Understand the rise, turning point and breakthrough of Internet finance in one article!

The rapid rise of any industry is not accidental. It is basically the result of the combined effect of various "time, place and people" factors that form the so-called trend. This was the case with the rapid rise of the Internet industry ten years ago, and also with the rapid rise of Internet finance three years ago.

Similarly, as time goes by, when the previous driving factors gradually fade away, industry development often reaches a turning point, and new driving forces need to be found to take off again. This article focuses on the development and changes of Internet finance since 2013, discussing its past rise, current turning point and future breakthroughs.

Four external factors that contributed to the rise of Internet finance

The year 2013 is known as the “first year of Internet finance”. Starting with baby financial management , various industries such as P2P, third-party payment, crowdfunding, and consumer finance have achieved leapfrog development. In my opinion, in addition to internal factors such as the efforts of Internet financial companies themselves, there are four major external factors that cannot be ignored.

External factor 1: The number of Internet users increased rapidly, and "Internet +" became a hot topic

With the popularization of the new generation of smartphones, the number of Internet users in China has entered a period of rapid growth since 2011. Between 2011 and 2013, the number of Internet users in China increased by 160 million, laying a solid population foundation for the rapid development of the entire Internet industry.

Figure 1. New number of Internet users in my country since 2011. Data source: CNNIC, Suning Financial Research Institute

Around 2013, there was a wave of Internet subverting traditional industries in China, and "Internet Plus" became a trend. Compared with the industrial thinking characterized by large-scale production, large-scale sales and large-scale dissemination, Internet thinking has produced a huge "disruptive" effect on traditional industries such as retail, wholesale, manufacturing, advertising, journalism, communications, logistics, hotel and tourism, and catering by reconstructing the market, users, products and industrial value chain. For a time, words such as free thinking, user thinking, iterative thinking, extreme thinking, traffic thinking, platform thinking, and cross-border thinking became popular all over the country.

With the successful reconstruction of traditional industries by the Internet, the financial industry, which "makes money without doing anything", has become the "last" bastion that Internet companies "covet", laying the foundation for the "Internetization" of finance.

External factor 2: The maturity of PE/VC industry provided capital support for the rapid development of Internet finance in its early stage

As of the end of 2012, there were more than 5,000 VC/PE institutions active in mainland China, providing convenient conditions for financing for Internet financial startups . Since Internet finance first emerged in early 2013, it was quickly regarded by PE/VC as a new investment outlet. In 2014, there were 193 equity investments in the domestic Internet finance industry, a year-on-year increase of 339%; the disclosed amount was 142 billion yuan, a year-on-year increase of 695.38%.

The support of PE/VC enabled Internet finance to continue the "free" thinking of the Internet in its early days, acquire customers and markets through large subsidies, and reproduce the word-of-mouth effect by attaching great importance to customer experience, thus completing the early accumulation. With the help of the Internet's features such as easy dissemination and rapid replication, Internet finance quickly achieved a geometric growth in scale after achieving the leap from "0 to 1", becoming an increasingly important force within the financial system.

External factor 3: The continued shortage of money has become the fuse for the rapid rise of "Baby Financial Management"

Before the money shortage in June 2013, commercial banks were confident that the central bank would inject money into the market at critical moments (in fact, the central bank has always done so) , and did not pay enough attention to liquidity risks. There is a widespread phenomenon in the banking industry of using short-term funds for medium- and long-term purposes to obtain higher interest rate spreads, while short-term funding expenditure needs are met through interbank market borrowing, resulting in a serious mismatch in the asset-liability maturity structure.

At the critical moment in June 2013, after experiencing the impact of various situations such as the decline in the growth rate of foreign exchange deposits, the increase in cash demand at the end of the quarter, and the rectification of banks' off-balance sheet wealth management business, the market demand for liquidity increased significantly, and the banking industry was, as always, waiting for the central bank to inject liquidity to save the situation. In order to strengthen banks' awareness of liquidity risk management, the central bank chose to wait and see, which quickly led to tight funds in the interbank market, a rapid surge in interbank lending rates, and a cash shortage.

Figure 2: SHIBOR overnight interest rate in 2013

In June 2013, baby financial management emerged as a new force thanks to the favorable timing and location of a "money shortage" in the financial market. With a yield rate of over 6% at one point, Internet baby financial management has gained ground and experienced explosive growth. For two years before June 2015, the 7-day annualized rate of return of Baobao Financial Management was above 4%, and Internet financial management became the preferred product for people's current financial management.

External factor 4: A relaxed public opinion environment boosts the Internet finance entrepreneurship boom

From 2013 to 2014, Internet finance, as an emerging thing, received relatively positive comments from all walks of life, creating a relatively relaxed public opinion environment for the rapid development of Internet finance. Regarding Internet finance, there were two main views at the time, either paying attention or despising it, both of which promoted the rapid development of the industry in its early stages from different angles.

One view is that Internet finance is of great significance and needs to be encouraged and supported. This part of the view is represented by scholars and practitioners, who believe that cloud computing and big data can effectively solve the credit risk assessment problems in the field of small and micro finance, and the long-tail effect of Internet channels has greatly lowered the threshold for financial services, thereby implanting the genes of "openness, equality, innovation, and service" into the financial field, bringing benefits to small and medium-sized investors, and also bringing new vitality to traditional financial companies, which will ultimately help promote the democratization of finance.

Another view is that Internet finance has not yet undergone fundamental technological changes, and is merely a repackaging of traditional financial products onto the Internet. This is just a change in channels and is unlikely to become a major trend. This view is mainly represented by practitioners in traditional financial institutions. In their view, baby financial management is essentially a money fund, and the P2P platform's "principal and interest guarantee" unspoken rule also has great hidden dangers, making it difficult to fundamentally shake traditional financial institutions.

With the help of the above-mentioned external environmental factors, Internet finance has made breakthrough progress in business areas such as P2P, online lending, third-party payment, crowdfunding, wealth management platforms, and auxiliary business areas such as big data credit reporting, bad debt collection, smart investment advisory, payment aggregation, third-party information platforms, and financial product search.

Figure 3. Internet finance business development index, data source: Peking University Internet Finance Research Center, Suning Financial Research Institute; January 2014 is 100

Four major factors accelerate the arrival of the industry turning point

The rapid rise of Internet finance itself has also produced a series of negative factors, which have changed the industry development environment in all aspects and ultimately accelerated the arrival of the industry's turning point.

Dilemma 1: Raising the compliance threshold

Since the release of the "Guiding Opinions on Promoting the Healthy Development of Internet Finance" in July 2015, Internet finance has gradually entered a period of centralized regulation. The overall compliance threshold of the Internet finance industry has been raised, becoming a catalyst for accelerating industry differentiation and the first hurdle for many small and medium-sized platforms to survive.

Taking the requirements for fund custody of online lending platforms as an example, the Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries clearly require that "online lending information intermediaries should implement separation management of their own funds from the funds of lenders and borrowers, and select qualified banking financial institutions as fund custodians for lenders and borrowers." However, according to incomplete statistics from Rong360, as of the end of September 2016, there were only 95 domestic platforms that had launched bank fund custody services, and nearly 200 others claimed to have signed fund custody agreements with banks.

Considering that for commercial banks, once the platform that conducts custody business goes bankrupt, not only will the initial IT investment be unable to recover, but they will also be prone to potential reputation risks related to fund repayment. Although banks are not legally required to bear repayment responsibility, financial planners often go to banks for explanation when their funds cannot be repaid, which has a certain negative impact on the bank's reputation.

Based on this, when banks carry out fund custody business, they often involve higher entry barriers to minimize the possibility of bankruptcy of the cooperative platform. Combined with the bank’s requirements for platform transaction scale, asset quality and other conditions, the author believes that at least 70% of the platforms will be blocked from fund custody in the future.

Dilemma 2: Scenario saturation and customer acquisition dilemma

On the one hand, Internet finance is easy to replicate and spread quickly. After two years of rapid development, high-quality financial scenarios have become saturated. On the other hand, since 2014, the growth rate of the number of Internet users has dropped sharply from about 10% to about 6%. The dividend of the number of Internet users has shown a clear downward trend year by year, which is insufficient to support the rapid growth of the industry. The result is that the Internet finance industry has fallen into an obvious customer acquisition dilemma.

One piece of evidence is that the effective online customer acquisition cost of many Internet financial platforms has reached more than 1,000 yuan. One or two years ago, this cost may have been less than 100 yuan, or even 20 or 30 yuan. The second piece of evidence is that almost all high-quality e-commerce platforms and social platforms have launched their own financial products and credit products. The relationship between scenarios and financial products has changed from previous cooperation to current self-operation, which naturally excludes many third-party financial products and increases the cost of financial products to expand high-quality scenarios.

Dilemma 3: Profitability Dilemma

After several years of rapid development, the Internet finance industry still faces widespread profitability problems. Mainstream business platforms such as third-party payment, online lending platforms and even consumer finance are generally in a state of loss or low-profit operation, and still cannot find a sustainable profit path in the short term. This has begun to affect the capital market's expectations for the development of the industry and accelerated the arrival of the capital winter.

Taking online lending platforms as an example, as of the end of October 2016, there were 2,154 platforms operating normally in China. Among them, only 8 platforms disclosed profit information on their official websites or financial reports, and 10 platforms disclosed profit information in media interviews with corporate leaders, totaling 18 platforms, less than 1% of the number of platforms operating normally.

Dilemma 4: Capital Winter

Internet financial companies are generally not profitable and rely mainly on venture capital to obtain the financial investment needed to maintain rapid development. However, the industry's long-term unprofitability caused venture capitalists to gradually lose patience and confidence, and the operating style changed from aggressive to cautious, ultimately triggering the arrival of a capital winter. As can be seen from the table below, venture capital in the Internet industry peaked in 2015, with a total of 5,334 companies raising funds; as of January-August 2016, the number of financings fell sharply year-on-year.

In the capital winter, without sufficient external financial support, the Great Leap Forward development model of Internet financial companies is difficult to sustain, which accelerates the industry into the stage of differentiation and integration.

Under the combined effect of the above factors, the two-tier differentiation of industry development has become a common feature of the entire Internet financial industry. This is particularly evident in industries such as P2P and third-party payment, and there are also signs of a winner-takes-all situation in the field of Internet consumer finance. The Internet finance industry has reached a turning point, and the entire industry has entered the second half.

The second half of Internet finance

Channel transformation was the main driving factor in the first half of Internet finance. With the disappearance of demographic dividends and scenario dividends, the driving role of channels has gradually diminished, and the industry's rapid growth has gradually become a thing of the past. In this context, if companies continue to use their past business models and operating ideas, they will undoubtedly get half the result with twice the effort and achieve little results. In my opinion, the so-called second half is just the natural result of the exhaustion of old driving factors. As long as new driving factors are found, the industry can still usher in another spring of rapid growth. At present, at least Internet finance still has the "financial technology" card to play.

In order to seize the new opportunities, Internet financial companies must break away from the traditional model that uses new customers and transaction size as core KPI indicators, focus on the refined mining of existing users and the transformation from transaction size to profitability, and increase their layout in financial technology on the basis of achieving profitability. After all, opportunities will only come to those companies that are prepared.

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The author of this article @洪言微语is compiled and published by (APP Top Promotion). Please indicate the author information and source when reprinting!