Hi Savings4Freedom friends!
Today I’m writing to you from Hangzhou, in China. I’m representing my company in an international competition and looking for new business opportunities. A beautiful city with more than 1000 years of history.
October was a strange month for Savings4Freedom. Due to personal reasons, I needed to withdraw a significant amount of funds from my portfolio. However, since I was predicting this particular need and kept the necessary funds on iban Wallet, I didn’t suffer any drop in my monthly S4F returns! The reason why I choose iban Wallet was exactly to allow me to have a small interest gain from my savings, but access to my funds immediately, without the need to sell loans or wait for liquidity.
By now, in case you follow the blog, you already know that I decided to set up a group of P2P lending investment principles. They have been crucial in supporting my decisions. Have you found yours? Let me know!
The Failure of P2P Lending Industry in China
Being in China, I decided to explore the reasons why, back in 2018, the local peer to peer industry collapsed, with significant losses to investors.
The Ezubao Scandal
Back in 2016, Ezubao one of the top 10 largest P2P lending platforms in China at the time, has been shut down and 21 executives have been arrested. Even though Ezubao only launched in July 2014, it quickly grew to attract hundreds of thousands of investors with promises of 9-15% returns.
The scale of the fraud was breathtaking. Around 900,000 individual investors have collectively been bilked out of US$7.6 billion, according to Chinese officials, in one of the largest Ponzi schemes ever conceived. It has been reported that an estimated 95% of all borrower listings on Ezubao were fraudulent. Meanwhile, the top executives used investor money to enrich themselves – spending on items and gifts including real estate, cars, and luxury goods.
From 2016 to 2018… More and more platforms…
But the industry rationalized this away as just one bad apple. The regulators announced new rules for the industry at the beginning of 2016 and there was a sense that the strong platforms would adapt and continue to perform well. And that is what happened for the next year or so. But by 2018 serious problems began to emerge. That year ended up being the year of reckoning for the industry.
The p2p lending industry had grown to around 4,000 platforms at its height which everyone agreed was not a sustainable number. The weak platforms were not going to make it but the trouble was as they failed they often took investor money with them. While there was definitely some fraud there were also cases of platforms that meant well but were simply unable to make online lending work.
Investors Guarantees and Losses
Many investors had put their life savings into a single P2P lending platform believing that their money was safe. Some platforms said they would guarantee investor principal and others implied they were backed by the government. What these investors did not understand was that once the platform went out of business these guarantees were worth nothing. But they truly believed the platforms should guarantee all these investments.
What Went Wrong?
Peer to peer lending was a failed experiment in China. It became so tainted by fraud and illegal activity that even the well-intentioned platforms have struggled.
When sourcing for responsibilities, the reason seems to go to a failure of the regulatory system. In 2013 the People’s Bank of China (PBOC) had identified many of the problems with P2P lending but did not do anything about it until it was too late. The reality is that it is really difficult to underwrite loans well. You need a lot of expertise, particularly when it comes to risk management, and only a small number of platforms fully realized this.
There was no signal of how trustworthy a platform was except for size and time on the market. So, there was a mad rush to grow very big, very quickly and there was little incentive to be a good actor. Many platforms that actually had effective risk management in place were overtaken (in size at least) by these young upstarts. It was a house of cards and in hindsight, it was no surprise that it all came crashing down.
What can we learn from it?
We need to actively ensure that the same mistakes don’t repeat themselves in Europe. It is our responsibility, as investors, to ensure we do proper due diligence and request greater transparency from the P2P industry. In a different approach, we need to push from decisive action from the regulatory bodies to establish a clear investor protection standard.
I truly want to see the P2P industry growth, but I believe everyone that reads the blog needs to be informed and consciously of the risks. Let’s learn from the Chinese experience and avoid painful surprises in the future!
What is your opinion on this subject? How do you plan your investment strategies to avoid too much risk? Let me know in the comments section.
But, without any further due, let’s check Savings4Freedom returns!