According to 01Caijing’s “2016 Annual China Consumer Finance Development Report,” peer-to-peer consumer finance capital reached RMB 99.1 billion that year, an increase of 90.9% compared to same period last year. Conservative estimates of the 2017 figure stand at RMB 200 billion. The securitization of consumer finance capital is also accelerating. 2016 saw the issuance of 51 asset-backed security products for consumer financing, totaling RMB 93.632 billion, 6.76 times the amount in 2015.
The consumer financing industry is at a window period. Source Code Capital’s Founding Partner Cao Yi discussed the possible changes for the industry in 2017 at the AnXin Securities Consumer Finance Summit:
The prospects of inclusive financing in China will be much greater than that in the U.S. Peer-to-peer has great historic value, but peer-to-financial institution will be the mainstream. Artificial intelligence will have a more thorough, transformative effect on the financial industry.
The following is Cao Yi’s speech:
Good afternoon, everyone. I am glad to be invited to share my experience. Source Code Capital has been primarily focused on early stage investments in the information industry since our founding almost three years ago. Our investment logic falls under our “Big 3” fundamental drivers (our 3 by 9 investment roadmap). The three driving forces are: Internet+, AI+, and Global. The nine sectors are nine major industry sectors that the three themes cover. For the time being, we will focus more on housing-related, automobile, financing, B2B, and social media content. “Internet+” financing is a higher priority.
1. Opportunities for inclusive financing will be much greater in China as compared to the U.S.
Opportunities for inclusive financing will be much greater in China as compared to the U.S. From discussions with partners from Silicon Valley like Andreessen Horowitz (a16z) last year, we found that Americans tend to create value through stock optimization, while the Chinese tend to approach this through incremental activation.
China’s financial market has great “increment activation” potential on top of stock optimization. By comparison, the American increment market is small. Banks, insurance institutions and funds are relatively well-developed. A high percentage of individuals and businesses access services from financial institutions. However, in China, inclusive financing has a great incremental market with ample entrepreneurial opportunities.
When analyzing any investment or entrepreneurial opportunities, we tend to look for three aspects: timing, favourable environment and harmonious relationships. These three aspects have been mentioned in China throughout its history, and when making major decisions, they are crucial.
In particular, we make decisions with two approaches: defining the problem and finding the solution. When defining the problem, each particular need is precisely laid out. When finding the solution, we look for processes and technologies that address the issue.
2. Finding solutions through information technology
From the supply side, profit from financial management products are falling, but the number of products is rising. At the same time, funding is facing the issue of binary pricing. On the demand side, market penetration of financial products has not been deep, especially among individuals and small or micro businesses.
On the one hand, a vast amount of capital is being supplied with lower return prospects. On the other side, the large demand of financing needs has not been met. The question is, how do we efficiently address the issue of high demand and match that to the large capital supply, how do we optimize stocks and achieve incremental value-add? The solution: using information technology, such as the internet and AI.
We found five potential paths to solve the problem.
(1)The first path is to cover the market shortfall of traditional financing through high cost-effectiveness. Qudian and Yongqianbao are examples of this method. They used data, models and machine learning to carry out risk management, using mobile devices to reach tens of millions of consumers without a single office or staff. Demand for small, protracted and large loans between a few hundreds to few thousand RMB was met. That is something traditional banks could not do effectively.
(2)The second path is solving traditional financial services’ efficiency problem. Due to disputes over property rights, challenges with reward systems, management efficiency issues and low technology utilization, traditional financial institutions cannot provide services with high efficiency. That has given entrepreneurial companies an opportunity. Using a few companies that we have invested in as example: Nongfenqi is focused on delivering installment loans for farmers for their farming equipment purchases, Yinker provides mid- to short-term loans with home properties as collateral, and Magnetic Finance gives loans to small or micro businesses. These companies are better at utilizing technologies such as the internet and big data to increase their efficiency.
(3)The third path is to “connect” and become better at matching supply and demand. Using a few companies that we have invested in as example: Nongfenqi is focused on delivering installment loans for farmers for their farming equipment purchases, Yinker provides mid- to short-term loans with home properties as collateral, and Magnetic Finance gives loans to small or micro businesses. These companies are better at utilizing technologies such as the internet and big data to increase their efficiency.Examples of this includes 1Caifu, which matches financial advisors with a vast number of financial products, and EtherCap, a financial advisory service connecting entrepreneurs with investment institutions. Information tech can maximize their ability to pair supply and demand.
(4)The fourth path is through proliferation and application of big data. Asset360 is an example, where they use big data to check non-performing assets, forming a better plan for such assets. They can even use big data to price non-performing assets.
(5)The fifth path is artificial intelligence. Artificial intelligence can be a new driver for the new financial industry, acting as a better optimizer of financial services than “Internet+”. With AI, there are opportunities for both investors and investees.
In conclusion, success requires the combination of the right timing, the right environment, and harmonious relationships. In this case, timing is the marketization of the interest rate while financial institutions lack quality assets. The favorable environment is where the users rely on mobile internet, big data and AI. Relationships refers to China’s massive demand and the large number of high-quality entrepreneurs. Together, these three elements create the concept “new finance.” “New finance” is the next big thing and has greater potential than the eras that came before it, including social media, search engines, e-Commerce and online-to-offline business.
3. P2P has served its purpose, P2F may now be the long-term norm
Lastly, I’d like to make a prediction for the future. Peer-to-peer (P2P) has helped China’s inclusive financial companies take the first step. At first, what we saw was that financial institutions were reluctant to serve small or micro businesses and individuals with low income. However, the emergence of P2P has changed that. There is great market value for that. As they grew over the past few years, inclusive financial companies and their services are receiving the recognition as institutional funding, evolving into P2F (Peer to Financial Institution).Those who receives these funds have not changed, but the suppliers are now financial institutions, such as banks, trusts and insurance companies. We have already predicted last year that in the future, P2F will be the more widely-used model that connects inclusive financial assets to funds.
It is undeniable that P2P has a great historical significance. Without P2P companies providing such services, a lot of small businesses would not be able to get funded. Financial institutions such as banks are willing to provide larger amounts of funding at lower costs only if your business performs very well. But nowadays, P2F is better suited for China’s current situation and better serves the population in an inclusive manner. Financial institutions have better credits and risk mitigation capability. They are better at picking inclusive financing companies and control risks than individual analysts. We think this is a better system.
4. Artificial intelligence will revolutionize the financial industry
Artificial intelligence will revolutionize the financial industry through machine learning, voice recognition and sensor technologies. Each technology will prove valuable at different stages in finance. Just as AI has been applied in the medical and educational fields, we think financial industry is a great testing ground for AI to see what it can do. As the stakes become more obvious, the problems that the finance industry may be able to solve are just as apparent.
In conclusion, as inclusive financing is undergoing transformation through both “Internet+” and “AI+,” we have high hopes for the industry. In trying to achieve a harmonious balance of the right time, the right place, and the right people, we hope that everyone will be able to play their part in this new era.