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China Paves Way for the Death of Traditional Banks

Alibaba made a splash over the summer with the launch of its online banking platform MYbank, further demonstrating the company’s commitment to expand into the financial industry. This comes in the midst of an all but exploding peer-to-peer (P2P) lending startup scene in China, in which private enterprises such as MYbank seem very likely to dominate soon.

MYbank’s primary focus is on loans to small businesses and individuals. As the bank only operates online, it has considerably lower operating costs than those of traditional banks, which allows it to lend smaller amounts than what is typically required at other institutions.

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“MYbank is here to give affordable loans for small and micro enterprises, and we are here to provide banking services, not for the rich, but for the little guys,” says MYbank executive chairman Eric Jing.

Traditional lending in China often means heavy preference towards state-owned firms. This leaves countless small to medium businesses high and dry. It is here that P2P lending in China has come into play in recent years, not only in the form of startups but with the recent emergence of private banks as well.

MYbank will compete with this pool of existing P2P lenders that cater to those unable to qualify for large bank loans. Jimubox, Edai, and Dianrong are examples of some better-known ventures, but there are numerous others. Most of these have grown rapidly in terms of valuation, which serves as further evidence of how this area of finance has taken off in China.

Last year there was a reported US$32.5 billion in loans issued from P2P lenders in China. This makes it (by a large margin) the world’s largest P2P industry.

The Australian Financial Review reports, “For Chinese investors, P2P lending offers higher interest rates than they’d get leaving their money in the bank, with the promise of lower risk than putting their money in China’s volatile stock market. Lenders claim they lower the risks of default by spreading the cash across a large number of loans.”

MYbank already has registered capital of 4 billion yuan (US$644 million) and is able to offer loans of up to US$800,000. The bank has also received a license from the China Banking Regulatory Commission, one of the few privately owned banks to do so. Tencent Holdings Limited-backed WeBank was the first, and is now officially recognized as China’s first private Internet bank.

Despite this green light from authorities, there are a number of unresolved issues in banking regulation. One such issue is the pending approval of facial-recognition technology for identity verification. This delay is preventing MYbank from allowing people to even open accounts. Also, concerning the appearance of literally hundreds of P2P loan operators in just the past few years, there comes with this a fair share of fraud, overextended borrowers, and business failures. All of which serve as a reminder of the high risk that many investors face during this trend.

This is one area that both MYbank and WeBank have a huge advantage. Given the sheer volume of user data that they already have access to (think Taobao, Alipay, and Tencent’s WeChat), they can more efficiently evaluate the credit risk of borrowers.

With regard to the glut of P2P enterprises, the banking regulatory commission is already in the process of establishing a division devoted to monitoring lending in China. Crowdfund Insider reports that the commission will implement a registration system for P2P lenders and will ban what are deemed high risk financial products. In addition to this, there is talk of stricter capital requirements for startups—a move that is expected to have a considerable impact on the number of P2P lenders currently out there.

Another notable rule will require lenders to have third-party institutions, such as banks, function as escrow agents. This measure will attempt to further safeguard investor funds.

Despite state-run regulators scrambling to have more control over private lending, many believe that this red-hot sector is just getting started, and is being welcomed amid the slowdown in China’s economy. Players like MYbank seem likely to benefit the most in all of this. If this turns out to be the case, it will help put a few more nails in the coffin of China’s brick-and-mortar banks.