China is now the largest P2P lending market in the world. In just the first half of 2015, people exchanged RMB 300 billion ($47 billion) on more than 2,000 P2P lending platforms. As P2P lending in China reaches a tipping point, we expect many platforms to fail, and only sophisticated and innovative platforms will survive and thrive.

The “Q&A: Peer-To-Peer Lending Platforms In China” report takes an in-depth look at P2P lending platforms in China,  including the main players, key differences between Chinese P2P lending platforms and those in the UK and US, the problems that Chinese P2P lending marketplaces address, challenges P2P lending platforms face, as well as best practices in the P2P lending industry.

While the potential for P2P lending in China is huge, the challenges that lie ahead for these companies are significant. To succeed, P2P lending companies must overcome barriers related to the external environment that they operate in and the operational obstacles that their platform face such as:

  • Fraud. Widespread fraud and embezzlement in P2P lending tarnishes the entire industry, damaging well-run marketplaces as well as the immediate victims of fraud. Many of China's P2P lending platforms are not transparent, failing to disclose their revenues, expenses or fund allocation.
  • Regulation. In late December last year, the China Banking Regulatory Commission (CBRC) published new draft rules calling for closer supervision of the P2P lending sector. Some of these regulations include establishing a third-party depository of customer funds, requiring P2P lending platforms to improve disclosure, and prohibiting platforms from building capital pools.
  • Accurate risk evaluation. Accurate risk evaluation and underwriting is challenging for P2P lending companies as many borrowers have little or no credit history and the lack of credit references makes it hard for P2P lending platforms to assess credit risk.
  • The high cost of physical distribution. Many P2P lending companies in China use stores or agents for customer acquisition and for credit and background checks on borrowers. This is expensive, hard to scale, and makes them less cost-efficient than marketplaces that operate purely through digital touchpoints. 

The P2P lending platforms that will continue to survive and thrive are those that can overcome the above challenges, and are able to leverage advanced technology-assisted risk evaluation systems. In 2016, we expect differentiation and innovation in the sector as sophisticated platforms provide more granular services and personalized experiences to their customers.