P2P startups feel the heat, as big boys enter fray

China's budding online finance sector is making serious inroads into the territory of more established financial services institutions, raising eyebrows almost daily with new ventures, new business models, record-breaking valuations, and of course, new bankruptcies.

Think about this: In 2012 when the industry was in its infancy and few had even heard of the expression "peer-to-peer lending", there were 110 such firms in China. By the end of July 2014, there were 1,200. And by the end of June, the number had mushroomed to 2,028.

P2P lending is no longer a quirky acronym - it's a booming market. But equally, I would not be surprised if the number actually returned to the levels of 2012, five years later.

I am certainly not a harbinger of doom. On the contrary, I'm very optimistic about the industry.

The business saw extraordinary development in China because of the sad fact that for too long, the nation's small businesses have been under-serviced financially, if not ignored, by a few State-owned, some might say bloated, inefficient banking giants.

The emergence of the P2P platforms simply filled the gap.

But after three years of free-wheeling growth which spawned a new generation of self-made startups, it is time now to take stock and accept that the "gilded age" for this industry may finally be over, meaning industry consolidation, which will inevitably see the closure of many firms.

Despite online finance's glitzy exterior image of slick modernity, the nature of lending and borrowing rarely change: That the possession of offline resources still determine how many investment opportunities you can offer to yield-hungry investors. Have that and everything is on your tailwind. Without that and everything becomes difficult.

Recently I interviewed one of the most successful online finance startup firms, Lianjia Licai.

Just six months after its launch, it has made impressive headway, becoming the country's fourth-largest P2P platform nationwide in terms of turnover. Its transactions swelled to 4.5 billion yuan ($725 million) in value during the second quarter, from 1.2 billion yuan in the first.

A closer look at the firm's business model explains the success: The platform is backed by Homelink Real Estate Agency Co, China's largest pre-owned home broker.

The home-sales market, of course, involves gargantuan amounts of money. Homelink is expected to complete deals worth 400 billion yuan this year, and for many of those, both buyers and sellers needed finance, either to pay off mortgages, or borrow money to buy.