China's budding online finance sector is making serious inroads into the territory of more established financial services institutions, raising eyebrows almost daily with new ventures, new business models, record-breaking valuations, and of course, new bankruptcies.
Think about this: In 2012 when the industry was in its infancy and few had even heard of the expression "peer-to-peer lending", there were 110 such firms in China. By the end of July 2014, there were 1,200. And by the end of June, the number had mushroomed to 2,028.
P2P lending is no longer a quirky acronym - it's a booming market. But equally, I would not be surprised if the number actually returned to the levels of 2012, five years later.
I am certainly not a harbinger of doom. On the contrary, I'm very optimistic about the industry.
The business saw extraordinary development in China because of the sad fact that for too long, the nation's small businesses have been under-serviced financially, if not ignored, by a few State-owned, some might say bloated, inefficient banking giants.
The emergence of the P2P platforms simply filled the gap.
But after three years of free-wheeling growth which spawned a new generation of self-made startups, it is time now to take stock and accept that the "gilded age" for this industry may finally be over, meaning industry consolidation, which will inevitably see the closure of many firms.
Despite online finance's glitzy exterior image of slick modernity, the nature of lending and borrowing rarely change: That the possession of offline resources still determine how many investment opportunities you can offer to yield-hungry investors. Have that and everything is on your tailwind. Without that and everything becomes difficult.
Recently I interviewed one of the most successful online finance startup firms, Lianjia Licai.
Just six months after its launch, it has made impressive headway, becoming the country's fourth-largest P2P platform nationwide in terms of turnover. Its transactions swelled to 4.5 billion yuan ($725 million) in value during the second quarter, from 1.2 billion yuan in the first.
A closer look at the firm's business model explains the success: The platform is backed by Homelink Real Estate Agency Co, China's largest pre-owned home broker.
The home-sales market, of course, involves gargantuan amounts of money. Homelink is expected to complete deals worth 400 billion yuan this year, and for many of those, both buyers and sellers needed finance, either to pay off mortgages, or borrow money to buy.
Banks have little interest in such small lending (except for large mortgages), so Homelink classically managed to fill a yawning hole in the market with its own funds.
But now it has formalized that function with its own standalone online P2P business, which allows online investors to become the creditors for others.
No wonder it has managed to overtake many established firms in such a short time. It does not have fancy technology. Its website and mobile app are simple, primitive even.
But as a property broker, Homelink knows exactly about debtors, about how much money is needed, and how it's used, and has managed to provide investors with a reliable and easily accessible platform.
I have also interviewed a number of other P2P platforms, and the latest case reminded me that all the successful ones have access to plenty of resources, before their virtual websites.
The earlier P2P firms acted simply as an online bridge between grass-roots small-sum loan companies and online investors. They or their partners just carry those businesses online.
Then came cash-hungry developers, who happily found an alternative funding channel other than trusts or private capital.
Most founders of these "property crowdfunding platforms" were those with experience of the property industry, or were simply offshoots of large developers.
In this game, resources are everything.
Bear in mind, that the most valuable investment opportunities are being snapped up by major banks, insurers, developers, and venture capitalists.
Also, realizing the importance of "resources", business development teams in P2P firms are more likely to put "quality" of the borrowers at second place, just to compete for more "projects". Thus the investment opportunities being offered online were likely to be inferior compared to the traditional players. But China's investors don't care, for now, as long as the returns are high.
Established players have already realized what they had missed and is catching up. Companies like Alibaba Group Holding Ltd and JD.com are investing in P2P or crowdfunding, and with their strong capital-backed partnerships, huge customer base and established online presence, wining back the war is not hard.
