Lenders need scale. Peer-to-peer ventures have failed to achieve this individually and collectively. Lufax is the latest to throw in the towel. China’s second-largest online lender is shrinking its peer-to-peer business, while denying rumours of a complete exit. The move signals more withdrawals and consolidation are on the way across the industry.

Explosive growth was halted by a series of scandals. These included lender Ezubao’s $7.5bn Ponzi scheme, which claimed 1m victims two years ago. The ensuing government crackdown brought mass shutdowns. China’s total of online lenders has shrunk by a half from a decade ago. 

New regulations have included a drastic cut in loan amounts and restrictions on marketing. The sector’s workforce has shrunk. Lufax rival Dianrong recently cut thousands of jobs and raised funds to meet higher minimum capital requirements.

Lufax, with over a fifth of the market, has managed to escape relatively unscathed. New users increased by a fifth and loans grew by almost a third last year amid the crackdown. It helps that Ping An owns 43 per cent. Loans are backed by the rock-solid balance sheet of China’s largest insurer. 

But rising market share means little when the sustainability of the sector’s business model is in question. There is little loyalty to any single platform among return-hungry individual lenders. Growth cannot continue for ever, implying revenue dependent on new lending fees is bound to slip.

Fortunately, Lufax hedged its bets by building up a wealth management business. It will apply for a consumer lending licence. The would-be disrupter will adopt the business model it was set up to challenge.

Investors have dodged a bullet. Lufax was planning a $60bn Hong Kong listing. Its $39bn private market valuation was mostly derived from the P2P business. If it comes to market at all now, a frothy fintech valuation would no longer be appropriate.

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