well, but the lack of initial regulation ushered in the downfall.

Actual regulatory measures were introduced in late 2016 and early 2017. This is despite internet finance kicking of many years prior. A lot of the initial service providers were able to operate without meeting any real regulatory requirements. This ultimately allowed various companies to defraud investors, triggering massive backlash and financial losses. 

By letting the industry thrive and regulating it afterward, China created a big problem for itself. Growth in peer-to-peer lending had stagnated and regressed as a result. Companies have been forced to consolidate in an effort to survive. The current finance industry landscape in the country looks very different. The concept is still perfectly viable, but the rules need to be in place from day one.

Too Many Cooks in the Kitchen

A unique business model in the peer-to-peer lending industry will attract plenty of attention. Consumers and investors still see merit in this approach. For startups, it is a great way to raise funding without having to wait months to do so. Convenience is a big factor, primarily when dozens – if not hundreds – of internet finance service providers pop up in quick succession. 

Due to the competitive landscape, consolidation is a matter of time. It is a dog-eat-dog world, especially in finance. Smaller companies will be absorbed sooner or later. This can either be done voluntarily or when the business is about to go under. Having too many cooks in the kitchen is counterproductive. At the same time, competition needs to be fostered at all times. 

In China, over 2,000 P2P lending platforms bit the dust between 2016 and early 2019. This further confirms how dire the situation had gotten at that point. It is a direct result of too many players in a small industry, and the sudden introduction of regulation after the boom. For SMEs, the semi-collapse of this industry is anything but good news. 

Never Ignore Warning Signs

Different companies will maintain different internet finance models. Crucial aspects to keep an eye on are maximum loan size, repayment period, and interest rates. When at least one out of three aspects looks too good to be true, the company needs to be scrutinized. All of these factors also come into play when companies need to liquidate assets for a variety of reasons.

For company owners, these warning signs are perhaps even more crucial. No one should be afraid to downsize during tough times, both in terms of assets and employees. It is never fun to do so, but neither is going out of business altogether.

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