
China's Peer-To-Peer Lenders Are Falling Like Dominoes as Panic Spreads - dtien
https://www.bloomberg.com/news/articles/2018-07-20/china-s-p2p-platform-failures-surge-as-panic-spreads-in-market
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twblalock
Peer-to-peer lending pretty much involves lending to people who can't get
loans from banks, and the banks are actually pretty good at deciding who is
too risky to lend money to, so why should this be a surprise?

The only way peer-to-peer lending will succeed is if the banks are overlooking
or turning away a large group of creditworthy customers, and so far it doesn't
seem like that is happening.

~~~
rahimnathwani
"banks are overlooking or turning away a large group of creditworthy
customers, and so far it doesn't seem like that is happening."

Bank _do_ refuse to lend to large segments of the population which can be lent
to profitably.

In China, part of the reason is caps on loan interest rates.

But banks in developed countries, like the US and the UK, also fail to serve a
large segment of the population. Those underserved by banks have limited
options to get loans for emergencies etc., and difficulty building their
credit history to gain access to cheaper credit in future.

If you're based in London and are a software engineer or data scientist
interested in solving this problem, please email me (personal address in
profile) and I can tell you about what we've built so far and what's ahead.

~~~
pkaye
> Bank do refuse to lend to large segments of the population which can be lent
> to profitably.

Why do they refuse to lend if it is profitable?

~~~
rahimnathwani
> > Bank do refuse to lend to large segments of the population which can be
> lent to profitably.

> Why do they refuse to lend if it is profitable?

Good question.

Note I didn't say it _is_ profitable for the banks to lend to those segments.
I said those segments _can be lent to profitably_.

In order to profitably lend to customers who banks turn away (mostly those
with a 'bad' credit history based on credit bureau data, or those with
little/no data at the credit bureau), you need:

1) Effective credit underwriting (i.e. accurate models/processes to decide
whether to accept a particular application, and how much to lend to that
applicant at this time), and

2) Efficient processes of acquiring, onboarding and servicing customers.

When a bank lends 10k at 8% for 3 years to a low risk customer, they'll make
over 1k in interest over the life of the loan. So they can afford to have
inefficient operations/systems.

When you lend 500 to a customer who is likely to pay back, e.g. 600 over the
next 6 months, there's only 100 in risk-adjusted margin there, to cover all
your costs of underwriting the loan, following up on missed payments etc.

~~~
Someguywhatever
I feel like the Market Segment is so small, and your costs will be so high,
and it requires so much expertise and oversight/monitoring that it won't be
worth it.

~~~
Woberto
"Worth it" is subjective; it doesn't necessarily have to be about turning a
big profit. In fact if it's a nonprofit, then the goal could be to just help
under-served communities, and it seems like it could have a positive enough
impact to attract some angel investors

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dtien
Posted this because having heard of P2P lending before, I had no idea that it
had grown to such a large ( scale and scope ) industry. The most recent
exposure I've had to P2P lending or microloans is probably Kiva's more
charitable based business model.

But these new companies are certainly not in that space, as some are charging
up to 20% on interest!? Who's taking loans at that level, and who's funding it
at that level on this type of trust system??

That had me intrigued, so doing more research, this article goes in depth on
the various types of lenders, the borrowers as well as their motivations, and
the collaterals involved:
[https://www.accaglobal.com/content/dam/ACCA_Global/Technical...](https://www.accaglobal.com/content/dam/ACCA_Global/Technical/manage/ea-
china-p2p-lending.pdf)

And some top US based companies at the moment:
[https://www.forbes.com/sites/oliviergarret/2017/01/29/the-4-...](https://www.forbes.com/sites/oliviergarret/2017/01/29/the-4-best-p2p-lending-
platforms-for-investors-in-2017-detailed-analysis/#7ccacc1252ab)

Still haven't read enough to form a solid opinion, but it is an intriguing
space. I definitely see the value in providing capital and easier access to
capital to people who probably never had the opportunity, but the space seems
ripe for fraud, manipulation, high defaults, etc.

~~~
xjia
> 20% on interest

Based on what I know, a large portion of the loans have very small amount and
short duration. For instance, people want to borrow 1000 CNY for a month and
pay back 1020 afterwards. That's already 2% per month.

EDIT: The reasons they need such loans are more complicated. Some needs money
for emergency. Some uses the money to buy stock/cryptocurrencies...

EDIT2: P2P platforms typically take money from the deep pockets and subdivide
into tiny loans. They earn the interest rate difference (e.g. 20% from users
vs 15% to capital providers).

> high defaults

Empirically the default rate is very low. People pay back on time if you call
or just text them. Honestly if they don't pay, it's totally fine, and the P2P
platforms just don't care, because they earn so much money...

~~~
geon
And some are just _really_ bad at managing their personal economy.

There is a popular edutainment show here in Sweden about people in difficult
economic situations, and at least half of them have taken 15-20 % interest
loans for luxury consumption, like vacations and hand bags.

It's a freak show.

~~~
pembrook
Isn't Sweden also famous for having 100 year mortgages?

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numbers
This is not a surprise, lending on a P2P platform is a "cool" idea but doesn't
end up making you much money since you have to keep rates competitive and you
always have the risk of someone not paying back.

As a lender on Lending Club, I don't recommend it. The returns are worse than
a bad year on the stock market holding ETFs.

I've stopped lending on there and now I'm just waiting to move my money
elsewhere.

~~~
pembrook
Just because the returns are lower doesn't _necessarily_ mean it's a bad
strategy.

As MPT states, as long as the returns are un-correlated to the stock market
they can improve the risk-adjusted returns to a portfolio. Even if the return
is lower (but still positive).

~~~
jnwatson
The problem is that it isn’t all that uncorrelated. Prosper tanked hard in the
financial collapse.

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ajross
I'm confused. Why are these firms "shutting down" if they don't have any
exposure to the loans they brokered?

I mean, the description of the business model sounds like it's a bunch of
transactional companies like ebay or paypal or whatever. Those might be
expected to "fail" if the overall market shrinks, if expected growth didn't
arrive, or if they get beaten by a competitor. But they don't fail "like
dominoes". If anything the exit of one player would be expected to strengthen
its competitors.

But the headline and analysis is using terminology that make this sound like a
credit crisis. Is it?

~~~
JumpCrisscross
> _the description of the business model sounds like it 's a bunch of
> transactional companies_

From the “people that are running these P2P companies don’t actually
understand what P2P really is,” these sound more like badly-run Prospers than
true P2P lenders.

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pishpash
"About 118 P2P lenders have failed in July, the most since _2016_ " \-- 200+
funds failed in Aug. 2016.

"Shakeout’s impact on the financial system has been limited" \-- because bond
holders are individual investors; it will depress future demand, but no
systemic risk.

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rdlecler1
I’ve been hearing this since 2011. The Chinese government seems to have an
amazing ability to get control over the situation as it always seems to be
teetering on the brink.

~~~
adventured
That's pretending nothing has changed since 2011. It's interesting you pick
that year, because that's not long after China's former approach collapsed
with the global consumer in the great recession, and they had to switch to
gorging on debt to continue faking a high rate of growth.

It's also fascinating that China would install a dictatorship right as this
switch-over - from organic growth to extreme debt - was occurring. I'd wager
the Communist Party is terrified of what's coming socially, and given their
overwhelming vote in favor of the dictatorship they think that power is going
to be necessary to control the people (they very knowingly voted to clamp down
on all human rights in the country by handing Xi that position).

Since 2011 they've taken on tens of trillions of dollars in new debt. As
recently as 2008 China's debt to GDP ratio was reasonable. Their debt to GDP
ratio has drastically worsened since and is very realistically the worst among
major economies now (when their immense shadow debt is included it's a
certainty). Household debt to income ratios have similarly gotten dramatically
worse in the last decade. There are in fact limits to how far a nation can
push such things.

Somewhere between 1/4 and 1/3 of their new GDP every year is going just to new
debt interest payments. When you consider what else needs to come out of that
new GDP, that's a very stark debt situation. In 2011 they also weren't seeing
record bond defaults.

The types that cry wolf are often early or very early in their predictions.
One has to ask if there is in fact any truth to what they're saying, instead
of only focusing on their regularly saying it. In the end, they may be too
early in their speculation, rather than entirely wrong.

China should have accepted slower organic growth and maintained their
financial health. They chose the Japan approach of levering up massively on
debt when the growth dropped off. They're so terrified of their own people
about what happens if growth is 2% instead of 6% (being terrified of their own
people is also why they installed the dictatorship to control them). It tells
you all you really need to know about their system, it's fragile and can't
survive a recession or stagnation.

~~~
antt
China has been predicted to collapse any day now since 2001 when I started
paying attention in highschool.

It hasn't but people always have an explanation on why this time it's
different.

Dictatorships have a remarkable ability to completely ignore the market and
coerce it to do their bidding. You only need so many public executions before
people stop doing things you don't like at scale.

What they don't have is the ability to indefinitely force hungry soldiers to
shoot hungry peasants. China is no where near that level.

~~~
duxup
They can ignore the market ... for some time.

Venezuela hasn't worked out.

Turkey seems like they're on the edge of the cliff right now. The lira was
already having serious issues due to massive spending before sanctions were
announced.

~~~
antt
You first have to ask the question, can the Chinese government ignore the
market longer than the market can ignore the Chinese government.

The answer so far is no and not only in China.

Once the global market is reconfigured in such a way that it funnels benefits
back to China they no longer ignore it. Much the same way the Portuguese
reconfigured the Asian spice market in the 16th century to their benefit for
the next two centuries.

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arbuge
"Analysts at China International Capital Corp. estimated on July 13 that no
more than 200 firms, or about 10 percent of existing platforms, will still be
around in three years."

Even for a large nation like China, 2,000 P2P platforms sounds like orders of
magnitude more than what is actually needed.

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pjc50
Ah, a shadow banking crisis, right on time!

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kawfey
I was literally just looking into the pros and cons of P2P lending because I
hadn't heard of it prior to today. I mentioned on another forum how annoying
my student loans are being part mine, part my fathers, and all with high
interest rates, and someone suggested P2P lending (such as SoFi).

Now I am not so sure.

~~~
toomuchtodo
I invested low five figures with Prosper, a US P2P lending platform, for
several years about a decade ago. The returns are abysmal (and when the Global
Financial Crisis hit, I had a bunch of notes go bad because of bankruptcies).
Why? Because P2P lending is lending of last resort. It's one step above payday
lending. I highly recommend _not_ lending on P2P platforms.

As a borrower, it might not be a bad deal if you can't get a loan secured by
real estate, or a personal loan, to refinance high interest debt. Depending on
your circumstances (debt to income ratio, outstanding debt, available credit,
income), you might consider using balance transfer offers that get you credit
at 3-5% to make headway on high interest debt.

For a wealth of anecdotal, self-reported experiences, checkout Reddit:
[https://www.google.com/search?q=reddit+investing+p2p](https://www.google.com/search?q=reddit+investing+p2p)

~~~
ipsin
US P2P platforms seem like a great way -- as a borrower -- to convert your
non-dischargeable debt (credit cards, student loans) into unsecured debt.

So: great for borrowers, terrible for lenders.

~~~
howard941
Credit card debt is generally dischargeable if it wasn't incurred in the 60
days before filing, wasn't fraudulent, and doesn't fall under other exceptions
(such as charging your tuition on your credit card). Unfortunately the nature
of the original debt carries through to the benefit of the new lender and the
debtor still has to file a motion to determine dischargability with notice to
the P2P lender if she wanted to discharge student loans converted in the
manner you suggest.

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basementcat
Sounds like this is the perfect time to take out a bunch of loans on a bunch
of Chinese P2P lending platforms!

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frostyj
Don't make it sounds like they didn't see this coming. They just simply don't
care.

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ilamont
I know someone who works in this industry in China. He cites illegal
activities, negligence of risk management procedures, and the resulting fear
of illegal activities and anticipation of a crackdown, as leading to the
current situation.

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songco
Lots of them provide more than 15% ROR, too high that some normal company also
put lots of money to p2p. This is crazy and it is certain most of them(p2p)
will go broke.

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known
Without collateral peer-to-peer lending is nothing but altruism

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madads
Pyramid schemes all eventually fail.

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pertymcpert
This article is 2 weeks old.

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nsp
I u

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NedIsakoff
There was the peer-to-peer lending in China with porn, how is that going? :)

