A "financial supermarket" offers loan services in Wenzhou. (Photo/Xinhua)
The CEOs of Chinese online lending sites Renrendai, 51Qian and Tuandai are all considered members of what is called Generation Y, and the list of online finance millionaires from this generation continues to grow. Since 2010, so-called peer-to-peer (P2P) lending through the internet has streamlined opportunities for a swath of loan managers aged between 25 and 30.
The "new age" finance has brought this group of young managers, who would otherwise work in the bottom rank of the traditional financial sector, to be in charge of China's online lending market, worth 20 billion yuan (US$3.2 billion) in transaction value.
P2P relies on internet contacts and eliminates the need for banks to act as intermediaries between borrowers and investors. Individuals willing to lend money and individuals needing to borrow money self-match transactions.
China's P2P lending sector only took root six five years ago. But since then, it is grown at an incredible speed to include over hundreds of website companies, according to the Chinese-language magazine Global Entrepreneur.
"Online lending is still in its wild west era. Everyone is rushing to stake one's claim in this new market. Top lenders this year has a high risk of being replaced the next year," said Tang Jun, the CEO of Tuandai.com.
Since last year, P2P online lending has taken another turn. Their new business method of late is to include so-called offline clients, which could prove lucrative. Indeed, a growing number of P2P lending platforms have been shifting offline, exchanging loans in person rather than through online transactions. Many new P2P lenders and borrowers are executing transactions offline for greater profit.
In China, the credit system is only available for the financial sector. Considered a good risk of lending money online, investors are usually cautious. For example, the total investment of 10,000 yuan (US$1,600) can be broken into many transactions over a period of six months. In comparison, each offline lending transaction can be up to 100,000 yuan (US$16,000), Global Entrepreneur said.
However, this form of lending carries a higher risk of non-performing loans. For investors or lenders to execute a transaction, they have to rely solely on the matching of a P2P site. In the tradition P2P online lending method, borrowers have to post and release their information for the lender to bid on their loan request.
As a trend, a growing number of P2P lending platforms have been shifting offline. Now a majority of P2P online lending companies have launched offline business, which essentially operate like small-time loan companies, seeking investors online and borrowers offline. These offline companies even offer financial products and a lending team that vets borrowers to ensure proper credit levels and loan quality. The offline method prohibits lenders and borrowers from matching and cutting deals by themselves but rather matches lenders and borrowers according to their proximity.
This offline twist lets firms take advantage of all the perks of online lending as well as of financial industry regulatory loopholes. Last November, two popular P2P companies, Renrendai and Youcredit, merged to form a solid online and offline lending platform.
"The financial products offered by offline method mitigate risk because of its transparency," Tang said. "The minimum investment can be as low as 50 yuan (US$8), with a maximum investor yield of over 18%. This way we can also utilize cash use efficiency."
The increasingly competitive environment has attracted many speculators into the market. Many P2P lending platforms have closed due to market credit issues or shortage of operating funds.
Other P2P lending platforms have turned out be to scams. Since providing financial information is not a norm in peer-to-peer lending, investors are raising more questions.
Once this type of fraud surfaces, more cases will likely follow, which would be potentially devastating for online lending.