On a trip to Beijing two weeks ago, the first thing I hear about is internet financing – P2P, crowd financing etc. I listened to a few of these Alibaba-like companies telling me their ambitious plans on how to meet the insatiable demands by their customers for buying things off their portal, where the “things” also include wealth management products, placing their spare cash on these portals which are not subject to the “recently cut” official deposit rates by the PBOC because – hey, Alibaba is NOT a bank, borrowing money from other portal users to fund little businesses and one even launched a credit card.
As the story goes, the business gets more and more into the business of money and I thought the business of money is about the business of banking. But no, these companies said they have received huge support from the regulators to keep up with their businesses. And some admitted that the regulators have “offered” them banking licences which they have politely turned down. They made it sound like the “offer” was a firm one – so it is that easy to obtain a banking licence but you refuse?
Of course the internet financiers do not want a banking licence. Why would they want to be restricted to all the regulations from loan-deposit ratios, required reserve ratios and then the all confusing Basel 3.
I had three questions for them – 1. what is the penalty rate for late payment? 2. what is the process on KYC (know your clients)? 3. how good is your internet security?
Penalty for late payment?
Answer from one company for Qn. 1 – 11%. I was shocked – 11% for late payment of unsecured personal loan. What would stop a desperate – ok, even the not so desperate – person to set up a dozen pseudo identities and take up a dozen loans.
Answer to Qn. 2 – don’t worry, we know all about our clients because they shop everything from our portal, they talk to friends through our portals, we know their lifestyles, their income bracket, their families and network of friends. Lastly, all the portals are now in discussion to come up wiht a “black list” of bad customers. Oh no, where’s client confidentiality? Silence.
Answer to Qn. 3 – we have the best security in town – believe me.
Crowding financing is gaining momentum in China. Based on an anecdote which I will relate below, I think it started two years ago. Crowd financing literally means borrowing money from the “crowd” of people in the same internet community to start up your own small business. I heard this story from my “foreign” broker who in turn heard this from an economist at a “local” broker. Said the economist – this is so common, it’s safe, nothing to worry – two years ago, she lent RMB1380 to a well-known economics professor who put up a business proposal to raise RMB1mn to set up a café. The prof raised the funds within days including RMB1380 from this young economist. Until now – two years later, she has not received a single cent of interest or principal on her loan which was meant to be a one-year loan. She has written it off but felt “happy” about it because it is only a small loss and she didn’t see it as a systemic risk. Really?? Isn’s the fact that the “crowd” – as well as the regulators – still didn’t see their money at risk… already a systemic risk?
Alibaba and Softbank – deja vu
I was then in a conference where the audience was polled for their opinion – do you see internet financing making a difference to banking? I had this deja vu moment – I remembered being polled this same question 15 years ago somewhere in Tokyo when Softbank share price was heading towards JPY20k. I recalled I picked some middle of the road answer. At that time, I was quite taken into the idea that “virtual money” can be the next big thing – can really replace physical money and more than that, virtual money is also a means of communications between different industries and different segments of society. It’s like Eureka. But alas it is not. Soon, the likes of tamagochis – virtual pets – and virtual anything soon went out of fashion. Human beings or rather Japanese people wanted to physically hug and hold each other and their pets and exchange money again to buy things. So the Softbank story ended… until 10 years ago – i.e. 5 years after the bubble burst – that Misayoshi Son, Softbank’s founder met Jack Ma of Alibaba and injected USD10mn into the latter. And the rest became history. So Son-san finally made a breakthrough for his internet empire where at the beginning he hit a real “physical” boundary – which was the border of Japan. The solution was to clone his business model into other jurisdictions. And better still, a market that has 10x the population size of Japan, and which has about 15% of the global merchandise trade flows. China’s boundary is huge. I agree. But is virtual money still going to work?