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Have you ever noticed small advertisements popping up everywhere while riding a bicycle in the city? What kind of impression do these ads leave on you?
Not long ago, the first case in the country where "Hua Hua" was illegally cashed out and resulted in a jail sentence was officially announced. The suspect, Du Mou, managed to withdraw 4.7 million yuan within just four days. The threshold for committing such a crime is low, yet the sum involved is staggering. The realization of these virtual credits under the guise of "Internet" and "new finance" brings new challenges for regulation. On one hand, violations are becoming more subtle, and on the other, risks are interconnected. It remains to be seen whether relevant parties can cooperate with platform entities to address these issues effectively.
When “funds hackers†target shared bikes
"What's so scary about it? I complete more than a dozen orders a day," said someone at Shenzhen Bookstore Square on January 16th. Using the identity of a “cash player,†the reporter passed through the “circle†and white bars on shared bicycles scattered around the city. "These small ads offer quick cash with no collateral required and instant cash-ins." According to the records of the other party’s flower production, the same "face-to-face transaction" had already completed three orders that morning, with amounts ranging from 200 to 400 yuan.
Scorpio is an internet financial consumer credit product launched by Ant Financial. Users can receive credit limits between 500 and 50,000 yuan and enjoy an interest-free period, but they must use it in specific scenarios or shops. Jingdong I-bar products are similar to Huarong’s, but they can only be used when shopping at Jingdong Mall. In the gray cash-out chain, flower buds and white strips have been used as arbitrage tools.
How does one achieve "instant cash"? For different amounts requested by the reporter as a "cash investor," the advertiser, surnamed Li (referred to as Li Sheng), demonstrated various options and fee rates for flowers, white bars, and even credit cards.
The first option involves flowers. After setting a quota, Li Sheng generated an Alipay QR code in less than half a minute on his phone. Once the "cash player" scanned the code, they were directed to purchase a mobile phone worth over 7,100 yuan. By clicking on the payment, the transaction was completed immediately. Li Sheng then deducted 6,390 yuan after taking a 10% commission and transferred the remaining amount to the "cash player." The entire process was completed without the need for the "cash player" to check the purchased goods.
In another scenario, the "cash player" had to verify the purchased goods. Li Sheng explained, "This is safer, but it comes with higher costs, so a 15% fee is charged." The cashier would buy the designated items on Tmall or Jingdong, complete the payment using flowers or white bars, collect the goods, and then return them at the "receipt price" to pay for the goods. The "cash player" would then deduct the transaction fee from the product’s purchase price. At this point, the entire cash flow was completed.
Li Sheng said, "We don’t create money. We’re just middlemen in the process." However, in a way, these individuals have become "money brokers" for various forms of illegal loan assistance.
"On the surface, the entire transaction follows a process of active consumption and transferring the price, but if analyzed closely, combining the two steps is essentially a process of illegal cash withdrawal," said Lawyer Luo Yang from Dacheng Law Firm, specializing in mutual fund regulations.
This type of gray cash flow has been under government control, yet it continues to be banned. Through the use of new platforms like urban shared bicycles, gray cash has reached a wider user base, bringing new challenges to supervision. According to the latest data obtained by the reporter from OFO, Shenzhen alone has 250,000 bicycles, with 3 million rides per day. Especially in areas like technology parks and shopping districts, user groups overlap significantly with those seeking cash advances.
Although both Moipai and OFO have explicitly stated that posting advertisements on bicycles is prohibited, removing these ads is as challenging as clearing wall "psoriasis" ads in cities.
Li Sheng told the reporter, "In Shenzhen, wherever there are bicycles, there are 'flower buds and white strips.'" The reporter counted a parking spot in a densely populated central business district and found that out of 20 bicycles, 8 had small ads, with 6 of them having phone numbers that led to cash-out services. The fees ranged from 8% to 15%.
Underground gray cash chain
If we calculate the transaction fees at 8% to 15%, the annualized interest rate for the capital cost of "cash players" and "white bar" arbitrage reaches 104.35% to 211.76%. Currently, the comprehensive rates of small short-term cash loan products from Internet giants like Ants and Tencent micro-lending, as well as well-known mutual fund platforms like Pleasant Loan, Wealth, and Fun Stores, are strictly capped at 36% annually. According to information from industry insiders, some smaller cash lending platforms still operate at around 130% to 150% annualized rates. Compared to this, the cost of illegal cash-outs via flowers and white bars is relatively high in the industry. So, why do people still take the risk?
In Li Sheng’s records, the reporter saw that in the past two days, there were 15 to 20 cash orders. Except for two large sums of 3,000 and 5,790 yuan, most were between 200 and 500 yuan. Many of these transactions involve electronic products, online games, and other forms of cash conversion, with daily cash flows estimated between 3,000 and 46,000 yuan.
Based on the small amount and high-frequency nature of these transactions, Lawyer Luo Yang analyzed that "this helps cash advanceers evade monitoring by Ant and Jingdong platforms; on the other hand, it also shows that the customer base of the cash-rolling platform overlaps significantly, and there are many similarities between the model of teams cashing out and previous models of small and medium-sized cash lending platforms without proper risk controls."
Li Sheng mentioned that he came from a cash-loan platform, which started in February 2016 by sharing small loan cash information in social circles. This involved various online payment tools and small loan products. One example was a product called Loserbank: "You can borrow with an ID card, get 5,000 yuan with just your ID, no credit check. Flowers, white bars, credit cards, cash instantly." The company behind Loserbank is Shenzhen Reel Credit Network Financial Services Co., Ltd., which claims to have raised 50 million yuan and was established in 2015. It is the first pure peer-to-peer online loan information integration platform in China. Only the depository bank is shown in the record information.
Following the clues provided by another advertiser who supported advertising with cash, the reporter uncovered the company behind him. Registration information showed that the company is located on Huaqiang North Road in Futian District, Shenzhen, with a registered capital of 1 million yuan, established in 2012, and a staff size of 50–99 people. The company’s business scope includes Ant Flower, Jingdong White, and credit card mentions. However, the reporter did not find the company during a site visit.
"Some companies can easily obtain merchant QR codes and then conduct multiple transactions, channeling the funds to P2P websites or small loan platforms, thus earning a spread," the founder of the company stated. The anonymization of mutual exchange transactions has created a mixed bag of practitioners. Some of the gray cash-out teams may themselves be on the edge of regulatory oversight, operating online and offline, forming a massive underground chain.
Risk Control Technology "Can't Stop"
This kind of gray gold chain isn't limited to local areas. The two "capital brokers" exposed during the reporter's survey expanded their "business" into the Pearl River Delta region. Their reach could be extended through "friends" in places like Jiangsu and Zhejiang, facilitating cash business.
Moreover, due to the low implementation cost of the cash-out business, besides offline sharing of bicycles, multi-platform and highly concealed methods of acquiring customers and trading channels have also developed. The reporter learned that on a well-known second-hand trading platform, small cash-rich teams of 2–3 people are active.
It's not difficult to see that in the entire cash-out process, a complete transaction chain is formed between the original consumer, the consumer financial product provider, and the e-commerce mall. Due to the involvement of "money brokers," cashing appears to have become an "unprivileged" sale and purchase. Driven by profit, the "money broker" end of the gray gold chain often involves complex subjects and a wide spread. Although it is strictly prohibited and the word "law" is on the head, it is still taken at risk.
In December 2017, the nation's first case of criminal use of "Hua Hua" for illegal cashing was sentenced. Within four days, the defendant, Du Mou, collaborated with over 2,500 e-commerce users across the country, cashing out more than 470 million yuan from "Hua Hua" and collecting over 400,000 yuan in fees, constituting an offense of illegal business operations. He was sentenced to two years and six months in prison and fined 30,000 yuan.
Regarding how to prevent the emergence of cash outbreaks on the platform, Ant Financial and JD.com both mentioned to the reporter their risk control systems. Ant Financial represents a smart risk control brain, anti-fraud policy engine, and partners' joint defense and control mechanism through massive data; it has intercepted hundreds of thousands of suspicious transactions and prevented most of the suspected fraudulent transactions in advance. JD.com informed that it technically monitors the matter and manages it afterward, identifying false and abnormal receiving addresses in real time and identifying businesses involved in brush orders or fraudulent transactions. Once violations are found, the store is closed and the funds involved are frozen.
However, Zhang Yexia, a senior researcher at Net Loan House, analyzes that such problems are irreconcilable and cannot be stopped by technical means alone. "The speed of new financial speculation methods tends to be faster than the speed of supervision," she said. She analyzed that the current e-commerce platforms have advantages in easy auditing and management of merchant qualifications and low entry barriers, and loopholes in business processes such as monitoring e-commerce operations have provided convenience for illegal arbitrage.
Alienated mutual gold risk
"Flowers" and "white bars" are cashed out. Like bank credit cards, they have arbitrage space because of their interest-free design.
Credit card cash has been rigorously investigated, but it has also been continuously banned. To a certain extent, it is because of its arbitrage design that creates "black soil." "Whoever takes the lead in combating cash out, the issuer scale, loan balance, and the conversion rate of customers converted in phases will all fall," a senior banking expert told the reporter. So no one would dare to actually ban the use of cash. Other products also face the same problems as credit cards.
According to the Analysis of China's Financial Supervision Report (2017) by the National Finance and Development Laboratory of the Chinese Academy of Social Sciences, financial technology stepped into the 2.0 phase, showing the functions of cross-border, decentralization, de-intermediation, and self-servoing: financial disintermediation is deepening. The weakening of the functions of traditional financial intermediaries, or "active disintermediation," reduces regulatory costs, creates new problems for financial consumer protection, and challenges the effectiveness of traditional financial supervision models. In this context, consumer credit products such as flower buds and white bars have a more complicated attitude to their cashing violations compared to bank credit cards due to their new financial attributes and associated scene trading.
"Even in the era of conventional POS machines, it was hard to distinguish whether payment and settlement were based on real trade scenarios or bad purposes based on cash. Not to mention the fact that in the Internet era, financial transactions became popular, the threshold was low, and links were much higher. Moreover, coupled with the anonymity of the transaction, the number of supervised entities is more and the risk point is more," said Lawyer Luo Yang. Even if supervision is increased, there will always be a time when one hundred secrets are sparse.
In fact, not only in the field of virtual credit cards, mutual gold risks cross and cover, but also challenge the supervision of other areas. "Internet financial fraud has almost involved all areas of finance. Under the cover of 'Internet+,' there have been numerous 'Ponzi schemes.' In July 2017, Zhou Hongren, director of the National Gold Experts Commission, introduced the domestic Internet financial platform 3.1 More than 10,000 households, including 21 types of business such as online lending, Internet asset management, and online crowdfunding, with more than 6,000 online lending platforms, nearly 3,500 Internet asset management, 800 network crowdfunding, and active users in the second quarter of the year With 530 million people, Internet finance has been universal, but risk prevention is still a long way off."
Helping others cash out and collecting commissions may be suspected of being illegal, and there are also hidden risks for users to cash out. Previously, users used online advertising to enter the intermediary cash QQ group in an attempt to cash out, provide the intermediary account number, password, and mobile phone verification code to the intermediary for ordering, but the intermediary changed the password after purchasing the virtual product. When the user asks for cash, he is found to have been kicked out of the QQ group and blacked out by the intermediary.
It should be noted that after the user cashes in through the transaction, he still bears the responsibility of repaying his/her account or order; and when the user conducts a transaction with the “money brokerâ€, the user may steal the sensitive information of the user’s personal account, password, etc., conduct various types of fraud.
Thinking: How to Balance Innovation and Risk
How to balance the relationship between internet financial innovation and risk prevention and supervision has always been the core issue that has been repeatedly mentioned by regulators. If regulation is not clearly defined and rules are not established, it also means that explosive growth has occurred in the past three years. The mutual gold platforms will always have a sword of Dakmus hanging overhead.
For example, in the online loan industry, beginning in 2013, the Internet's P2P innovation model has developed a hot market, and in the following years, various types of online loan platforms have ushered in explosive growth in both number and scale. With the savage growth of this period, various problems in the industry such as illegal fund-raising and run-way fraud have gradually increased. In the processing of these new gold issues, the main problem is to "find together and investigate together." Supervision has always been considered as passive, but by the end of 2016, especially since the second half of 2017, the frequent exchange of gold regulatory actions has long been an earlier pattern.
Under the new regulatory idea, the promiscuous industry will surely attract a new round of reshuffling. The sword of Dakmus falls, so "bad news" is that some of the non-compliant platforms will be cleared out; "good news" is that after the industry's threshold is improved, high-quality platforms provide more secure and compliant services.
The ant flower scorpion and the Jingdong white bar are based on the real trade background and the payment and settlement are made. The escrow is currently a pure fund transfer. However, the background of the scorpion and white bars cannot be completely screened and the behavior is reviewed. Why? Internet finance has the characteristics of anonymity, light assets, cross-regional, cross-industry, and media. Some of these are simply not hybrids among institutions registered in the name of financial institutions, and the industry is promiscuous, making its risks more widespread and mine clearance more difficult.
The cross-cutting and complicated financial risks of the Internet have always been recognized as the difficult points for supervision. Therefore, the passive supervision before this time did not mean not to control or to know how to manage. No matter whether it is okay or not, the one-size-fits-all policy is not correct. As a result of the intensive release of regulatory documents issued in the second half of 2017, it can be found that supervision now presents the idea of "subject supervision" and "behavioral supervision" in parallel.
The main feature of "subject supervision" is to establish who can do this through the threshold, qualifications, and licenses, and who is most qualified to do it. Therefore, mutual gold special rectification continues to advance, and the filing schedule has a specific timetable. It is planned to be the main tone of the development of online loan platform for a period of time in the future; the "behavioral supervision" is characterized by the prohibition of what can not be done, such as not being able to operate across geographical areas, and the annualized comprehensive rate cannot exceed 36% of the red line, such as the recent payment by some third parties. Institutions have been punished by the central bank due to business irregularities and even have been revoked license plates.
The "subject supervision" + "behavioral supervision" are parallel and intensive, intensive compliance and regulatory documents are issued. On the one hand, it reflects the "strictness" of the year of strong supervision in 2017. On the other hand, it also shows flexibility, but it is a long-term one. There is still a gap in the establishment of the supervision mechanism. Some scholars raised the voice last year and proposed to introduce "regulatory sandboxes" in the financial science and technology field. The practice of regulating sandboxes is similar to the logic of free trade practices, delineating a security space or region within which financial technology tests various innovative solutions such as financial products, services, business models, and marketing methods. At present, the mechanism still stops at the discussion stage.
The regulatory authorities took the initiative to attack and grow along with the mutual gold market, aiming to guide the industry to grow wildly into the top-level design specifications. Although as some legal experts in the field of mutual capital observe, the current subject supervision is still in a priority position. This aspect is determined by China’s financial regulatory system; on the other hand, the main body supervision has the fastest results in the investigation of leaks. Immediately, but it seems too fast and urgent.
However, one of the ideas that the supervisory level is more clear in gradually exploring is to raise the threshold and strictly comply with regulations. As market participants, we must be able to be sensitive to the changes in market water temperature, but also be familiar with where the wind blows.
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