When Chinese flight booking operator Baitour needed cash to grow its business last year, it opted against using Industrial and Commercial Bank of China, its long-term lender and the world's largest bank, turning instead to Internet finance startup Jimu Box.
For Baitour, getting funds via Jimu Box, a peer-to-peer (P2P) online platform that matches lenders and borrowers, was quicker and required no upfront collateral.
Borrowing from banks "was tough, really tough", Baitour Vice President Tian Xiaoming told Reuters.
"We couldn't get the funds we needed from the bank," said Tian. "Peer-to-peer turned out to be the best alternative."
Despite repeated cuts in China's official interest rates to boost the slowing economy, local banks appear reluctant to lend to potentially high-risk small companies, a trend similar to the credit crunch that plagued Europe during its own slowdown.
Seeking cash, an army of entrepreneurs is increasingly turning to P2P platforms and other forms of Internet financing, posing a dilemma for Chinese regulators, who want to lift growth but are wary of these unregulated credit pools.
P2P credit stands at $53 billion in China, according to P2P001, a widely followed website for Internet lending.
While only a fragment of total bank lending it represents a threat to the traditional banking model since by quickly pooling funds, P2P platforms do away with the need for a bank intermediary between lender and borrower.
Jimu Box, which became a top 10 Chinese P2P player in two years, responded to Baitour's loan application in one day, compared to ICBC procedures lasting several months, said Tian.
Since June 2014, the ticketing business has borrowed $19.9 million from Jimu Box, sliced in hundreds of short-term micro-loans spread across individual lenders who, like 19-year-old undergraduate Apple Guo, were lured by attractive returns.
"It helps me pay my phone bills," Guo said.
BIG DATA
While banks use internal rating systems and business plan analysis to assess loan risk, P2P players such as Dianrong.com use computer algorithms to wade through masses of personal data.
Dianrong.com, backed by U.S. fund Tiger Global, asks borrowers to allow it to purchase data from credit card company UnionPay to assess cashflow and can lend using future income as collateral.
Dianrong.com also uses public shaming as a tool.
The platform requests access to a borrower's Weibo account, China's equivalent of Facebook, to lend. If payment is missed, Dianrong.com posts a request for help with payment, embarrassing the borrower.
"People have parents paying for them, their ex-girlfriend," said Ling Kong, chief technology officer at Dianrong.com.
But this approach raises data privacy issues and poses questions about the legitimacy of accessing customer data.
While P2P is a global phenomenon, it's spreading fast in China thanks to the proliferation of low-cost smartphones among the tech-savvy, entrepreneurial younger generation.
The number of P2P lenders in China more than doubled to 1,700 in 2014 from 2013, and credit grew four times, according to the P2P001 website.
Although P2P emerged to fund individuals and small companies, it is also proving attractive to China's cash-strapped property industry.
Greenland Hong Kong Holdings Ltd, a subsidiary of China's second-largest developer, the state-backed Greenland Group, said in late March it had set up an online platform that connects property developers and investors with financing and investment opportunities.
Beijing-based Modern Property has raised more than 40 million yuan ($6.45 million) this year from four crowdfunding campaigns, online financing similar to P2P.
"It lowers intermediary costs, including refinancing costs and marketing fees and speeds up sales," Modern Property President Zhang Peng told Reuters.
SAINT OR SINNER?
The industry's rapid growth has presented challenges, with 287 Chinese P2P firms shutting down last year. The 98 closures in December alone exceeded the total for 2013.
Of the closures in 2014, 46 percent were caused by fraud or absconding P2P company owners, according to industry data provider Wangdaizhijia.
"A lot of money is coming in quickly and (the platforms) don't know how to manage it. Without the right risk management and asset allocation, there's also a lot of systemic risk," said Ling from Dianrong.com.
China's central bank has voiced some concerns and Beijing is expected to introduce regulation for the industry this year, said a source at a government financial services agency, a move industry players predict will force consolidation in the overcrowded sector.
Despite those concerns, Gong Shengpan, deputy governor of the People's Bank of China, said this month that more freedom should be granted to non-deposit taking lenders, according to respected magazine Caixin.
"In an online environment, you have to think a bit differently," said Greg Medcraft, head of the International Organization of Securities Commissions, a body which brings together securities regulators from around the world.
"At the end of the day, if it's a digital solution that can take the same equation and deliver more value to the customer, then it's all about harvesting the opportunity and mitigating the risk."
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