“In the Name of Finance”: What is the Next Tail Wind?

Shunwei Capital
Jul 28, 2017 · 15 min read

There have been two waves in the diversified innovations in asset: 2C and 2B.

This article has been authorized for publication on iHeima by Shunwei Capital (WeChat ID: shunweicapital).

Regulate on cowboy growth. Are the players in the market still full of confidence?

Yue Lei: Internet finance, fintech, new finance… from the first internet finance wave (P2P, financial management interfaces) of the past few years to the gradual implementation of regulatory policies and the delineation of supervision boundaries, where do you think the opportunities in the new round of financial entrepreneurship will be?

Cheng Tian: The first-phase internet finance start-ups in China basically engage in P2P finance and financial management. Current regulatory policies and supervision boundaries should also be oriented at the first wave of enterprises that are basing their development on internet finance. We have observed that there is a similar group aggregation effect in many industries. Often, a single point of opportunity leads to explosive industry growth as well as chaos and lack of order for a while. The internet finance industry may exceed the scope of a single point of opportunity. There is even an industry-wide trend of higher penetration rates. Thus, the impact and effect may be greater. Over the entire course of development, appropriate supervisory moves in the right directions can serve to “clean up”, organize and regulate the industry and also to promote continued industry maturation in the long term.

In the second stage of development for internet finance firms, there have been new developments in terms of diversified innovations with various asset ends, and the emergence of start-ups focusing on insurance and securities products. There has also been the broader trend of development of supporting businesses for internet finance. There have been two waves in the diversified innovations in asset: 2C and 2B. This is similar to how e-commerce has developed in China according to our observations. The 2C sector had emerged first, followed by 2B. Consumer finance has learned from the developmental pathways and experiences of e-commerce merchants and has seen even greater increases in user penetration rate. These companies have made the transition from 2C to 2B very quickly and have almost realized “walking on two legs” on both 2C and 2B, starting out with one “foot” and then following with the other. There are a number of outstanding investments in the area of 2C finance, and for area of 2B, the investment on Edianzu by Shunwei Capital has made a great headway as well.

In the last two years, various kinds of new 2C asset ends have seen tremendous development. Areas include campus credit in the early days to 3C, medical aesthetics, property rental, renovation, education, healthcare, travel and tourism, retail, and rural finance, etc. Where are the new opportunities for the future? Insurance, securities, financial management, robo-advisory, infrastructural services, derivative services, etc., are areas that I think have potential. The challenges and risks with 2B are greater compared to 2C. However, there certainly are opportunities too. 2B presents various scenarios and vertical-industry possibilities as well as the possibility for cooperation between multiple transaction platforms. There is even the possibility of new connective devices. Then, there is the integration of new technologies, such as block chain or artificial intelligence, with any of the sub-industries that we have talked about, like finance, insurance and assets. The application of new technologies to existing business models can also present new opportunities.

Shunwei Capital has invested in nearly 20 firms within the broadly-defined field of internet finance. These investments cover asset end, insurance, securities, and various aspects of derivative services, etc., where significant amounts have been invested.

The time for China to lead global fintech is up

Cheng Tian: A recent article in the Economist talks about how China’s fintech innovation industry is leading global development. I think the article makes a lot of sense. China’s fintech industry is currently breaking free of its accustomed imitation of Silicon Valley and developing innovation products and business models in the process. No matter in the area of payments, online credit or even P2P, many Chinese companies are ahead of U.S. companies in terms of methods deployed. Although the U.S. is more advanced in terms of wealth management, Chinese companies are now gradually catching up, and develop in a quick manner.

Then, for credit, the majority in U.S. and Japan continue to rely on offline channels and brick-and-mortar presences. China is, following the last few years of rapid growth in online credit, far more advanced than the developed nations in terms of penetration rates, and products and services offered.

Third, scenario-based consumer fintech is very strong in China, and penetration rates have been gradually growing in all vertical sectors. A number of approaches have been created through experimentation to bind merchant interests, win more users, conduct on-site risk control, resist systematic risks, and fight so-called “black industries” (i.e., hackers and those who sell stolen information, etc.), etc.

Finance is a high-risk industry, but at the same time we are also astounded by the courage, survival abilities and innovation capabilities of China’s start-ups. As for future innovations, we are now slowly entering unknown terrain where there is no case study from around the world to reference and learn from. Companies would need to explore new frontiers with the support of investors. We have even seen how China’s internet finance model and methods have already begun to travel overseas.

Shunwei Capital pays attention to various scenario-based applications in the arena of consumer finance

Question: Shunwei Capital has a rather comprehensive portfolio in the 2C consumer finance arena. Could you tell us a little about Shunwei’s setup in this area? Are there still opportunities in 2C finance? If yes, what would be the possible scenarios or asset ends where opportunities might be found?

Cheng Tian: We are very passionate about internet finance and have thus made quite a few investments. Currently, most investments appear to be in scenarios with comparatively low use frequency at the higher end of the consumer market. There may be more possibilities in the area of consumer finance. The majority of start-ups try to balance consumer spending with use frequency by expanding their offerings or even extending their businesses into virtual credit cards or cash loans. In the future, localized platforms may emerge. Many companies are already exploring the opportunities for multiple product types.

Currently, we have made investments in the following kinds of consumer finance companies: Omni prime (for 3C), Shenma Finance (electric vehicles), CashBUS (online credit), MiMe (medical aesthetics), and jimu.com (also known as PINTEC, general financing). In the area of 2C, we still do not have complete coverage, but some non-financial companies that we have invested in, such as in retail and in the automobile and property-related industries have also experimented with financial products.

What are the various types of consumer finance enterprises and their growth pathways like?

Question: Generally, consumer finance companies seek to make an entry by means of a particular target market or scenario, and then expand horizontally. For instance, I target the white-collar market first, and then expand into medical aesthetics, renovation, property rental, and overseas travel; if I use the student market as an entry point, then I may expand into 3C products. However, to meet the needs of a population that is growing older and moving on to other phases in life, like students becoming white-collar professionals, will also produce new needs. What are the boundaries and logic for consumer finance companies when they come to diversify their offerings?

Cheng Tian: Personally, I feel that currently there are three models to achieve the so-called boundaries along the logic of consumer finance. One type of company focuses on product types and scenarios, while another type of company focuses on customer demographics, and provides comprehensive services on the strength of such knowledge. The third type of company focuses on credit backgrounds. Actually, in the U.S. there are many companies that operate along the third model. It does not matter who you are; however, your credit rating represents your ability to repay and your ability to bear interest.

The great majority of start-ups in China typically enter the market on the first model, and once they meet a certain growth limit they will start to integrate the second model into their operations. This is a natural extension. And then they finally come to the third model, where the use of credit ratings is the most precise. In the future, it is highly probable that Chinese consumer finance companies would define the credit class that they are serving. This returns to your first question: expansion into multiple areas with multiple product types, and finally return to the credit background of a certain market segment.

Real estate and automobiles, the biggest asset types, present opportunities in the area of finance

Question: Automobiles and real estate are the two biggest markets in finance. Since the second half of last year, automobile financing (auto mortgage loans, consumer, dealer) and property financing (monthly lease payments, transaction-type financing, property mortgage loans) have gradually become the new focuses in finance. What is your take on these two biggest areas?

Cheng Tian: There may be opportunities in property leasing. However, opportunities may be limited to certain existing scenarios. The second type would be the provision of services to sub-lessors. This is a market that is worth watching. Property transactions are affected by both finance policies and real-estate policies. The third type would be what has been described as the most traditional: property mortgage loans (including bridging loans). This is a very common market in China. As there is collateral involved, the risks are comparatively controllable. Thus, this is quite commercialized and there are many products from countless companies in China.

Question: There are three points of entry with automobile financing: the first is the provision of services to dealers and the second is the provision of services to consumers. The third type involves the mortgaging of vehicles. What is your take?

Cheng Tian: Automobiles have been a rather hot asset area recently, and there has been much exploration and experimentation. As I have mentioned just now, just like property mortgage loans, automobile mortgage loans are a relatively common service. The second would be products created for dealers. I am personally a little more cautious, and with China’s current market situation, the risk to smaller enterprises is massive. In China, we have found that the credit risks of smaller enterprises to be sometimes greater than individual risks for pure consumption. The market for consumer services is very big, and there is also sufficient room for profits. I feel that there will still be opportunities here.

Entrepreneurship in the area of finance is bustling in the cities, and rural finance is but a matter of time

Question: Some are of the opinion that interest rates of rural financing are too low, and the capital costs are too high, and that there is little room for profits here. However, Shunwei Capital has made fairly comprehensive investments in the area of rural financing. Why does Shunwei Capital believe so strongly in rural financing?

Cheng Tian: For Shunwei Capital, the rural internet is a major investment theme and point of faith. There are indeed various issues with the rural market, parts of which are not very developed. However, in the rural market are also countless opportunities. First, the rural market has a large population, and the internet penetration rate is rapidly rising while infrastructure is also quickly being improved. Moreover, the government is willing to provide support, which means that bonus policies are present. In addition, a more important point is that competition is less intense in the rural context and operational costs are also lower.

For rural financing, the capital costs can actually be controlled because the government, banks and government financial services offices are all supportive of villages, agriculture and farmers. Thus, capital costs should decrease over the long term. Hence, if we have lower capital costs and relatively lower operational costs, we would then need to look at the interest rate differential. If HQ can control its costs well and able to operate with enough efficiency, then the risk and reward levels would be more balanced.

Question: On this subject, actually there are two sorts of setups on the rural financing scene: one caters to the rural lifestyle scenarios while the other is centered on the production environment. What is your take on these two setups?

Cheng Tian: I feel that opportunities are present for both, because the majority of rural households do not have the concept of registered companies. Thus, even in the business scenario, the concept is still based on the individual and the family unit. From the credit perspective, no matter if the borrower uses the funds obtained for production or consumption, there is little difference between the two. Of course, over the course of actual operations, there will still be some different criteria deployed in the course of risk control and product design.

Question: Consumption is perhaps more on improving the village environment. One is a capital expenditure and the other is a cost expenditure.

Cheng Tian: Correct, but personally, I am of the opinion that the line that separates these two can be quite ambiguous. The owner of a small farm buys a mobile phone and a piece of farming machinery in his name. It would appear that the purchase of the piece of machinery is more for production purposes, while the purchase of mobile phone is more for personal consumption. However, the mobile phone is used most of the time for business, so it is hard to draw the lines. Now go back to the product design and characteristics: for a financial product, how it is used is very important. However, the so-called asset risk assessment is still focused on the target’s cash flow, repayments, and product design. As to purpose, though it is an important point of reference in the course of risk control, it can become ambiguous over time. From this perspective, while consumer finance is a bustling area in urban setting, gaining popularity in the rural context will simply be a matter of time. In this area, we have invested in Nongfenqi and made a number of beneficial experiments.

The internet insurance is still in the early stages of development but bears promising prospects

Question: The internet insurance industry has been quite “hot” recently, with certain keywords like “auto insurance”, “health insurance”, “channel/agent”, and “product design”, etc., being often mentioned. Many entrepreneurs feel that there are certain challenges to creating start-ups and taking off in this area. First, on the product side, to a very large extent, the market is controlled by insurance companies. Second, on the channel side, start-ups would have to go up against traditional telemarketing or agent channels. Take auto insurance for instance, one would also have to contend with various scenarios and new channels with the automotive aftermarket. Hence, there may not be much space for companies that specialize in internet insurance. Therefore, many people are of the opinion that where value can be produced by internet insurance is on the level of data, which can then be transformed into products, and then into pricing. This is a kind of value.

The second kind of development and experimentation may take place on the channel side, where the information transmission is even faster. The first challenge here is: fundamentally, data obtained from the insurance company, automaker or even healthcare institution must be consolidated in order to break down the barriers between datasets. However, to compete with traditional offline channels would be to have to contend with pressures from both past competitors and new competitors alike. Hence, many entrepreneurs feel that the market may be too hard to crack at this stage.

Cheng Tian: Users needed to be educated. Fundamentally, it is a matter of customer flow and penetration. I feel that in many industries, the challenges are great in the early stages of internet technology adoption. However, we should also look at if there are any ways to make the endeavor easier.

Question: One way for internet insurance start-ups is to join hands with traditional resources for synergy.

Cheng Tian: Correct, collaboration is a good thing, and allows both partners to increase market penetration together. Everyone is experimenting, and it is normal to have doubts. Doubts have to be dispelled by the start-up by means of innovation and experimentation.

The current method is to work together with others to achieve mass while seeking to expand into more areas. Start-ups must give full play to the company’s strengths: they must also rely on bonus policy, and on institutional innovation and model innovation, and at the same time expand its product offerings once it reaches a certain state of growth. Over the course of this process, there will be a synergistic effect from users. Crossing over into other product types is already happening, and this is a two-way process. From the insurance perspective, start-ups are working together with various traditional firms from channel companies to insurance firms and middlemen. These companies are pulling together the industry’s potential strength by leveraging their respective advantages on model, product and technology. We have seen the penetration rates of internet insurance products, such as auto insurance, rise and change swiftly. For auto insurance, we have placed our support in Cheche365.com.

Question: What are the considerations for the area of securities?

Cheng Tian: Putting cyclical factors aside, China’s securities market is a massive market and also one of the world’s most active markets. Apart from shares, the market for other financial products is also enormous. Internet securities businesses have been developing in China for a number of years. However, there are still innovations aplenty. In particular, in recent years many have integrated the use of Big Data and artificial intelligence technology. For this market, I sense that there is also the possibility of “a hundred flowers blossoming”. For a very long time, individual investors and small-to-mid-sized investors will remain the main group of investors in the market. Their choices and preferences are more varied which means that a number of innovative financial tools are needed to meet their needs. In this area, Shunwei Capital has invested in companies such as uStock, stockwin, and livermore.

Just one or two outstanding companies don’t make a “tail wind”; a pool of outstanding companies, however, do — internet finance

Question: The majority of finance projects offer very good profits. Funding for these projects serves not as a lifeline but as additional capital. Some of those who invest in finance also have their strategic plans.

Cheng Tian: Correct. Venture capital institutions that invest in finance have split into clear camps. Some of these institutions are particular fond of internet finance, and invest specifically in this area. However, there are also other institutions that are a little leery of the risks inherent in finance.

The venture-capital circle in China is developing very quickly today, and a growing number of investors are willing to bear some risks. As long as there are reasonable gains involved, people are still willing to take part. Hence, the camp that favors internet finance has grown swiftly in the last few years. In my opinion, in the last two years the true “tail wind” has been internet finance. Just one or two outstanding companies don’t make a “tail wind”; a pool of outstanding companies, however, do From this perspective, internet finance has gradually become the most effective approach of internet monetization following e-commerce, advertising, and value-added services. It has very broad coverage, and has partnered various other industries. Further, in the last two years, internet finance has nurtured a group of pretty good companies. They can be called the “first tail wind”. Investors are paying a lot of attention to certain shared-economy business models. These models, which are also a derivative of internet finance, have very strong installment and leasing characteristics.

Finance is a tool for monetization, and also has the chance to become infrastructure

Question: Now, we are at the “Finance+” age, that is, finance is worked together with a specific scenario, asset type, as well as various channels.

Cheng Tian: It is indeed a “Finance+” age. I totally agree.

Question: This also includes: finance + supply chain, finance + vehicle, finance + logistics. In a market of significant size, as long as there is a mismatch between risk and credit resources, finance will theoretically have an entry opportunity.

Cheng Tian: There is the possibility of penetration. We can even say that internet finance is a monetization tool. In the future, it may no longer be a sector but a piece of infrastructure and methodology.

Question: Because there have been quite a few internet companies in the last wave, that have mastered flow and channels, thus, from this perspective, it is most advantageous for them to engage in financial monetization.

Cheng Tian: Correct, eventually we are looking at the extension of user flow. Fundamentally, opportunities in the internet business revolve around users and user flow. In finance, due to its inherently diffused risk characteristics, there should still be quite a few opportunities available. Using internet tools, the power of technology and accumulated data to satisfy user needs in a certain area is the basic driving force for the development of the internet finance industry.

Finally, no matter if we are talking about internet finance start-ups or investors in these start-ups, we must have the appropriate risk awareness at all times and at the same time work actively to embrace and adhere to regulatory supervision. We have been very pleased to see many outstanding companies that have grown through the many changes and evolutions from internet finance to fintech and then to “technological finance”. These companies have been able to develop swiftly under the driving force of both data and artificial intelligence and grow stronger over the process of finance and technology transformation. In the foreseeable future, China’s internet finance industry should be able to continue to lead the rest of the world in terms of innovation in this field.

Written by

Early stage VC founded by Lei Jun (Xiaomi CEO) and Tuck Lye Koh. Manages $2 billion USD with over 200 portfolio companies invested.

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