The biggest Peer to Peer (P2P) lending market, China, has been experiencing explosive growth. After two articles introducing the historical growth and outlook for this market, we are going to take a micro look on the huge variety of (P2P) lending platforms emerging in China. To give a full introduction of different platforms, we categorize the platforms based on their business model, whether they are on or offline, collateral requirements and target customers.
1. Traditional P2P
Traditional platforms only provide authenticated information on borrowers and investors to promote deals. These platforms are not involved in the transaction. Borrowers and investors have a direct creditor/debtor relationship. Examples include Tuandai.com, Ppdai.com
2. Assignments of credit
Under this model of assignments of credit, a specialized creditor is established. The specialized creditors lend money to borrower and transfer the debt to investors. Borrowers and investors do not have a direct claim debt contract. P2P platforms are highly related to these creditors and provide services throughout the process. This business model is utilized by Creditease.
The advantage of this business model is that it can meet different needs of borrowers and investors. Deals are not done passively as matches occur, but proactively, resulting in faster expansion.
Because of the strong relationship between P2P platforms and the creditors, regulators may determine the investments as “dark pools”. Regulatory risks are significant. Examples of this business model include Creditease.cn, Lufax.com.
1. Online Platforms
The pure online platforms do not get involved in the deals directly, but focus on information publication, online reviews, and related work. Risks are minimal for these platforms. Their development is correspondingly limited without a direct customer base.
Tuandai.com cooperates with third party guarantee agencies and third party escrow agencies. The biggest advantage is stable return and fast redemption.
Ppdai.com is a well-known online platform with extensive projects and a good reputation. Rather than requiring collateral, Ppdai only considers credit history, incurring high risks to investors. This constrains its long term development.
2. Online to Offline (O2O)
Under the O2O model, borrowers are recommended offline by small credit institutions or guarantee companies. After revision by the platform, project information will be posted on the platform. These P2P platforms focus on website operation and investor development. The cost of O2O model is low. However, the core business of the platforms is not lending, but connecting.
Eloancn.com franchises offline within the same city. Franchisees look for qualified borrowers and conduct onsite inspection to recommend borrowers and contacts to the platform. Borrowers who are not internet users get involved. Risks are better controlled, but location diversification is limited.
Touna.cn is an O2O direct platform. It owns an offline company to develop borrowers. Through cooperation with Pengyuan Credit, Touna provides highly diversified projects. However, the non-performing loan ratio is high in 2014.
Renrenmoney.com cooperates with small credit companies and guarantee companies, which work on offline development and investigation. Guarantee companies provide full guarantee in principal and interest. Risk management is provided by a specialized agency. The platform focuses on matching deals.
Some P2P platforms require borrowers to provide collateral or guarantees from a third party company. Although default risk is well controlled, development of these platforms is constrained by the number of guarantee companies. High quality guarantee companies may take advantage of their good reputation to squeeze the pricing power of P2P platforms.
There are usually two types of guarantee. One is third party guarantee, where P2P platforms cooperate with third party guarantee companies. Risks are fully transferred to guarantors. The other one is self-guarantee. If loans default at maturity, investors can transfer the claim to the platforms. Platforms will return the principal to investors first and pursue recovery of non-performing loans.
Weidai.com.cn is an online financial services platform that focuses on automobile financing. Before the project information is published, borrowers have to transfer ownership in Weidai’s offline direct store. Weidai has rich experience in collecting debts. Risk control system is well established.
Person to Business (P2B)
Jimubox.com – Core business of Jimubox is corporate loans. Cash flows are transparent and returns are relatively high. But the loans have longer terms and higher principal, resulting in higher risks for the platform, even with third party guarantee.
PPmoney provides a series innovative products cooperating with Guangfa Fund and other institutional investors. Its offline credit company securitizes qualified projects and sells them to PPmoney platform and third party guarantee companies. At the same time, offline credit companies would sign a repurchase agreement to buy back the securitized products at a premium before the maturity. PPmoney sells the bond securities to individual and institutional investors through its platform.
Although different forms of P2P lending platforms better satisfy needs of more investors and borrowers, potential financial and legal risks are still big concerns of investors in determining the platforms to use. In the next article, we will introduce more about P2P regulation in China.