UOTC Dianrong Incorporation of Blockchain Technology Case Study Please read the Dianrong case study (see HBS Coursepack) and answer the following questions with substantive answers in a cohesive essay. Your paper should be at least 3 pages in length. Use proper grammar, spelling, citations, etc.
i. What are the trade offs that Dianrong is facing? How should the company prioritize its objectives? What should Soul Htite do?
ii. As detailed in Exhibit 1 of the case, there are different collaboration models that Dianrong has adopted in working with various parties on technological development. How should the company decide on the nature of collaboration for technological developments in the future (via organic and in-house developments, partnerships, joint ventures, or acquisitions)?
iii. Assuming that the company manages to raise an additional US$100 million, how should Dianrong allocate the capital across its many business units to maximize value in the long run? Should the company spend the money on internal R&D initiatives or M&A pursuits? Or both?
iv. How should the company work with the local regulations in China? Should the company focus on reviving the P2 industry in China in the process? If so, how?
v. Are there other technologies that Dianrong should consider adding to its already expansive portfolio of technologies? In contrast, are there technologies that may seem redundant at the firm at the moment? How should Dianrong manage this to improve its competitive edge with its “technology DNA?”
Compose your essay in APA format, including the introduction and conclusion, and in-text citations for all sources used. In addition to your 3 page (minimum) essay, you must include an APA-style title page and reference page.
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REV: JUNE 28, 2019
CHRISTOPHER J. MALLOY
LAUREN H. COHEN
ANTHONY K. WOO
Dianrong: Marketplace Lending, Blockchain, and
“The New Finance” in China
Technology is the DNA of Dianrong.
— Soul Htite, Founder & CEO of Dianrong
Soul Htite, Founder and CEO of Dianrong, one of the largest online peer-to-peer (P2P) lending
platforms in China, completed his speech with a smile on his face. He was one of the key speakers at
RISE in Hong Kong, a preeminent technology conference in Asia, and talked about Dianrong’s recent
fintech initiatives, which aimed to create better financial service offerings using technology.
Considerable progress had been made at the company, but Htite’s mind remained fixated on the recent
issues that the company had been confronting.
On July 12, 2017, Dianrong announced the acquisition of the asset-origination operations of
Shanghai-based Quark Finance, augmenting Dianrong’s asset management capabilities across China. 1
Quark Finance operated 71 borrower service centers in 47 Chinese cities, providing comprehensive
loan underwriting data collection and servicing. The acquisition also included Credit Studio, a platform
providing data analysis through automated and human interactions to achieve mass-production credit
evaluations and processing.
In March 2017, Dianrong had also announced the development of blockchain technology a for
supply chain finance. 2 Blockchain, a frontier technology that had generated a lot of hype around the
world, especially in the fintech space with US$ 1.53 billion of investments from banks, business and
governmental organizations from 2013 to 2017, 3 was rapidly gaining prominence. Dianrong aimed to
create the first blockchain platform for supply chain finance in China. The goal was to provide capital
to smaller suppliers in the supply chain, and provide enhanced visibility and transparency of supply
chains for large multinational manufacturers.
a Blockchain was a self-sustaining, peer-to-peer ledger technology with an integrated set of computer codes for managing and
recording transactions without the involvement of any central authority. (See the “Blockchain Note” of Harvard Business School
by Prof. David Yoffie for more details.)
Professors Christopher J. Malloy and Lauren H. Cohen and Researcher Anthony K. Woo (Asia Pacific Research Center) prepared this case. It was
reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business
School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements,
sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2017, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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218-043
Dianrong: Marketplace Lending, Blockchain, and “The New Finance” in China
The company had made several recent forays into other related sectors, with their creation of “DR
Group” as an umbrella corporate structure that included all wholly-owned businesses, joint ventures,
and partnerships. This rebranded group structure encompassed the various aspects of “The New
Finance,” leveraging fintech innovation to deliver value for borrowers, lenders, and investors. The DR
Group included the flagship Dianrong operations in China, as well as other regional and global
business activities. (See Exhibit 1 for more details.) However, whether the company should pursue
diversification aggressively at this stage in order to capitalize on the current market opportunities was
far from certain. Recent advances at the company, while promising, were complicated by the
uncertainties in the political and regulatory landscape. The Chinese government had recently
announced sweeping reforms for the P2P lending market. While Dianrong had robust compliance
systems in place, the general perception and market sentiment towards the sector were not favorable,
as the domestic Chinese market had recently witnessed a wave of fraudulent cases in the P2P sector,
including Ponzi schemes and investment scams that took advantage of investors.
Dianrong found itself at a crossroads. How should the company leverage its advantage in
technology and position itself in the market? Which sectors within its larger umbrella structure were
the most promising avenues to focus on? Was Dianrong tackling too many sectors and problems at
once? Htite’s view was that in order to truly succeed in China a technology company had to “create”
much of the ecosystem and infrastructure oneself, as opposed to in the US where companies could
simply “provide add-ons” to existing firms and capabilities. But the reality of trying to excel in so
many different areas was daunting. Taking a seat at the front row at the RISE conference, Htite took a
sip from his coffee cup, and started to prepare for his upcoming investor meetings.
Industry Overview
The Traditional Banking Industry in China
Based on statistics from a Bank of China research report, assets and liabilities of China’s commercial
banks posted double-digit growth rates of 15.6% and 15.3% from RMB 155.8 trillion (US$ 22.6 trillion)
and RMB 144.3 trillion (US$ 20.9 trillion) respectively as of the end of 2015, 4 while the economy
continued to grow at a stable yet slower pace of 6.7% in the third quarter of 2016. 5 The banking system
handled savings deposits of RMB 49 trillion (US$ 7 trillion), 6 and the assets of the five major Chinese
banks b accounted for 55% of total bank assets. 7 However, the outlook of the traditional banking
industry was drawing concerns, as the majority of China’s banks were state-owned, and capital
naturally flowed directly to large state-owned enterprises, which crowded out the funding for small
and medium enterprises (SMEs) that were increasingly starved of credit to grow. According to the 2016
Blue Book of Internet Finance, China’s slowing economic growth did not bode well for SMEs, and had
potentially contributed to an “increase in the risk of loan defaults.” 8 Not only was the application
process for a bank loan tedious, complex and time-consuming, 9 traditional banking services relied
heavily on the build-out of physical branches with highly-trained professionals and financial advisors
servicing clients. The banks tend to focus on working with SOEs or real- estate companies on large
deals so their underwriting and operational costs can be diluted over a larger loan amount, and SMEs
and individuals were often underserved.
Problems in the Chinese financial sector were further compounded by the lack of an appropriate
system-wide credit-profiling mechanism. China’s Credit Reference Center was currently in charge of
the nation’s credit-profiling system. 10 While profiles of over 800 million individuals had been collected,
b The five major banks were the Industrial and Commercial Bank of China (ICBC), Bank of China (BoC), China Construction
Bank (CCB), Agricultural Bank of China (ABC) and China Industrial Bank (CIB).
2
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Dianrong: Marketplace Lending, Blockchain, and “The New Finance” in China
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many such profiles contained only basic information such as names and identification numbers. In fact,
merely 350 million (less than a third of the total number of Chinese adults) had credit records, with the
rest rendered “credit invisible.” 11 In contrast, only about 14% of the U.S. population lacked a credit
score. 12
The Rise of Peer-to-peer Lending
With the emergence of the Internet, the financial sector was one of the most digitized industries
globally. 13 Referring to the application of new technology and innovation in the financial sector, the
term “fintech” was coined in the 1980s. 14 While the U.S. had witnessed waves of startups in the sector,
the development of China’s fintech space had lagged that of its Western counterparts, as the Chinese
financial services sector gradually modernized along with the liberalization of the economy. (See
Exhibit 2 for more details.) The number of P2P lenders and total transaction volume in China was much
larger than those of the United States and Europe combined. Along with nine other regulatory agencies,
the People’s Bank of China (PBOC) released a set of guidelines in July 2015 implicitly acknowledging
the issues of accessibility presented by traditional financial institutions, and the promising potential of
fintech in addressing them. 15 The macroeconomic environment was also conducive to the emergence
of fintech, especially P2P lending, in China. Rapidly growing domestic spending patterns, coupled
with relatively limited financing options, had created opportunities for P2P platforms connecting
borrowers and investors. 16
P2P lending became popularized in 2011 as the Chinese leadership encouraged the application of
fintech to broaden the reach of financial services to small businesses and individuals. In 2016, the
transaction volume of P2P lending in China surpassed RMB 2.8 trillion (US$ 406 billion), representing
an increase of 138% from 2015. But the sector’s growth had slowed down to slightly more than half of
that in 2014 and 2015, according to a report by Shenzhen-based financial portal P2P001. 17 China’s P2P
lending space had experienced explosive growth as it was “too easy to attract investments,” according
to Michael Zhang, Chairman of the Beijing-based Puhui Finance (a P2P lender). 18 Since 2007, the
number of P2P platforms had ballooned nationwide, as P2P offered an alternative fundraising channel
for SMEs in dire need of capital, while lenders were enticed by higher returns offered by P2P lenders. 19
Abner An, Founder of Daokoudai, another Beijing-based P2P platform, added that “there was no entry
barrier to start a P2P business [at the beginning],” and anyone could “spend RMB 40 (US$ 5.8) to buy
some [P2P] software from Taobao… c to start an online lending business without any regulator’s
scrutiny.” 20
Since 2014, the entire Chinese peer-to-peer (P2P) industry had descended into a period of turmoil,
where hyper-growth became the norm, quality of industry professionals declined rapidly, and
questionable transactions emerged. 21 Escalating market competition pressured firms to take on risky
projects, which eventually led to a downward spiral in the P2P space (i.e. “a race to the bottom”). The
absence of a comprehensive regulatory framework resulted in a series of scandals, including deceptive
practices, fraudulent claims, and business collapses. Retail investors in China lost billions of dollars in
2016 when certain P2P platform operators disappeared with investors’ cash. In January 2016, police
detained more than 20 people associated with a Ponzi scheme after the founder of Ezubao (a P2P
platform) allegedly scammed over 900,000 investors of RMB 50 billion (US$ 7.2 billion) d across the
country. 22
c Taobao was a Chinese online shopping website similar to eBay and Amazon that was operated by Alibaba Group.
d Based on an exchange rate of 6.9 Chinese Yuan (RMB) per United States Dollar (US$), according to foreign exchange quotes
from OANDA Corporation.
3
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Dianrong: Marketplace Lending, Blockchain, and “The New Finance” in China
A Vital P2P Regulatory Framework
To better regulate the sector, the Chinese government stepped in and intervened in August 2016
with the “Interim Measures for Administration of Peer-to-Peer Lending Information Intermediaries,”
published jointly by the China Banking Regulatory Commission (CBRC), Ministry of Public Security,
Cyberspace Administration of China, and the Ministry of Industry and Information Technology. 23 (See
Exhibit 3 for more details.) With P2P platforms defined as “information intermediaries” rather than
“financial institutions,” the official document detailed a negative list of P2P business activities. 24 P2P
platforms were barred from taking public deposits, creating asset pools, and providing any forms of
guarantee for lenders. The new rules explicitly prohibited online lenders from guaranteeing principal
or interest on loans they facilitate, nor were they allowed to market wealth management products or
issue asset-backed securities. 25 The instigated measures also required P2P lenders to appoint banks as
their custodians to safeguard investors’ money, with full disclosure of how their clients’ funds were
used. 26 All this was easier said than done, however, with only 183 platforms establishing custodian
accounts at commercial banks, 27 while another 122 were in the process of signing a custodial agreement
by the end of 2016. 28 Battered by the turmoil and chaos in the P2P space, banks had shown lukewarm
response to the custodian business. 29 Also, as P2P platforms were now considered online information
intermediaries, they had to secure the Internet Content Provider (ICP) license to continue operations
in China, but so far fewer than 50 P2P operators met this requirement. 30 The policy measure also
spelled out the loan size limits for P2P lending, with RMB 200,000 (US$ 29,000) from one lending
platform and RMB 1 million (US$ 145,000) across platforms in total for the amount an individual could
borrow. For an institution, the limits were RMB 1 million (US$ 145,000) and RMB 5 million (US$ 725,000)
respectively. 31
With the new rules, “regulators were trying to turn P2P into a supplement of the banking industry
[to minimize risks]”, explained Xianyong Wu, Chief Executive at Shenzhen-based Touna Financial
Services. 32 Jianpeng Deng, Vice President of the Internet Financial Innovation Research Institute, stated
that “the current regulations increased the operating costs of P2P lending platforms” and that the
majority of P2P lending firms “would likely vanish in the next two or three years.” 33 A report copublished by Beijing Bureau of Financial Work and Nanhu Internet Finance Institute detailed how the
explosive growth of P2P in recent years “exposed a multitude of problems,” and “P2P operators and
regulators would face stern challenges to ensure a healthy growth of the P2P sector.” 34
The Dawn of a New Era
While it was expected that the number of active users of P2P would surpass nine million in 2016, 35
the industry continued to be clouded by uncertainties. The Chinese government initiated a review of
P2P lenders in late 2016 with spot checks by provincial-level financial service offices, assessing risk
management, operational scale, IT infrastructure, investment sources and shareholders’ credibility
before giving P2P lenders the green light to continue operations. 36 While the deadline for
implementation of the new PBOC P2P rules was extended for a year, many platforms were expected
to close down in March 2017 when Chinese authorities completed the review of the credentials of 3,000
P2P lending operators, which might trigger a run on deposits. 37 Industry insiders estimated that merely
200 P2P companies would survive Beijing’s investigations. 38
The impact of the P2P debacle was bleeding to other industries. A case-in-point was P2P’s contagion
effect on China’s real estate sector. During the height of the P2P boom, P2P firms occupied a lot of
China’s prime real estate. This was no longer the case, however, with P2P lenders vacating office
buildings since the nationwide crackdown on fraud in the sector. 39 For instance, “vacancy rates in
Grade A office buildings in the Futian and Luohu districts in Shenzhen went up in the first quarter, as
a rising number of P2P companies closed up or surrendered their tenancy,” as detailed in a Cushman
4
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Dianrong: Marketplace Lending, Blockchain, and “The New Finance” in China
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& Wakefield report. 40 “Some high-end office buildings did not welcome P2P companies now. They
worried that potential fraud from this sector would hurt the image of the building,” explained Qiang
Hu, a property agent based in Shenzhen. 41 Local authorities in Shenzhen, Shanghai and Beijing had
also ceased the registration of new firms with names containing words such as “finance”, “P2P,” and
“online lending,” while promotional activities (e.g. celebrity endorsements and media advertisements)
of P2P lending were prohibited. 42
According to Yin Zhentao, Secretary General of the Research Center for Financial Law and
Regulation under the Chinese Academy of Social Sciences, proper fintech policies and regulations
would help guide the sector to “standard-compliant growth.” 43 At the same time, “capricious
policymaking could be dangerous,” said Yan Yipan, Chief Executive of the law firm Zhejiang Panyuan,
and added that “the government needed to have a better understanding of what P2P was. Heavyhanded regulation might undermine the long-term growth of the fintech sector.” 44 Establishing a
regulatory framework for the fintech sector was one of the top priorities of the Chinese Government, 45
which sought to strike a balance between technological innovation and societal stability.
The Beginning of Dianrong
Headquartered in Shanghai, China, Dianrong had branches in more than 30 cities across the
country. Dianrong originated more than $500 million in monthly assets for 4 million retail lenders.
With loans totaling RMB 29 billion (US$ 4.3 billion), and a non-performing loan rate of 2.3%, the
platform was ranked third in the country, and first in terms of compliance, transparency and
technology, according to the P2P statistics website Wangdaizhijia. The company had a comprehensive
system and infrastructure in place with more than 5,000 employees at the end of 2Q17, which included
more than 600 fintech engineers and hundreds of risk-management professionals.
Founded in 2012 by Soul Htite and Kevin Guo, Dianrong combined strengths in both engineering
and legal, similar to the Lending Club e in the United States. Htite had solid technical expertise and
contributed international management and consumer finance experience to the duo, while Guo’s legal
knowledge guided the company to focus on legal and compliance as top priorities from day one.
Dianrong announced its series A financing in early 2014, with Northern Light Venture Capital leading
the round. Tiger Global Management, which also invested in Yahoo, JD.com f and other prominent
Internet companies spearheaded the subsequent B round of investment in early 2015. The company
raised US$ 207 million in its recent series C-round of funding (an industry record in terms of funds
raised for such a round) led by Standard Chartered Bank, along with other investors including China
Fintech Fund, Bohai Leasing (now Bohai Financial Investment Holding), and Max Giant Capital. The
company was named in 20…
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