Connect with us

Executive Voice

Excessive Financialization of the “Internet+” Economy Calls for Vigilance

The financial problems of the Chinese online platform Danke Apartments, which was listed in the U.S. this year, have not only caused significant losses to hundreds of thousands of tenants, landlords, and the financial institutions involved, but also caused much disputes in the society. Some cities in China have even had to intervene in the social problems caused by Danke, introducing mitigating, transitional, and temporary regulations in an attempt to resolve the problems. With industrial downturn, a total of 16 apartment rental platforms had encountered financial problems in the first half of this year, which also brought about a series of disputes. In the name of “inclusiveness”, this new form of business-service has had a great impact on the economy and society, In particular, its tendency of excessive financialization poses a major caveat.

The business model of Danke is in fact the concept of “Internet+” that has received numerous praises in recent years. Its intention is to realize the matching of rental information and the effective utilization of long-term rental resources through the application of technology. If Danke were operating solely on the basis of the “Internet + rental” business model, it would not have caused such a big issue. However, as of now, Danke Apartment is actually more of an “internet + finance + rental” business model through cooperation with financial institutions and the use of financial leverage to achieve rapid expansion and profitability. Through its business practices and other means, Danke has received significant operating income in advance to achieve market expansion, which has actually exposed itself to the liquidity risks inherent in some typical financial institutions. Once the market has changed and its market expansion is hampered, problems with its cash flow and liquidity would cause it to enter a vicious cycle, which in turn would accelerate its exposure to credit risk.

Unlike conventional housing rental agencies, Danke and other apartment rental platforms have further expanded their leverage by partnering with financial enterprises to provide rental loans and issue ABS based on rental income. From 2017 to 2019, Danke expanded rapidly through in-depth cooperation with WeBank and made use of the “rental loans” business model. The percentage of active leases paid by cash loans was 91.3%, 75.8%, and 67.9% in 2017, 2018, and the first nine months of 2019, respectively. Danke therefore, speeded up its expansion through financial leverage. Its potential financial risk has exceeded the company’s capacity, and is transmitted to its clients and financial institutions, which then amplified to the society as a whole.

Looking at the development of the internet economy in recent years, the innovation of various applications has indeed exerted great influence on the conventional sectors such as retail and tourism. The new business models, such as e-commerce, online shopping, and bike-sharing, have brought great convenience to the lives of many. However, in terms of the development model of the internet economy, there is a problem of excessive financialization in areas such as online shopping, apartment rental platforms, and shared travel; any accident could very well bring disastrous consequences, causing great economic losses and negative social effects.

In the earliest model of the internet economy, equity financing and rapid growth were generally carried out by means of capitalization such as venture capital, followed by exiting after their IPO listing. This capitalization model is also subject to some investment failures, but after all, investors have a strong risk bearing capacity, and the impact is limited to the investment and financing fields, with limited negative effects.

Starting with Ofo bike-sharing, the “Internet+” model has become more and more permeable to consumers, and also become more financialized. It is not only a “money burning” model through direct capitalized financing, but it also indirectly increases leverage through the means of inclusive finance, consumer finance, and asset securitization such as ABS. On the one hand, it increases consumption by cooperating with financial institutions. On the other hand, these platforms themselves have accelerated their expansion through asset securitization. As a result, its level of risk has ballooned as the market has grown in size and revenues have soared. Coupled with aggressive internal decision-making and loopholes in external regulation, the risk of this excessive financialized model will eventually explode and cause a series of problems.

The internet giants that have grown up in the early stage all involve in the financial business to varying degrees. Ant Group, Tencent’s WeBank, Jingdong, and NetEase are all expanding in the consumer finance and online lending sectors. While these internet giants carry out “regulatory arbitrage”, they also induce some young people to form the habit of “excessive consumption” and “excessive credit”, causing a number of social problems. This mode of excessive financialization not only brings about financial risks, but also gives rise to many social contradictions and unstable factors.

Of course, from a regulatory point of view, there have been alerts to apartment rental platforms such as Danke. On September 7 this year, China’s Ministry of Housing and Urban-Rural Development (MoHURD) solicited public opinions for housing rental regulations. It mentioned to strengthen the supervision of rent, the use of deposits, and other operating conditions. Enterprises with irregularities in rent collection and management will be included in the list of abnormal operations. In practice, some places require the rents collected to be deposited into a supervisory account. In addition, the People’s Bank of China has been pushing for the implementation of new regulations on online lending to strengthen the regulation of the financial business of internet enterprises. While this belated regulation will help regulating future market conditions, and it will inevitably lead to an accelerated exposure to the risks of excessive financialized “Internet+” enterprises such as Danke. At a time when the Internet+ model is beginning to integrate deeply with financial services, a systematic and forward-looking regulatory system should be established for new financial-like business models. In particular, the long-term funds of clients should be comprehensively and strictly regulated to avoid a series of negative effects.

Final analysis conclusion:

Since the beginning of this year, the COVID-19 pandemic has brought a “black swan” impact to the economy and society, and has also led to the accelerated exposure of risks to some excessively financialized “Internet+” enterprises. When the clients of such platforms are mostly ordinary consumers, the damages done would be greater. It is therefore necessary to strengthen market regulation to ensure that innovations are not distorted.

Founder of Anbound Think Tank in 1993, Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

Join Disrupt Magazine

Become A Disrupt Contributor

Most Disruptive

Entrepreneurship9 months ago

Navy Veteran Davis Chris Takes the Music Industry by storm

In life, you need to break down anything that might be holding you back and change course if need be...

Entrepreneurship10 months ago

5 Disruptive Leaders Paving the Way in 2021

Where there is uncertainty, lies a whirlwind of opportunity. 2020 was the year that had entrepreneurs learn a great deal...

Politics1 year ago

Brock Pierce Wants To Disrupt The Two Party System And Be Your Next President

We don’t usually cover politics much here at Disrupt, but when Crypto billionaire and friend of the show, Brock Pierce...

Business1 year ago

John Mcafee – Predictions For The Future

John McAfee is a world-famous tech CEO, computer scientist, civil disobedience activist, privacy advocate, and pioneer of the commercial anti-virus...

Finance2 years ago

Gaby Wall Street – Teaching Latinas to Thrive During The Crisis

It’s no secret we are facing one of the most challenging financial times of the last few decades as we...

Entrepreneurship2 years ago

Tony Delgado – The #1 Entrepreneurship Movement In Puerto Rico

Puerto Rican online market is in constant progress. With many entrepreneurs who are coming here to start a business, it...

Entrepreneurship2 years ago

Elena Cardone – The 10X Ladies Conference Is Declaring 2020 The Decade For Women

The next ten years are meant for women to continue growing their potential and succeeding in multiple areas, including business....

Marketing2 years ago

How Josh Elizetxe Built Snow Into a $40 Million Dollar Business

There is nothing quite like an entrepreneur’s determination when starting a business. That’s my original quote by the way (pun...

Entrepreneurship2 years ago

How Jason Capital Became A Self Made Millionaire By 24

Have you ever wanted to earn the respect of everyone who ever looked down on you at some point in...

Entrepreneurship3 years ago

Sam Bakhtiar On His Way To A Quarter Billion

Dr. Saman Bakhtiar, who prefers being referred as Sam, lives in an 8200 square foot $5.2 million house, Sam is...


Copyright © 2020 Disrupt ™ Magazine - Disrupt is a Minority Owned Privately Held Company

Disrupt ™ is the voice of Latino entrepreneurs around the world. We are part of a global movement to increase diversity in the technology industry and we are focused on using entrepreneurship to grow new economies in underserved communities around the world. We enable millennials to become what they want to become in life by learning new skills and leveraging the power of the digital economy. We are living proof that all you need to succeed in this new economy is a landing page and a dream. Disrupt tells the stories of the world top entrepreneurs, developers, creators, and digital marketers and help empower them to teach others the skills they used to grow their careers, chase their passions and create financial freedom for themselves, their families, and their lives, all while living out their true purpose. We recognize the fact that most young people are opting to skip college in exchange for entrepreneurship and real-life experience. This Podcast was designed to give them a taste of that.