Internet-facilitated lending entering new phase

Hu Xu, head of research at the Chinese Academy of Financial Inclusion at Renmin University of China, said internet-facilitated lending still has value, but cooperation with lending facilitation institutions cannot replace a bank's independent risk management, nor should it turn banks into mere funding channels.

For private banks and city commercial banks, Hu said, reducing cooperation with lending facilitation institutions is only the beginning. The real challenge is to strengthen their own customer acquisition and risk management capabilities while properly managing their existing loan portfolios.

Since last year, a number of regulations have taken effect, including the new rules on the management of internet-facilitated lending by commercial banks and regulations requiring lenders to clearly disclose the comprehensive financing costs of personal loans.

In addition, the "Measures for the Administration of Online Marketing of Financial Products" came into effect on Sept 30. Zeng said this means compliance costs will rise further. Small and medium-sized lending facilitation platforms that lack sufficient capital, risk management capabilities or differentiated businesses are likely to be acquired or exit the market, while leading platforms will consolidate their market share by leveraging their advantages in funding costs and technology capabilities, further increasing industry concentration.

"From funding sources and product pricing to advertising and marketing, financial regulation now covers the entire business chain. This marks the internet-facilitated lending market's transition from a period of extensive growth to a new stage of more standardized, transparent and sustainable development," said Dong Ximiao, chief economist at Merchants Union Consumer Finance and executive director of the Shanghai Institution for Finance and Development.

"Over the next three to five years, lending facilitation institutions are expected to gradually shift from traffic channels to technology service providers. Compliance will no longer be a competitive advantage, but the basic requirement for doing business," Dong said.

Wang Pengbo, chief analyst at market consultancy Botong Analysys, said small and medium-sized lending facilitation institutions that previously relied on multiple layers of customer referrals and profited from reselling traffic through various channels will be rapidly pushed out of the market. Wang expects that in the future, competition across the industry will shift from simply competing for traffic to competing on compliance capabilities.

Tian Lihui, a finance professor at Nankai University, said the old business model based on the formula of high interest rates to cover high risks and multiple layers of customer referrals to spread costs has effectively been dismantled by three sets of constraints: caps on comprehensive financing costs, mandatory disclosure requirements for marketing and stricter standards for debt collection.

Tian said demand for credit has not disappeared, but is instead shifting from marginal borrowers whose risks are difficult to price, toward mainstream borrowers whose risks can be more accurately assessed and priced.

Industry experts said the focus of the internet-facilitated lending sector has now shifted from extensive scale expansion to more refined customer selection and risk cleanup. Lending facilitation institutions are gradually eliminating customers with weaker credit profiles and higher risks and tightening lending standards to meet regulatory compliance requirements. At the same time, the industry as a whole is accelerating the process of clearing out risks.

Some lending facilitation institutions said they will leverage the technological capabilities they have accumulated in risk-control technology, system development and user operations to provide standardized technology solutions to licensed financial institutions.

Looking ahead, Dong said lending facilitation institutions will develop a clearer complementary relationship with banks and other financial institutions and play a positive role in promoting inclusive finance, supporting consumption and helping micro and small businesses grow.