Roland Berger recently published the latest report of the Transformation Expert series: Compliance Transformation Strategy for China’s P2P Industry, to shed light on P2P models in Europe, the US and China as well as the compliance development of their respective P2P platforms, and to forecast China’s regulatory trend of the P2P industry. As the report points out, the wild growth of China’s P2P industry is coming to an end while a regulatory system integrating government surveillance and industry self-discipline is taking shape, thus the industry is on track to regulated development. The report also suggests that during the last year before the opportunity window closes upon official release of P2P regulatory guidelines, P2P platforms should carry out reform in key sectors and properly deal with derivative problems, to accomplish compliance transformation and lead the industry to healthy development.

Shanghai, September 28, 2016

China’s P2P industry has been booming since 2007, featuring two main business models – online-only credit and O2O (online to offline) credit. The O2O model is the most common practice. However, the regulatory vacuum at the early stage caused massive chaos and led to industry volatility. The Interim Administrative Measures on Business Activity of Internet Credit Information Intermediary Agencies (the ‘Measures’), published in August 2016, marked a start of the industry's regulated development in China. In future, the government would focus on ‘red line’ regulation, classify platforms and offer differentiated treatment under the policy of ‘assist the superior and restrain the inferior’, as well as provide, on a gradual basis, more specified provisions regarding rules and regulatory systems, and strengthen cooperation among organizations to ensure steady transition.

As a result, platforms should actively carry out self-inspection and start reform in sectors that overstep the red line as soon as possible. They should also conduct comprehensive rectification during the last year of opportunity window before the official release of regulatory guidelines. The report summarizes the framework of comprehensive compliance transformation of P2P platforms, and focuses on the reform of eight key sectors, classified as per strategy, business and operation. Besides, attention should be paid to four major problems that may occur during the aforesaid reform and transformation.

Eight Sectors for Remediation:

• Strategy - comprehensively review future strategies from the perspective of compliance: clarify future development targets, platform positioning and core business model; straighten out the relationship between platforms and associated companies to ensure independent operation of P2P business and avoid spread of risks.

• Business - establish an online-only P2P internet lending model: plan transformation of offline wealth-management teams, close down or merge physical stores and design online business-operating model; optimize P2P product design and sales, and avoid overcrossing the red line.

• Operation - complete reform in accordance with the Measures: construct a risk management system that is based on big data and cloud computing; introduce bank custodians, eliminate maturity mismatches and enhance liquidity management; complete information disclosure and risk assessment of investors, etc.; upgrade information system and build up website security and application-level disaster recovery system and facilities.

Four Major Derivative Problems:

• Inability to choose among business scale, profitability levels and risk control

During compliance transformation, shrinking business scale will reduce profit margin and impact investor’s confidence. Platforms should adjust their short-term growth targets and give up unrealistic expectations, and at the same time should have a thorough understanding of upcoming situations and make choice among scale, profitability and risk.

• High staff turnover causing human resource volatilities

At the critical stage of reform, doubts and misunderstandings caused by management’s negligence of communication within the company may lead to the resign of a large number of core employees. Company founders and senior management should inform employees, in a timely manner, of a definitive and clear development vision and approaches to compliance transformation, and promptly respond to employees’ questions.

• Multiple internal and external influences leading to risks including exceedingly inadequate cash flows

Insufficient funding for wealth management and improper handling of customers’ panic can easily lead to risk events such as platforms’ severe shortage of liquidity. On the one hand, platforms should maintain an appropriate pace of reform to ensure a smooth transition; on the other hand, platforms should, revolving around the lifeline of ‘cash flows’, improve cash flow calculation, monitoring and warning, develop risk event precaution mechanisms and launch preparatory efforts as soon as possible.

• Only focusing on the immediate life-or-death problem during compliance transformation, and neglecting the formulation of long-term developing strategies

At the moment, room for arbitrage in the P2P industry will gradually disappear, and the window of opportunity is going to close. Under such circumstances where only the fittest survive, the key to a long-lasting success for platforms lies in formulating a clear vision for future development, establishing a sustainable profit model and building up core competitiveness, so as to achieve differentiated development.