Chinese lending company executives exchanged views with their UK counterparts, and both sides found ideas they could borrow

British and Chinese peer-to-peer lending firms recently had a chance to learn from each other during a weeklong visit by Chinese company leaders to the United Kingdom.

The business involves lending to unrelated individuals, or "peers", without going through a traditional financial intermediary such as a bank or other traditional financial institution. It emerged in its modern form about a decade ago in the UK.

The 15 peer-to-peer company leaders from China attended a forum at the London Business School on the future of P2P lending. Cecily Liu / China Daily

But while UK businesses are strong in such areas as sophisticated websites, technology-assisted lending decisions and consumer protection, Chinese companies also are leading in innovative new ways.

"Although China's P2P market still faces many crucial challenges, it has the greatest potential to take off and make a significant contribution to the real economy," says Sun Lei, CEO of 9fbank.com, a Chinese P2P company started in 2006, and one of the Chinese executives who visited the UK.

"China's P2P market is dominated by small and medium businesses that achieve tremendous growth with the funds from P2P lending," Sun says.

"The UK's market has developed for 10 years and today there are still only dozens of P2P lending firms, but in China there are already about 2,000 firms of various sizes and scales."

Sun says China is already pioneering new methods of innovative P2P lending, and an example is lending to farmers in a way that turns a family farm into a business, bringing in lenders to effectively become shareholders.

If a dairy farmer wants to increase production, he can borrow through a P2P platform to increase the number of cows on his farm, and the lenders will receive a share of the revenue made from the additional cow.

"This is different from traditional financing because a bank would not want to own a cow. At the same time it is a model the Western countries do not have, because P2P lending in Western countries focuses on the borrower himself, and not an asset in his business," he says.

The 15 P2P company leaders from China visited the UK in November to talk with UK company leaders as part of a trip was organized by Beijing-based consultancy Into Global Business Communications.

Companies visited included Zopa, famous as the world's first P2P firm. Others include Wellesley & Co and Funding Knight. They also attended a forum at the London Business School on the future of P2P lending.

Zopa was founded in 2005, but the practice really took off globally after the financial crisis when traditional financial institutions became more reluctant to lend.

The industry has substantial global growth potential, supported in part by low interest rates, a benign credit environment, evolving regulatory dynamics and robust institutional investor support, experts say.

Funding Circle, Lending Club, Prosper, RateSetter, and Zopa are among the largest global P2P lenders, which combined had nearly $3.5 billion in loans outstanding as of the end of 2013, up from just $1.2 billion at the end of 2012, according to Fitch Ratings.

Some industry insiders expect global P2P lending to grow to $1 trillion by 2025.

"In the US, P2P financing mainly serves individual consumers to pay back their credit card loans, and in the UK, consumers borrow from P2P platforms for buying a house or car," Sun says.

But in China, another issue that pushed the rapid growth of P2P lending is the difficulty Chinese small and medium-sized enterprises have in getting financing from Chinese banks, which traditionally have favored lending to larger, state-owned enterprises.

"For many SMEs and family businesses, they are already seeking alternative channels of financing after discovering the difficulty of borrowing through the traditional channels, such as borrowing from family and neighbors," Sun says.

After working at China Minsheng Bank, Sun decided to establish his own lending company.

He says Chinese P2P firms can learn a lot from their UK counterparts in developing a good Internet platform to facilitate P2P financing and also building up a good regulatory environment to help create a level playing field.

"P2P firms in the UK place a greater emphasis on the Internet, so the lenders and borrowers can communicate in an efficient and transparent way. Internet platforms also enable extensive information disclosure for lenders and borrowers to make informed decisions," Sun says.

He says in China, much of the P2P activity still takes place offline because many companies have not invested in technologically advanced platforms.

"In the UK, the online system will determine whether to lend to an applicant or not based on a set of data input, but in China this decision will be made by a few people sitting at a table having a discussion. This means in China, the decision made could be more arbitrary and the use of labor input is inefficient."

Also, Sun says the lack of a good regulatory environment is also a challenge in China, because P2P companies as a result engage in practices unacceptable by industry standards.

The UK's P2P industry is regulated by the Financial Conduct Authority, which implements rules addressing the specific risks and operational features characteristic to the industry. But in China, there is no regulating authority or concrete rules governing the industry.

Sun says one example of an unacceptable practice common in China is to create a cash pool where all money is being gathered into one bank account and lent to different borrowers.

"This is not acceptable because financial flow in P2P lending is supposed to be point to point, so each account should be kept separate," Sun says.

Another irregular practice in China is for P2P firms to promise lenders that they will receive the money they have invested, he says.

Such a practice is against industry practice because P2P companies are not traditional banks, but instead are intermediaries that collect fees from brokering loans between borrowers and lenders. Their role is to facilitate information disclosures and it is the responsibility of lenders to assess and accept the risks of default.

But because there is no regulator, many P2P firms use this practice to win clients. Sometimes they use new lenders' money to repay old lenders in cases of default, which is an illegal practice in P2P lending, Sun says.

Sun's words are echoed by Hua Meng, CEO of the Chinese P2P company Cashlai.com, who is also a researcher at the Chinese Academy of Social Sciences.

Hua says the Chinese government already has expressed the intention to regulate the P2P industry, having recognized its important contribution to the Chinese economy.

"The UK's P2P market regulation is great because it focuses on consumer protection, which is important for the long term growth of the industry," Hua says.

Scott Murphy, who works in policy and consumer affairs at RateSetter, a UK P2P company, says he believes Chinese firms can also learn from the UK firms' practice of creating a provision fund to help ensure secure returns for the lender.

The fund is drawn from a risk-weighted fee that lenders pay, and is used to cover defaults automatically should they occur. He says since RateSetter's founding, no lender has lost any money due to defaults.

Murphy adds that there are many lessons the UK's P2P companies can learn from China, and an example of this is offline lending, which seems to reach a wider base of users including those who are less Internet-savvy.

"The China route is meeting the needs of a wider group of consumers," Murphy says. "We should be looking at the examples in the States and in China to see if this is something we'd like to see in the UK."

Sun says China's P2P market has the potential to become world leading, because it has grown rapidly over a short time and also the demand for borrowing from Chinese SMEs is so great.

"I expect Chinese P2P firms to make a significant contribution to the importance of P2P lending globally," he says.

cecily.liu@chinadaily.com.cn

( China Daily European Weekly 01/02/2015 page19)