FreeS Fund Year-End Special | Fintech 2019: What Opportunities Exist in a Tight Regulation Cycle?

In the first month of 2019, the financial industry carried forward the intense regulatory scrutiny and heated attention from 2018, already seeing a flurry of major developments: the launch of the STAR Market, the Xiong'an Equity Exchange, and a change in leadership at the CSRC.

Looking back at 2018, what were the defining events or keywords that shaped the financial industry? What lessons did frontline entrepreneurs learn from a year of operations? In such a highly policy-sensitive sector, how do founders view regulation? Has the golden age of entrepreneurship truly ended? Where does the future of finance lie?

To explore these questions, we interviewed the CEOs of five fintech companies in FreeS Fund's portfolio — each competing in a different niche of the financial industry, some with over three years of battle scars, others founded in 2018 as regulations tightened. We hope their answers offer you a closer perspective on the fintech industry and Chinese startups today.

Finance has always been a priority investment area for FreeS Fund. We believe now is the time to renew our focus on investing in financial startups. In 2019, we look forward to meeting more outstanding financial entrepreneurs.

Q1

What were the major events or keywords shaping the financial industry in 2018? How did they affect your company?

Lingyun Gu, CEO of IceKredit: The changes in finance during 2018 were inseparable from 2017. Three major events stand out: the Cybersecurity Law in June 2017, Document 141 in December 2017, and the new asset management regulations at the start of 2018.

Together, these brought unprecedented strict standardization to finance — covering everything from the source of capital to business operations, from how consumers use services to how data is handled.

As a result, any company whose core business was lending or financial services faced massive regulatory pressure and adjustment. Against this backdrop, they badly needed tech companies like IceKredit to help formalize risk control through technology. Before, when finance was growing wildly and coarsely, we were just a nice-to-have. Now, we've become a must-have. That's why, even as everyone said the macro environment was terrible in 2018, we managed to grow against the tide.

Hong Lin, CEO of Haifeng Technology: We're in asset management, so this year's keyword was definitely the new asset management regulations. Their impact on the industry is profound — essentially eliminating channel business, stopping idle capital circulation, and breaking up funding pools.

A more specific keyword, I'd say, is net-value pricing for funds. This doesn't just affect financial platforms; it affects ordinary people. You walk into a bank, and the wealth manager tells you, "I have this fund with 6% annual returns, come buy it." That may no longer be compliant.

As regulation lands and tightens, compliance costs inevitably rise. For a new tech company like ours that uses technology to solve compliance problems, this is an absolutely golden opportunity.

Zhijian Zuo, CEO of Xinqian Academy: For the financial industry, the core keyword in 2018 was "deleveraging." Including the biggest economic event of the year — the US-China trade war — which, when reflected through finance, was essentially the Trump administration kicking China when it was most vulnerable from active deleveraging, triggering a round of passive deleveraging.

The results are plain to see. Pretty much across the board — from stocks to P2P to real estate — major asset classes took roughly a 30% haircut. Some highly leveraged companies basically collapsed, while others kept struggling through, kicking the can down the road.

Wei Min, CEO of Zejin Financial Services: What affected us most was the deepening of regulation. Regulators have long wanted financial flows to reach the real economy. In 2018, numerous documents were issued with many requirements for financial institutions — for example, having local governments report supply chain finance innovators, plus various inclusive finance mandates — all hoping to get financial resources to small and micro enterprises through supply chain finance.

The benefits for us were direct. Because we build industry finance for large enterprises based on their business scenarios. Companies are now broadly starting to care about this issue. For financial institutions, supply chain finance is a relatively low-risk approach, so everyone's looking for innovative solutions, even approaching us with a more open attitude, hoping to collaborate. So the overall environment has been quite favorable for the supply chain finance sector.

Ke Xu, CEO of Vantech Intelligence: The new asset management regulations and the STAR Market. I think these were the two most frequently discussed events, and the ones with the greatest medium- to long-term significance.

Q2

One operational lesson you learned in 2018.

Hong Lin, CEO of Haifeng Technology: The lesson in operations is what I call the "golden brick" theory. Whether you call it a counter-cyclical period or economic decline, it's not a bad thing for me. It forces us to think about how much of our growth was "fake fat." It's easy to feel like, because we were senior executives at big financial institutions and then got VC money, we should rapidly expand the team. That's actually unnecessary. Like the golden bricks in the Forbidden City, which go through many processes and are gradually polished to have real core substance — teams are the same. At our peak we had over 80 people; now we're at about 50. We use fewer people, but our capabilities across the board and our profitability have both improved.

Lingyun Gu, CEO of IceKredit: The problems we encountered in 2018 were like what any child inevitably goes through during puberty. Maybe you need more bone or calcium to grow, and dislocations frequently happen between different parts. Because IceKredit was growing extremely fast, there was always one or several departments that became excruciatingly painful from failing to keep pace with the company's overall development.

Specifically for employees, this pain manifested in two ways. First, employees became unclear about boundaries. This made some very driven employees occasionally feel lost. Should I take one more step forward? If I do, will it cause discomfort in other departments? But if I don't, is that what a core employee at a startup should do? Second, from an organizational structure perspective, when a company reaches a certain scale, we often face a choice: should we prioritize the Y-axis of rules and regulations, or the axis of individual subjective will?

We hired nearly 150 people in 2018, which is terrifying. In the process of bringing in so many new people, how do you digest them with a previously strong corporate culture? We didn't actually do this very well. In this regard, we fell into a small pit — though we've since climbed out, somewhat disheveled. Additionally, when company headcount exceeds 80-100 people, especially when we shot up to over 200, the company becomes less flat. This inevitably reduces overall operational efficiency to some degree, or decreases the transparency that originally allowed projects to move quickly, and problems emerge.

It's like when you've just switched from a relatively rough road to a relatively good one — you think you'll drive faster or more comfortably, but you find it's not like that. Because a sudden change in road conditions, whether from bad to good or the reverse, makes the driver maladapted. We encountered this situation during the year. Our current state is: hurriedly buying new screws and parts, unable to stop the car while assembling it, discovering in motion that some parts are so old they're about to fall apart, while newly installed screws have their own friction pains. It's a very painful stage.

Zhijian Zuo, CEO of Xinqian Academy: The overall lesson was still in risk control. Even though I'm already a fairly cautious and careful person, I was still inevitably affected indirectly by deleveraging.

Our business doesn't directly involve the core of financial behavior — we don't directly touch money — so the impact was relatively indirect and controllable. But it still affected our overall business. The lesson I drew from this is that the quality of financial enterprises needs to be tested by time. This fundamentally conflicts with the explosive growth that internet companies pursue.

Wei Min, CEO of Zejin Financial Services: One lesson is that professional capability and sales capability for financial products should be equally weighted.

Supply chain finance is a very heavy business with strong professional requirements. In the current supply chain finance market, it's hard to earn client trust without professional capability. But having only professional capability without valuing sales doesn't work either. We're a team from banking with very strong professional capabilities — whether in financial product design, IT capability, or business operations. Many of our existing clients were acquired purely through our professional capabilities.

While this approach is very solid, our insufficient emphasis on sales led to inadequate reach with large-B clients, and consequently, insufficient speed. I felt this deeply in 2018. Sometimes when we encountered excellent enterprise users, they had already been captured by competitors. Large-B clients have a characteristic: if a scenario is already occupied by someone else, the decision cost of switching partners is very high. This means we lost many opportunities. So in 2019, we'll increase investment in sales.

Ke Xu, CEO of Vantech Intelligence: Vantech Intelligence is still quite young — just six months old. We hit potholes every day, so it's hard to say which counts as a major operational lesson. None are deep enough yet; we still need to reflect.

Q3

Finance has always been policy-sensitive. How do you view regulation?

Lingyun Gu, CEO of IceKredit: The result of this round of regulation is that, for the first time, good money is driving out bad, rather than the reverse. As mentioned above, the more regulation, the better it is for companies like ours.

Ke Xu, CEO of Vantech Intelligence: Finance is inherently meant to coexist with regulation; there's no such thing as absolutely free finance. In financial companies, some people may feel frustrated that when they're stepping on the gas to do business, the compliance department is always hitting the brakes. It seems annoying, but both stepping on the gas and hitting the brakes are indispensable and inseparable for a financial company. If a car had no brakes, no one would dare step on the gas.

Regarding financial regulation in the new era, I believe the regulated entities have already entered the digital age, so regulatory methods must also be digitized. Through regulatory technology, combining spear and shield, embedding regulation at the origin of business, at the front lines, and throughout the entire process — letting regulation serve business and business comply with regulation. I firmly believe this new era of regulation is arriving.

Hong Lin, CEO of Haifeng Technology: Financial regulation is a difficult problem; we must acknowledge that regulation requires accumulation. America relies on Wall Street to allocate capital and mobilize the country's strategic development direction, always staying ahead of the world. But looking back at American regulatory statutes, the ones that still have fatal effect today are from the 1930s and 1940s. You can see how solid the foundation of American financial regulation legislation really is. Regulators should study more fundamentals and issue fewer directives.

Zhijian Zuo, CEO of Xinqian Academy: The financial industry deals directly with money, and money and sex — both touching on human instincts — basically can't withstand testing. From this perspective, I'm relatively supportive of financial regulation. Otherwise the moral hazard in this industry would simply be too great.

Every past financial crisis, while having cyclical or structural factors, when examined specifically in finance, was essentially regulation lagging behind the market, with risks typically exploding two to three years later.

Wei Min, CEO of Zejin Financial Services: First, financial regulation is definitely necessary. Moreover, regulation actually supports innovation — think how many fintech innovation enterprises have emerged in recent years. For supply chain finance, the state has been continuously encouraging it, with increasingly concrete measures. I'd say we're very fortunate to have chosen a good direction.

Q4

What do you think of arguments that the golden age of entrepreneurship has ended, or that there's a capital winter?

Hong Lin, CEO of Haifeng Technology: These arguments are unnecessary. How many years has China's equity and PE industry even existed, and already people feel they can't continue? I really think it's just beginning. Rather, the broad asset management regulations, cleaning up channels, then bringing in fresh water — every move seems good to me. This way everyone can race on a track with clearer rules. Right now is just a track-clearing process; things will definitely get better and better.

Zhijian Zuo, CEO of Xinqian Academy: I agree with "capital winter." In Q4, every institution was slashing valuations. Not just the primary market — the secondary market too. From a valuation perspective, this is a capital winter.

The end of the golden age of entrepreneurship didn't start in 2018 either. Theoretically, we can only say that in this cycle, the golden age of entrepreneurship has ended. Opportunities brought by technology and cycles will always exist — it's just that most companies won't survive to see that day.

Lingyun Gu, CEO of IceKredit: Everyone's talking about capital winter now, but I actually feel it's not that bad. Besides, since there's winter, as long as spring remains in the cycle of seasons, spring will definitely come. So the companies that can survive through winter should emerge with more optimized and healthier structures.

In our track, we've always adhered to three principles: no lending, no data trading, no cryptocurrency issuance. Our structure is very optimized, and from 2015 to now, what we've insisted on doing has never changed.

So far we still maintain extremely high growth rates, and our various core departments are in continuous expansion and hiring. However, in the expansion process, we also remind ourselves to judge based on the genuine needs of our business — how many people we actually need to add — rather than blindly thinking that because others are laying off and we're hiring, we're the winners. Don't end up standing alone on a high peak, acting as sentry and lookout for others. That wouldn't be worth it.

Wei Min, CEO of Zejin Financial Services: Winter definitely exists, but for us, the sensitivity isn't that high. Because our company hasn't particularly relied on capital to develop; capital markets have been more of a catalyst. Developing by burning money doesn't fit our development philosophy.

The capital that previously focused on trendy, rapidly growing projects may now also become more rational, willing to accept projects that are more solid but with lower growth rates. From this perspective, everyone returning to their original aspirations is definitely a good thing.

Ke Xu, CEO of Vantech Intelligence: As long as humanity still needs innovation, the era of entrepreneurship will never end.

In any era, the key success factor is yourself. In times of frenzied capital, if you yourself aren't frenzied enough, you're still at a disadvantage. In times of cautious capital, doing solid work反而 can give you an advantage. At worst, is a capital winter necessarily bad? Sometimes we shouldn't get hung up on certain terms — at the very least, we can choose to be optimistic.

Q5

How do you see the future of the financial industry?

Hong Lin, CEO of Haifeng Technology: I think the future of finance needs to be divided into two phases. Before the December 31, 2020 deadline (when the new asset management regulations fully take effect), it's all basically a rectification and transition period. During this time there will still be cases of passing off fish eyes as pearls, but in the latter half of the transition period, many innovative products will emerge. After the end of 2020, it's a new phase. This process is like a child learning to walk — gradually getting on the right track.

I always believe that with a better regulatory environment, there will be better enterprises. I don't know what others think, but I'm definitely looking to the future. Everything we're doing now is preparation for January 1, 2021 — matching new products, new business states, and new business models to the new phase.

Finally, those in financial services need to think clearly about some things. You might get rich overnight, or suddenly die tomorrow with no direction; you need to use internet thinking and technology to do business, but can't expect internet speed. We've been around about three years, with over 600 institutional clients now — already quite fast development — but there are still many areas for improvement.

Lingyun Gu, CEO of IceKredit: Over 40 years of reform and opening up, we've been overly obsessed with two things: "perpetual" growth and demographic dividend. Both have now been hit hard. In the entrepreneurship domain, this manifests as founders' obsession with model innovation, especially in the 2C track. Whether it's Apple, Amazon, and Facebook in the US, or BAT in China, they all seemed to confirm that only 2C companies can grow big. This situation started changing from 2017, though many entrepreneurs still deep down want to believe that to build a great company, it must be 2C-oriented. Now it's definitely very different — even Tencent is pivoting to 2B, and this shift is happening in fintech too.

The soil for fintech growth in China is very fertile. First, the historical data traceability that fintech depends on is particularly strong. Even China's big five banks, including city commercial banks, rural commercial banks, and those old banks that haven't restructured into joint-stock companies, retain historical data to a far greater degree than in other sectors.

This means any company entering fintech has access to extremely rich data, and this data is structured. This makes the business boundaries and foundation of finance much stronger than other industries.

What I've always believed is that as we gradually say goodbye to China's two obsessions with past crazy growth, people will turn to valuing technological innovation, and more people will truly be willing to work on core technology and real "black tech." The future of fintech particularly needs the mutual drive and fusion of business model innovation and technological innovation.

Wei Min, CEO of Zejin Financial Services: I'm full of confidence about the future of supply chain finance. I'd say we've finally reached good times. The state is gradually strengthening regulation in some areas, but is resolutely supportive of supply chain finance. What I can feel is that whether it's licensed financial institutions like banks, or quasi-financial institutions like industrial finance divisions, they're increasingly recognizing our technology-output service model.

What we need to urgently do now is fill the shortfall in sales, rapidly converting the potential energy accumulated over the past three years into kinetic energy for development.

Ke Xu, CEO of Vantech Intelligence: Finance ultimately exists to serve the economy. With the arrival of digital society, and the historic reconstruction of information and credit, traditional finance must inevitably be restructured. The thinking model of digital currency is a prototype for thinking about future finance — a very interesting attempt. It may seem too immature now, or even a tool for fooling investors, but its theoretical foundation is future-oriented: at the origin of an economic activity, personalized financial instruments are already configured for it — finance is the entity, the entity is finance.

Zhijian Zuo, CEO of Xinqian Academy: For startups, opportunities in finance are actually just beginning. We only need to look at user demand for financial services and the penetration rates of various financial businesses to see. China's financial services are still in a very primitive state, similar to where the internet was around 2000. There are still very, very many opportunities in this industry.

Deleveraging wipes out a batch, then those who remain divide up the remaining cake. In the internet industry, scale effects dominate — basically winner-takes-all — hence the saying "the number two must die." But in finance, financial laws operate above internet effects, so the ultimate landscape is "the survivors are king" — it's about who can survive long enough.

Summary

1. Although 2018 just passed with massive changes in finance, the impact of regulatory policy will continue for a considerable time.
2. The landing of the new asset management regulations and a series of other regulatory policies has made tech companies serving compliance and risk control truly needed, and the cooling of capital has truly put technological innovation and business capability competition on the table.
3. Now is the time to renew focus on financial investment, because after finance experiences cycles of opening and regulation, this is the second major wave of entrepreneurial and innovative opportunity.

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