It's the wild, wild Web for new breed of lenders

Ji Shaofeng, managing director of a company specializing in small-loan services in Jiangsu province, predicted on his personal blog on sina.com that most of the current P2P platforms would fail. This is not merely for a lack of third-party credit ratings, or because the platforms' operations are not sufficiently transparent. "Rather, the P2P business model has a deep flaw that is driving them to the wall," Ji said.

By definition, P2P lending means individuals lending their extra cash via a website to someone else, most likely a stranger, who needs it but does not want to deal with the procedures that bank loans require. The only condition these lenders impose is that money is repaid with a reasonable interest rate.

But in many cases, this is not how it works in China, Ji noted. Despite the government's "red lines" on what P2Ps should not do, they actually tend to act as online banks, not as independent channels of funds.

Under the current P2P model in China, creditors do not choose borrowers after scrutinizing the latter's business profiles and credit standing. Instead, they lend money directly to a platform, attracted by the platform's often-dubious assurances about its risk-control methods and ability to generate high returns, he noted.

This being the case, in dealing with borrowers, P2Ps can only resort to high, and sometimes usurious, interest charges. But the higher the interest rate goes, the likelier the debtors are to default. Some of them simply go into hiding after they fail to achieve their promised business growth.

This also explains why no government entity has had the courage to issue a full business license to any of them, in an obvious precaution against possible mass protests following a collapse.

As a result, Ji lamented, China's Internet financial market has degenerated into a free-for-all.

Web-based financing can grow into a flourishing alternative financial market if its participants have a sound legal and regulatory environment, low barriers to competition, strict rules on company transparency and a sustainable business model.

These will be the components for the country's next-generation of Web financial companies. And it will be a different world that few of today's online lenders will last long enough to see, Ji said.

New platforms seem to realize that they have to differentiate themselves from the earlier online lenders to be successful.

There are also fully registered banks branching out into Web-based short-term lending, even for mobile phone users. The participation of regular banks may help redefine the landscape of the nation's Internet financial market, business commentators said.