Nine Predictions About Fintech

摘要: As the liberalization of finance and interest rate proceeds and the repression on domestic finance has been lifted, there will certainly be some twists and turns in the financial revolution in the coming years. In the future, the market will enter a more rational and stable developmental phase.

(Chinese Version)

The emergence of fintech and its prosperous development are mainly decided by the current economic environment.

Looking from the credit and liquidity cycle, the innovation on finance also has a cycle. The main driving force of such innovations is from the excess of financial liquidity. It should be noted that the nature of capital is the pursue of high return. Due to the dissatisfying economic situations in recent years and the falling capital profitability, asset innovation has become a way to solve the demand for capital return.

Fintech, as a matter of fact, is also asset innovation.

In Li Feng’s opinion, foundering partner of FreeS Fund, innovative asset usually contains high risks and for the demand for stability, the financial system will have to spread the risks and undergo securitization through different means and derivatives. On the recent Lendit Fintech Summit, he made the following comment:

“Investment should also follow this sequence. That’s why we invested in some companies that focus on innovative asset first and then invested in some data companies and asset securitization companies. These companies work out new ways to solve risk diversification and the pricing of innovative asset. We can expect new finance platforms and models will appear in the near future.”

One thing is for sure: fintech has changed our lives profoundly.

Fintech provides companies and individuals the funding they need to establish or expand their business, optimizing the supply chain and building a credit system. The emergence of new payment methods accelerates the revolution on transaction and creates opportunities of new business.

Fintech brings wealth management to ordinary people, making it more convenient and affordable, as smart consultants will give them advice on wealth management. In the insurance business, insurance premium is lowered effectively by making use of big data, allowing more users to enjoy Internet insurance.

When comparing the Chinese market and American market, many would find that China has its unique way in financial innovations. In America, the wide adoption of credit cards from banks makes P2P more of a competitor of traditional banks. Some industry insiders believe that the exit of Lending Club’s CEO was due to the fact that P2P platforms had posed a threat to the interest of bankers at the Wall Street.

In China, we can tell from regulators’ attitudes that financial innovation is built upon the repression financial environment. The Chinese leadership wishes that every innovation in the industry is a result from complementary behavior in traditional finance that solves the flaws in traditional finance.

As the liberalization of finance and interest rate proceeds and the repression on domestic finance has been lifted, there will certainly be some twists and turns in the financial revolution in the coming years. In the future, the market will enter a more rational and stable developmental phase.

What’s next for fintech? We TMTpost have concluded the possible trends in this industry in the coming years:

The industry will become more centralized

The concept era has already passed for fintech companies. Currently there are several thousands of P2P companies, a great amount of crowdfunding platforms, and a series of smart robo-advisor platforms that emerge recently. It seems that the market has grown accustomed to such businesses.

What’s more, the intervention of regulators, the intensifying competition in the market, and the deepening user education, have created the conditions for the industry to be highly centralized. In the end, the competition will go back into the battle about business model and capital.

At present, fintech companies that are valued highly are: Ant Financial, valued at $60 billion; LuFax, valued at $18.5 billion; Zhongan Insurance, valued at $7.63 billion; JD Finance, valued at $7.18 billion; WeBank, valued at $5.5 billion; Paypal, valued at $47 billion. From this perspective, we can learn that Chinese fintech companies are large in scale even globally. In the following years, fintech companies that are leading in the industry will go public and acquisitions and mergers will take place in the industry.

Robo-Advisor service needs appropriate localization in the Chinese market

AI technology’s application in the financial field brings about robo-advisor service. Harvest Fund has teamed up with Guanghua School of Management of Peking University to establish a postdoctoral center that dedicates to the study of AI technology in investment and large asset allocation.

TH Fund, on the other hand, is promoting online robo-advisor service to the public. DC Fund partnered with Beijing Institute of Big Data Research to found a big data club, in an attempt to push the development of smart finance forward.

It’s apparent that publicly offered foundations are wishing to innovate on products and services in accordance with the clients’ investment target, based on the current foundation item. In this way, these foundations can improve the companies’ investment management and IT operation alongside. In the future, robo-advisor might become a new direction for the development of publicly offered foundations.

Besides publicly offered foundations, the traditional bank industry, the stock market, and Internet loan, are all user channels that will need robo-advisor in the future. However, in China, this industry is in need of appropriate localization process. Firstly, Chinese investors in general distrust third parties when it comes to financial management. The Chinese audience still needs time to embrace this new trend.

Secondly, there are still uncertainties in whether robo-advisor platforms can integrate enough asset, manage them, and provide them for investment clients. Furthermore, these platforms should also have a great understanding about clients’ risk preference and demands.

The robo-advisor industry has been developing in the U.S. for several years and therefore the users have a rather good understanding of such services. “We provide robo-advisor service according to the goal. The goal might be wealth management, or it might be pension management or just simply to hedge,” Jon Stein, CEO of American robo-advisor platform Betterment, introduced.

It might take a user six or seven days to open an account in other organizations in America, but on Betterment the process only takes five minutes. Apart from that, the platform has also developed many safety solutions to insure the digital and paperless operation, saving time for users.

In addition, the platform provides a complete service set that includes interest rate and exchange rate etc., allowing users to keep up with the changes in the market fast. Betterment’s operation is a great example for Chinese robo-advisor platforms to learn from.

The interest rate will fall

Currently, the interest rate remains high among Internet loan platform. The interest rate on some platforms is as high as 20%. On this matter, the vice president of CEIBS Lujiazui Institute of International Finance Liu Shengjun said:

“Such interest rate obviously won’t last long under the current economic situations in China. But why is it so high? One is that the risks brought by the difficulty in identifying the borrowers. But as technology advances, I believe this issues will be improved soon. The interest rate will go down.”

The reality is that companies’ profit growth doesn’t not match the overly high interest rate level, which means many loans can be considered as fraud, bringing high risk of bad debt.

The biggest value of block chain lies in digital asset management

A large number of summits and forums relevant to block chain have appeared recently. However, on most of these conferences, only concepts and ideas had been discussed. Practical discussions on technologies, algorithms, and applications are still rare. An investor told TMTpost that 90% of the talks is vague ideas.

Block chain is still in an early phase in which people are beginning to know about it. As a matter of fact, there are very few excellent technological teams in the downstream of block chain in the world. VCs are very cautious when investing in block chain startups. Some teams might give themselves a high valuation, which VCs don’t recognize.

“We believe that the biggest value of block chain lies in the digital asset management and trade, not just simple scenario applications. However, asset management requires very advanced technologies. So far we haven’t seen any outstanding startups in the country,” said an investor, believing that the block chain industry is still too young and therefore invested in some big data companies and data analysis startups that are relevant to robo-advisor.

Some block chain startups invented the concept of ICO. Different from IPO, ICO, short for Initial Coin Offering, means turning issued stocks into digitally encrypted coins. In simple terms, it means even if VCs are not liking some startups, they can still issue their own coins on crowdfunding platforms based on block chain to raise fund.

The Dao in overseas set the crowdfunding record as it raised $100 million in just 15 days. However, the company faced technological attacks and lost $60 million.

A block chain startup team in China last year amassed over ¥4 million through issuing coins on crowdfunding platforms. The capital here is mainly from early bitcoin players, who gained a fortune in 2013 when the value of bitcoins suddenly rose.

Just like the credit risks that equity crowdfunding has faced, these ICO projects have similar issues: One is that a effective information disclosure channel hasn’t been established yet and the annual white paper report is not enough to convince the investors; another is that risk pricing is generally outsourced job and the leading party set a pricing on some certain asset, which means the leading party can give the outsourced party a lever, making it hard to avoid interest conflict.

Platforms will confirm their business model and start to transform

Fintech companies have been developing fast in the past few years. Driven by irrational enthusiasm, the industry has received enormous attention. However, it should be noted that such speed is not sustainable. Now the time for transformation has come and they must grasp the opportunity. The current profitability and business model are not working for them, making the companies stand in the very front of challenges and risks.

Every platform is looking for the business model that suits them. The funding of some platforms are becoming more centralized and are moving towards a comprehensive direction.

JIMUHEZI, a company started from P2P, recently founded its parent brand PINTEC, which integrates JIMUHEZI, DUMIAO, YIDIAN Foundation, 76HUI, and the robo-advisor line. In this way, PINTEC’s business line covers P2P, credit decision engine, foundation sales, business credit investigation, robo-advisor, making the company evaluation and competitiveness higher than its original identity.

The unique P2P platform PPDAI has achieved profiting since this year. To maximize the value of the big data risk control system the platform has been working on for nine years, PPDAI has launched PAI Instalment and starts to focus on the development of offline asset.

The platform enters the markets in the northeast, northwest and regions around Shanghai in China and target the blue-collar audience. It rolls out credit-based instalment and loan service, which is a supplement to online credit loan.

Credit investigation will be the first step as more value hides in big data

The most direct value of big data is that it makes the threshold of financial service lower.

The while industry is thinking about how to improve fintech platforms’ risk identifying ability and risk pricing ability through big data technology. Beside the P2P industry, what uses could big data be of in fields such as Internet credit investigation, Internet equity financing and equity crowdfunding.

On that, Meng Tian, vice secretary of ASIFI made the following comment:

“There are a lot of space for development in using big data to conduct credit investigation. China is very different from America. The three major credit investigation organizations in the U.S. are relatively matured which the credit investigation system in China is isolated internally. To solve the issue of credit investigation, besides the credit investigation of the central bank, there are more and more enterprises that start to utilize Internet technology to address this matter. In this case, China’s developmental path will be very different from that of western countries.”

In the past credit investigation is conducted by the central bank since the central bank had all the data from financial organizations in the banking industry at its disposal. In the big data era, gathering data other than those from financial organizations has the following difficulty: How to put those data together; how to set a series of indicators; how to evaluate the financial service ability of enterprises or individuals real-time?

Currently in China, there’s a huge gap between big data and achieving commercial value. First we have the technological threshold. In American, the supply of data scientists is far from meeting the market demand. In China, on the other hand, 99% of enterprises don’t have to ability to build their own team of data scientists while the application demand of data is growing fast.

Secondly, the cycle is too long. Even if a data science team is established, it still requires lots of time for the data scientists to filter and handle the data with the data analysis tools provided by the market. In general, the cycle of an average data mining project is 3-6 months.

Meanwhile, the return doesn’t match up the investment either since the cost for storing data is quite high. If not applied reasonably, data can only be another cost burden. Massive exploration can’t nor insure the commercial result.

Internet loan’s hotspot lies in financial consume and supply chain finance

Banks usually loan to infrastructure construction projects. In contrast to that, banks don’t have much of passion when it comes to consumer loan. At present, the Chinese economy is moving towards consume-driver, which in fact provides many opportunities for P2P companies, bringing more loan channels to investors.

The Internet loan industry will be specified into different sectors in the future and therefore chances to dig deeper will appear. Consumer loan, for example, will become more matured as the sector becomes more professional.

Furthermore, the tendency of personal wealth growth in China should also be noted. P2P Internet loan will expand to wealth management service and then to supply chain finance. Major leading enterprises can borrow from banks or get financing directly, but there are also many small companies in the supply chain. For them, financing is not an easy way to raise fund. Therefore, P2P Internet loan gives them a channel.

Break the bailout curse

Bailout doesn’t only exist in the Internet finance sector. It’s more of a social phenomenon.

In Liu Shengjun’s opinion, there are many enterprises in China that should go bankrupt ultimately become zombie companies. Even in the real estate sector, many people purchase an apartment and only to find that the developer is lowering the housing price.

Besides that, the fee for property service in some old communities will raise as well. This series of phenomenon are the result of bailout, something that people don’t want to see in terms of social stability and gaming.

The economic growth of China has started to slow down and more incidents related to enterprise risks are taking place, and therefore bailout in the Internet finance sector is inevitable. It’s impossible for one company to change the situation. That’s why the industry as a whole must work together with other industries to counter this issues. About that, Liu Shengjun believes there are some directions that’re worth trying:

The regulation can supervise the industry adequately and the competition will become more rationalized as time goes by. Investors will have to change their mindset. The more the risks, the more profit out there. It’s impossible to have a 10% return when the risk is only as mild as making a deposit in the bank.

Internet finance companies also need to spread out its investment fund. If they are going to do it through technological means, then they would have to put the fund in different baskets instead of just one. Whether it’s spreading out on P2P platforms, or spreading among different clients and borrowers, can be effective in lowering the risks and help avoid bailout.

However, it doesn’t mean self discipline is not needed in the industry. Fintech is an emerging thing, and therefore there’s a lack of relevant regulations and rules for it. The forerunners in the industry must have self discipline and avoid bailout.

The evaluation logic has changed for the investors, making assets the crucial factor that decides win or lose

Investors’ valuation logic has changed. The entire Internet environment is transforming from online closed loop to offline. It’s quite similar for the Internet finance sector. Li Feng believes that the assets almost decide the plays and competition result of P2P platforms in the coming years.

Fintech startups have two kinds of competitors: One is Internet companies, the other is financial organizations. To survive and even thrive in this industry, startups would have to balance themselves between these two groups of competitors: Whether the business they are doing is more of a online closed loop, or offline closed loop? “This will decide the survival space for an enterprise,” he said.

“Giant Internet portals such as YuEbao are the largest financial platforms. However, what are the largest asset platforms? Many might not know that. The reason for that lies in the fact financial products that are standardized and more about finance management are close to the online closed-loop economy, while the asset field is close to offline and real economy. That’s why big companies can’t really dominate a market.”

To find better asset, CreditEase has founded the Investment Foundation For New Finance Industry with ¥3 billion and $500 million, mainly giving funds to financial industry, and industries like the Internet, big data, cloud computing, and social network etc. that are related to fintech. The foundation has recently made a follow investment in the block chain startup named Circle in its D round financing.

This might a one of the way out since indirect financing will become more of direct financing. During this process the platform will engage in channels facing the primary market and secondary market. From Li Feng’s perspective, this is the investment sequence in the credit cycle, which is new wealth management form will start to rise from the ground after the emergence of new asset and financial technology service companies.

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[The article is published and edited with authorization from the author @Sun Cheng, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.

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