20-F 1 d214294d20f.htm FORM 20-F Form 20-F
falseFY0001691445As Hainan Shanghu obtained software enterprise status in the fourth quarter of 2021, the Group reversed a total of RMB220.2 million tax expenses in the fourth quarter of 2021 including RMB76.1 million related to 2020 and RMB144.1 million related to for the first three quarters of 2021. As Shanghai Shanghu obtained Key Software Enterprise Status in 2020, the Group reversed a total of RMB33.8 million tax expenses related to 2019 in 2020.The balance of payable mainly includes funds received from borrowers but not yet transferred to the institutional funding partners due to the settlement time lag. The Group acquired an insurance brokeage company in 2020. The acquisitions met the “single or similar asset threshold” and are not considered as business combination in accordance with ASC Topic 805 but asset acquisition.Depreciation and amortization expenses for the years ended December 31, 2019, 2020 and 2021 was RMB57,712, RMB51,780 and RMB37,277 respectively.Security deposits and other deposits primarily includes security deposits and rental deposits. Security deposits were set aside as requested by certain institutional funding partners, held in deposit accounts with the institutional funding partners. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
20-F
 
 
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
                
For the transition period from
                
to
                
Commission file number:
001-38269
 
 
FinVolution Group
(Exact name of Registrant as specified in its charter)
 
 
Cayman Islands
(Jurisdiction of incorporation or organization)
Building G1, No. 999 Dangui Road
Pudong New District, Shanghai 201203
The People’s Republic of China
(Address of principal executive offices)
J
iayuan Xu, Chief Financial Officer
Phone: +86 21 8030 3200
Email: xujiayuan@xinye.com
Building G1, No. 999 Dangui Road
Pudong New District, Shanghai 201203
The People’s Republic of China
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
Trading
Symbol
 
Name of each exchange
on which registered
American depositary shares (one American depositary share representing five Class A ordinary shares, par value US$0.00001 per share)
 
FINV
 
New York Stock Exchange
Class A ordinary shares, par value US$0.00001 per share*
     
New York Stock Exchange
 
 
*
Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
 
 
As of December 31, 2021, there were 1,433,791,404 ordinary shares outstanding, consisting of 854,591,404 Class A ordinary shares and 579,200,000 Class B ordinary shares, both with a par value of US$0.00001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    
No
  ☐ 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     
Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     
Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):
 
Large accelerated filer      Accelerated filer    
Non-accelerated
filer
 
                 Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  ☐
 
 
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  ☒           International Financial Reporting Standards as issued             Other  ☐
            by the International Accounting Standards Board            
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes  ☐    No  ☐
 
 
 

TABLE OF CONTENTS
 
  
 
1
 
  
 
3
 
 
  
 
4
 
ITEM 1.
 
  
 
4
 
ITEM 2.
 
  
 
4
 
ITEM 3.
 
  
 
4
 
ITEM 4.
 
  
 
74
 
ITEM 4A.
 
  
 
118
 
ITEM 5.
 
  
 
118
 
ITEM 6.
 
  
 
137
 
ITEM 7.
 
  
 
147
 
ITEM 8.
 
  
 
148
 
ITEM 9.
 
  
 
150
 
ITEM 10.
 
  
 
150
 
ITEM 11.
 
  
 
161
 
ITEM 12.
 
  
 
162
 
 
  
 
164
 
ITEM 13.
 
  
 
164
 
ITEM 14.
 
  
 
164
 
ITEM 15.
 
  
 
164
 
ITEM 16A.
 
  
 
165
 
ITEM 16B.
 
  
 
166
 
ITEM 16C.
 
  
 
166
 
ITEM 16D.
 
  
 
166
 
ITEM 16E.
 
  
 
166
 
ITEM 16F.
 
  
 
167
 
ITEM 16G.
 
  
 
167
 
ITEM 16H.
 
  
 
167
 
ITEM 16I.
 
  
 
168
 
 
  
 
169
 
ITEM 17.
 
  
 
169
 
ITEM 18.
 
  
 
169
 
ITEM 19.
 
  
 
169
 
  
 
173
 
 
i

INTRODUCTION
Unless otherwise indicated or the context otherwise requires in this annual report on Form
20-F:
 
   
“ADSs” refers to our American depositary shares, each of which represents five Class A ordinary shares;
 
   
“average rate of transaction service fees” for a given period is computed by dividing the total amount of transaction service fees we received during the period by the total volume of loans originated on our platform during the same period. For loans funded by individual investors, the transaction service fee was collected from borrowers for our services in matching them with investors and for other services we provided over the loans’ lifecycle. For loans funded by institutional funding partners, the transaction service fee is collected from third party guarantee companies and, if applicable, the institutional funding partners for our services in borrower introduction and preliminary credit assessment, as well as other services we provide over the loans’ lifecycle;
 
   
“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;
 
   
“delinquency rate” refers to the balance of the outstanding principal for loans that were 15 to 29, 30 to 59, 60 to 89, 90 to 119, 120 to 149 and 150 to 179 calendar days past due as of a date as a percentage of the total outstanding balance of principal for the loans on our platform as of such date. Loans that are delinquent for 180 days or more are typically considered
charged-off
and are not included in the delinquency rate calculation;
 
   
“individual investors” refers to the individual investors who invested through our platform historically. We have ceased facilitating new loans with funding from individual investors on our platform since October 2019;
 
   
“investment transactions” for a given period refers to the total number of investments executed by investors on our platform. An investor’s investment in a loan is counted as one investment transaction;
 
   
number of “unique borrowers” at a certain point in time refers to the cumulative number of borrowers whose loans on our platform had been funded before such point in time;
 
   
number of “unique borrowers” in a given period refers to the total number of borrowers whose loans on our platform were funded during such period;
 
   
“outstanding loan balance” in the China market as of a given date refers to the balance of outstanding loans delinquent within 180 days from such date;
 
   
“outstanding loan balance of the overseas markets” as of a given date refers to the balance of outstanding loans delinquent within 30 days from such date;
 
   
“ordinary shares” refers to our Class A and Class B ordinary shares, par value US$0.00001 per share;
 
   
“overseas markets” refers to our overseas markets outside China, including the Philippines, Indonesia, Vietnam and Singapore;
 
   
“RMB” and “Renminbi” refer to the legal currency of China;
 
   
“US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States;
 
   
“vintage delinquency rate” refers to (i) the total amount of principal for all the loans in a vintage that become delinquent, less (ii) the total amount of recovered past due principal for all loans in the same vintage, and then divided by (iii) the total amount of initial principal for all loans in such vintage. For purpose of this annual report, loans facilitated during a specified time period are referred to as a vintage. Loans that are delinquent for 180 days or more are included in the calculation of vintage delinquency rate; and
 
1

   
“we,” “us,” “our company,” “our” and “FinVolution” refer to FinVolution Group, its subsidiaries, and, in the context of describing our operations and consolidated financial information, the consolidated variable interest entities in China, including Beijing Paipairongxin Investment Consulting Co., Ltd., Shanghai Zihe Information Technology Group Co., Ltd., and Shanghai Ledao Technology Co., Ltd. and their respective subsidiaries.
Our reporting currency is the Renminbi because our business is mainly conducted in China and substantially all of our revenues are denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this annual report is based on the rate certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at RMB6.3726 to US$1.00, the noon buying rate on December 30, 2021 set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 22, 2022, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.5010 to US$1.00.
 
2

FORWARD-LOOKING STATEMENTS
This annual report on Form
20-F
contains forward-looking statements that reflect our current expectations and views of future events. Known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
 
   
our mission and strategies;
 
   
our future business development, financial condition and results of operations;
 
   
the expected growth of the online consumer finance platform market in China;
 
   
our expectations regarding demand for and market acceptance of our products and services;
 
   
our expectations regarding our relationships with institutional funding partners and borrowers;
 
   
competition in our industry;
 
   
general economic and business condition in China and elsewhere; and
 
   
relevant government policies and regulations relating to our industry.
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. You should thoroughly read this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. In addition, the rapidly changing nature of the online consumer finance industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
 
3

PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
 
ITEM 3.
KEY INFORMATION
Our Holding Company Structure and Contractual Arrangements with the Consolidated Variable Interest Entities
FinVolution Group is not an operating company in China but a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities. We conduct our operations in China through (i) our PRC subsidiaries, (ii) the consolidated variable interest entities with which we have maintained contractual arrangements, and (iii) the subsidiaries of the consolidated variable interest entities. PRC laws and regulations restrict and impose conditions on foreign investment in value-added telecommunications services business, such as the internet content provision services and online data processing and transaction processing services. Accordingly, we operate these businesses in China through the consolidated variable interest entities and their respective subsidiaries, and rely on contractual arrangements among our PRC subsidiaries, the consolidated variable interest entities and their respective shareholders to control the business operations of the consolidated variable interest entities and their respective subsidiaries. Revenues contributed by the consolidated variable interest entities and their respective subsidiaries accounted for 96.3%, 92.5% and 88.0% of our total revenues for 2019, 2020 and 2021, respectively. As used in this annual report, “we,” “us,” “our company” and “our” refer to FinVolution Group, its subsidiaries, and, in the context of describing our operations and consolidated financial information, the consolidated variable interest entities and their respective subsidiaries in China, including but not limited to (i) Beijing Paipairongxin Investment Consulting Co., Ltd., or Beijing Paipairongxin, which was established in June 2012; (ii) Shanghai PPDai Financial Information Service Co., Ltd., or Shanghai PPDai, a subsidiary of Beijing Paipairongxin, which was established in January 2011 and operates our ppdai.com website and PPDai mobile application and used to engage in our historical business of online lending information intermediary; (iii) Heifei PPDai Information Service Co., Ltd., or Hefei PPDai, a subsidiary of Shanghai PPDai, which was established in December 2016 and holds the value-added telecommunication business operation license, or the VATS License, for operation of call center services; (iv) Shanghai Erxu Information Technology Co., Ltd., or Shanghai Erxu, a subsidiary of Shanghai Zihe, which was established in April 2018 and primarily engages in the business of introducing borrowers to institutional funding partners to match transactions; (v) Chengdu Yougao Information Technology Co., Ltd., or Chengdu Yougao, a subsidiary of Shanghai Zihe, which was established in December 2019 and holds the VATS License for the content provision services (excluding internet content provision services); and (vi) Shanghai Ledao Technology Co., Ltd., or Shanghai Ledao, which was established in January 2019 and currently does not engage in any business operations. Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest in the consolidated variable interest entities and their subsidiaries.
A series of contractual agreements, including loan agreements, business operation agreement, power of attorney, equity pledge agreement, exclusive technology consulting and service agreement and call option agreement, have been entered into by and among our subsidiaries, the consolidated variable interest entities and their respective shareholders. Terms contained in each set of contractual arrangements with the consolidated variable interest entities and their respective shareholders are substantially similar. As a result of the contractual arrangements, we have effective control over and are considered the primary beneficiary of these companies, and we have consolidated the financial results of these companies in our consolidated financial statements. For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements.”
However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the consolidated variable interest entities and we may incur substantial costs to enforce the terms of the arrangements. In addition, these agreements have not been tested in China courts. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations, and such contractual arrangements may not be as effective as direct ownership in providing operational control” and “—The shareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”
 
4

There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with the consolidated variable interest entities and their shareholders. It is uncertain whether any new PRC laws or regulations relating to consolidated variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the consolidated variable interest entities is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to the consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”
Our corporate structure is subject to risks associated with our contractual arrangements with the consolidated variable interest entities. If the PRC government deems that our contractual arrangements with the consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the consolidated variable interest entities and their respective subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and our company as a whole. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings and oversight on cybersecurity and data privacy, as well as the lack of inspection by the Public Company Accounting Oversight Board, or the PCAOB, on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, please refer to risks disclosed under “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China.”
PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations, including data security related regulations, in this nature may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.”
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us” and “ —We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.”
 
5

Permissions Required from the PRC Authorities for Our Operations
Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries and consolidated variable interest entities and their respective subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company and the consolidated variable interest entities in China, except that Shanghai PPDai has not obtained any VATS License. Due to the lack of regulatory authorities’ final interpretation of the applicable laws, there still exists uncertainties on which category of VATS License that may be applicable to Shanghai PPDai as the operator of our ppdai.com website and PPDai mobile application, and therefore Shanghai PPDai has not obtained any VATS License. We cannot rule out the possibility that Shanghai PPDai may be deemed by certain regulatory authorities as operating our ppdai.com website and PPDai mobile application without an appropriate VATS License and we may be subject to regulatory penalties, including, but not limited to, rectification orders and warnings, fines, confiscation of illegal gains, and suspension or termination of operating of our website and mobile application. In addition, given the rapid evolving of the online consumer finance industry and the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For example, when Shanghai Erxu provides the service of introducing borrowers to our institutional funding partners to match transactions, it also provides the preliminary credit assessment services to our institutional funding investors for the borrowers referred by it, and if the preliminary credit assessment services provided by Shanghai Erxu to our institutional funding partners are deemed by the regulatory authorities as the credit reference business or information provision activities, Shanghai Erxu may be required to obtain a license for individual credit reference business, or alternatively, pursue cooperation with licensed credit reference agencies and submit the relevant cooperation agreement with the People’s Bank of China, or the PBOC or its provincial branches. If we cannot obtain the regulatory approval or complete the filing in a timely manner, we may be deemed as violating the applicable laws and regulations of credit reference services and subject to regulatory penalties, including cessation of business operations, confiscation of illegal gains, fines from RMB50,000 to RMB500,000, and even criminal liability. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—The laws and regulations governing online consumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected” and “ —If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.”
Furthermore, in connection with our issuance of securities to foreign investors, under current PRC laws, regulations and regulatory rules, as of the date of this annual report, we, our PRC subsidiaries and the consolidated variable interest entities, (i) are not required to obtain permissions from the China Securities Regulatory Commission, or the CSRC, (ii) are not required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, and (iii) have not received or were denied such requisite permissions by any PRC authority. However, if the relevant PRC governmental authorities determine that our business may affect national security, they may initiate cybersecurity review against us. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Any failure to comply with existing or future laws and regulations related to data protection, data security, cybersecurity or personal information protection could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating results and business.”
However, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of and filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.”
 
6

Cash and Asset Flows through Our Organization
FinVolution Group is a holding company with no operations of its own. We conduct our operations in China primarily through our subsidiaries and consolidated variable interest entities and their respective subsidiaries in China. As a result, although other means are available for us to obtain financing at the holding company level, FinVolution Group’s ability to pay dividends to the shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and license and service fees paid by the consolidated variable interest entities in China. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to FinVolution Group. In addition, our PRC subsidiaries are permitted to pay dividends to FinVolution Group only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Further, our PRC subsidiaries and consolidated variable interest entities are required to make appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies. For more details, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Holding Company Structure.”
Under PRC laws and regulations, our PRC subsidiaries and the consolidated variable interest entities are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to examination by the banks designated by SAFE. The amounts restricted include the
paid-up
capital and the statutory reserve funds of our PRC subsidiaries and the net assets of the consolidated variable interest entities in which we have no legal ownership, totaling RMB4.6 billion, RMB6.3 billion and RMB7.8 billion (US$1.2 billion) as of December 31, 2019, 2020 and 2021, respectively. For risks relating to the fund flows of our operations in China, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”
Under PRC law, FinVolution Group may provide funding to our PRC subsidiaries only through capital contributions or loans, and to our PRC consolidated variable interest entities only through loans, subject to satisfaction of applicable government registration and approval requirements.
Our board of directors declared dividends in March 2019, March 2020, March 2021 and March 2022. In addition, in March 2022, our board of directors approved an annual cash dividend policy, pursuant to which we will declare and distribute a recurring cash dividend at an amount of no less than 10% of our net income after tax in the previous fiscal year in the future. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For PRC and United States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”
 
7

Financial Information Related to the Consolidated Variable Interest Entities
The following table presents the condensed consolidating schedule of financial position for the consolidated variable interest entities and other entities as of the dates presented.
Condensed Consolidated Statements of Income Information
 
    
For the Year Ended December 31, 2021
 
    
FinVolution
Group
   
Company
Subsidiaries
   
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
   
Consolidated
Variable
Interest
Entities and
Their
Subsidiaries
   
Eliminations
   
Consolidated
Total
 
    
(RMB in thousands)
 
Third-party revenues
     —         1,132,093       4,057       8,333,978       —         9,470,128  
Inter-company revenues
(1)
     —         2,545,816       16,400       796,071       (3,358,287     —    
Net revenues
     —         3,677,909       20,457       9,130,049       (3,358,287     9,470,128  
Third-party expenses
     (18,617     (892,810     (18,850     (3,441,504     —         (4,371,781
Inter-company expenses
(1)
     —         (812,471     —         (2,545,816     3,358,287       —    
Related party expenses
     —         —         —         (7,503     —         (7,503
Provision for accounts receivable and contract assets
     —         (4,288     —         (134,938     —         (139,226
Provision for loans receivable
     —         (406,560     —         32,317       —         (374,243
Credit losses for quality assurance commitment
     —         —         —         (1,963,609     —         (1,963,609
Total operating expenses
     (18,617     (2,116,129     (18,850     (8,061,053     3,358,287       (6,856,362
Income (loss) from subsidiaries and VIEs
(2)
     2,526,062       1,015,784       2,369,387       (448     (5,910,785     —    
Income from operations
     2,507,445       2,577,564       2,370,994       1,068,548       (5,910,785     2,613,766  
Other income, net
     1,502       26,847       345       93,674       —         122,368  
Profit before income tax expenses
     2,508,947       2,604,411       2,371,339       1,162,222       (5,910,785     2,736,134  
Income tax expenses
     —         (92,428     (3,927     (144,463     —         (240,818
Net profit
     2,508,947       2,511,983       2,367,412       1,017,759       (5,910,785     2,495,316  
Net loss attributable to
non-controlling
interest shareholders
     —         14,079       —         —         (448     13,631  
Net profit attributable to FinVolution Group’s ordinary shareholders
     2,508,947       2,526,062       2,367,412       1,017,759       (5,911,233     2,508,947  
 
8

Condensed Consolidated Statements of Income Information
 
    
For the Year Ended December 31, 2020
 
    
FinVolution
Group
   
Company
Subsidiaries
   
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
   
Consolidated
Variable
Interest
Entities and
Their
Subsidiaries
   
Eliminations
   
Consolidated
Total
 
    
(RMB in thousands)
 
Third-party revenues
     —         533,106       36,882       6,993,099       —         7,563,087  
Inter-company revenues
(1)
     —         1,098,946       48,303       159,319       (1,306,568     —    
Net revenues
     —         1,632,052       85,185       7,152,418       (1,306,568     7,563,087  
Third-party expenses
     (20,720     (581,725     (26,690     (2,000,511     —         (2,629,646
Inter-company expenses
(1)
     —         (159,319     (18,086     (1,129,163     1,306,568       —    
Related party expenses
     —         —         —         (10,104     —         (10,104
Provision for accounts receivable and contract assets
     —         (28,274     —         (116,387     —         (144,661
Provision for loans receivable
     —         (160,932     —         (302,243     —         (463,175
Credit losses for quality assurance commitment
     —         —         —         (2,007,968     —         (2,007,968
Total operating expenses
     (20,720     (930,250     (44,776     (5,566,376     1,306,568       (5,255,554
Income (loss) from subsidiaries and VIEs
(2)
     1,991,262       1,395,376       2,036,131       (2,372     (5,420,397     —    
Income from operations
     1,970,542       2,097,178       2,076,540       1,583,670       (5,420,397     2,307,533  
Other income, net
     2,158       13,162       319       100,830       —         116,469  
Profit before income tax expenses
     1,972,700       2,110,340       2,076,859       1,684,500       (5,420,397     2,424,002  
Income tax expenses
     —         (125,569     (10,152     (319,700     —         (455,421
Net profit
     1,972,700       1,984,771       2,066,707       1,364,800       (5,420,397     1,968,581  
Net loss attributable to
non-controlling
interest shareholders
     —         6,491       —         —         (2,372     4,119  
Net profit attributable to FinVolution Group’s ordinary shareholders
     1,972,700       1,991,262       2,066,707       1,364,800       (5,422,769     1,972,700  
 
9

Condensed Consolidated Statements of Income Information
 
    
For the Year Ended December 31, 2019
 
    
FinVolution
Group
   
Company
Subsidiaries
   
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
   
Consolidated
Variable
Interest
Entities and
Their
Subsidiaries
   
Eliminations
   
Consolidated
Total
 
    
(RMB in thousands)
 
Third-party revenues
     —         218,433       1,456       5,742,868       —         5,962,757  
Inter-company revenues
(1)
     —         1,811,586       49,546       27,033       (1,888,165     —    
Net revenues
     —         2,030,019       51,002       5,769,901       (1,888,165     5,962,757  
Third-party expenses
     (25,590     (447,653     (24,765     (2,213,442     —         (2,711,450
Inter-company expenses
(1)
     —         (24,011     (27,033     (1,837,121     1,888,165       —    
Related party expenses
     —         —         —         (43,494     —         (43,494
Provision for accounts receivable and contract assets
     —         (3,811     —         (258,071     —         (261,882
Provision for loans receivable
     —         (42,241     —         (257,263     —         (299,504
Total operating expenses
     (25,590     (517,716     (51,798     (4,609,391     1,888,165       (3,316,330
Income (loss) from subsidiaries and VIEs
(2)
     2,390,542       1,046,664       2,277,941       (1,128     (5,714,019     —    
Income from operations
     2,364,952       2,558,967       2,277,145       1,159,382       (5,714,019     2,646,427  
Other income, net
     7,898       28,976       67,182       32,435       —         136,491  
Gain from quality assurance
     —         —         —         98,405       —         98,405  
Realized gain from financial guarantee derivatives
     —         —         —         31,444       —         31,444  
Fair value change of financial guarantee derivatives
     —         —         —         (56,287     —         (56,287
Profit before income tax expenses
     2,372,850       2,587,943       2,344,327       1,265,379       (5,714,019     2,856,480  
Income tax expenses
     —         (196,861     (16,597     (268,504     —         (481,962
Net profit
     2,372,850       2,391,082       2,327,730       996,875       (5,714,019     2,374,518  
Net profit attributable to
non-controlling
interest shareholders
     —         (540     —         —         (1,128     (1,668
Net profit attributable to FinVolution Group’s ordinary shareholders
     2,372,850       2,390,542       2,327,730       996,875       (5,715,147     2,372,850  
 
10

Condensed Consolidated Balance Sheets Information
 
    
As of December 31, 2021
 
    
FinVolution
Group
    
Company
Subsidiaries
    
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
    
Consolidated
Variable
Interest
Entities and
Their
Subsidiaries
    
Eliminations
   
Consolidated
Total
 
    
(RMB in thousands)
 
Cash and cash equivalents
     38,231        2,199,438        3,877        2,176,581        —         4,418,127  
Restricted cash
     —          381,582        —          3,691,832        —         4,073,414  
Short-term investments
     —          31,378        —          1,173,523        —         1,204,901  
Accounts receivable and contract assets
     —          85,767        —          1,805,079        —         1,890,846  
Quality assurance receivable
     —          —          —          931,798        —         931,798  
Property, equipment and software, net
     —          69,156        —          43,241        —         112,397  
Intangible assets
     —          63,760        —          35,187        —         98,947  
Loans and receivables, net of credit loss allowance for loans receivables
     —          285,781        —          1,696,495        —         1,982,276  
Investments
     —          150,510        —          820,607        —         971,117  
Investment in subsidiaries and VIEs
(3)
     10,574,557        6,108,415        9,984,072        70,578        (26,737,622     —    
Deferred tax assets
     —          112,247        —          343,494        —         455,741  
Prepaid expenses and other assets
     2,795        220,173        3,816        1,672,654        —         1,899,438  
Amounts due from Group companies
(4)
     694,123        3,534,245        744,700        2,200,275        (7,173,343     —    
Right of use assets
     —          197        —          48,941        —         49,138  
Goodwill
(9)
     —          50,411        —          —          —         50,411  
Total assets
     11,309,706        13,293,060        10,736,465        16,710,285        (33,910,965     18,138,551  
Payable to platform customers
     —          —          —          81,150        —         81,150  
Deferred guarantee income
     —          —          —          1,089,503        —         1,089,503  
Expected credit losses for quality assurance commitment
     —          —          —          3,188,561        —         3,188,561  
Payroll and welfare payable
     —          102,032        4,189        146,697        —         252,918  
Taxes payable
     —          143,411        —          57,237        —         200,648  
Funds payable to investors of consolidated trusts
     —          —          —          1,795,640        —         1,795,640  
Contract liability
     1,610        —          —          6,826        —         8,436  
Amounts due to Group companies
(4)
     647,199        2,221,430        299,662        4,005,052        (7,173,343     —    
Amounts due to related party
     —          —          —          2,265        —         2,265  
Deferred tax liabilities
     —          91,976        —          45,656        —         137,632  
Accrued expenses and other liabilities
     5,647        34,544        71        598,570        —         638,832  
Leasing liabilities
     —          172        —          33,184        —         33,356  
Total liabilities
     654,456        2,593,565        303,922        11,050,341        (7,173,343     7,428,941  
Total FinVolution Group shareholders’ equity
(3)
     10,655,250        10,574,557        10,432,543        5,659,944        (26,667,044     10,655,250  
Non-controlling
interest
     —          124,938        —          —          (70,578     54,360  
Total shareholders’ equity
     10,655,250        10,699,495        10,432,543        5,659,944        (26,737,622     10,709,610  
Total liabilities and shareholders’ equity
     11,309,706        13,293,060        10,736,465        16,710,285        (33,910,965     18,138,551  
 
11

Condensed Consolidated Balance Sheets Information
 
    
As of December 31, 2020
 
    
FinVolution
Group
    
Company
Subsidiaries
    
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
    
Consolidated
Variable
Interest
Entities and
Their
Subsidiaries
    
Eliminations
   
Consolidated
Total
 
    
(RMB in thousands)
 
Cash and cash equivalents
     28,435        941,996        1,194        1,660,549        —         2,632,174  
Restricted cash
     —          307,428        —          3,176,799        —         3,484,227  
Short-term investments
     —          —          —          1,970,958        —         1,970,958  
Accounts receivable
     —          178,350        —          685,556        —         863,906  
Quality assurance receivable
     —          —          —          1,121,554        —         1,121,554  
Property, equipment and software, net
     —          26,866        —          67,010        —         93,876  
Intangible assets
     —          63,760        —          35,187        —         98,947  
Loans and receivables, net of credit loss allowance for loans receivables
     —          247,045        —          2,107,837        —         2,354,882  
Investments
     —          62,434        —          888,081        —         950,515  
Investment in subsidiaries and VIEs
(3)
     7,949,999        5,076,480        7,534,510        48,147        (20,609,136     —    
Deferred tax assets
     —          6,247        —          149,511        —         155,758  
Prepaid expenses and other assets
     1,247        42,967        2,932        1,002,863        —         1,050,009  
Amounts due from Group companies
(4)
     1,302,606        1,766,747        502,970        —          (3,572,323     —    
Right of use assets
     —          583        —          54,385        —         54,968  
Goodwill
(9)
     —          50,411        —          —          —         50,411  
Total assets
     9,282,287        8,771,314        8,041,606        12,968,437        (24,181,459     14,882,185  
Payable to platform customers
     —          —          —          103,453        —         103,453  
Deferred guarantee income
     —          —          —          1,259,396        —         1,259,396  
Expected credit losses for quality assurance commitment
     —          —          —          2,390,501        —         2,390,501  
Payroll and welfare payable
     —          79,040        8,994        132,955        —         220,989  
Taxes payable
     —          100,846        —          53,552        —         154,398  
Funds payable to investors of consolidated trusts
     —          —          —          1,661,841        —         1,661,841  
Contract liability
     3,447        —          —          —          —         3,447  
Amounts due to Group companies
(4)
     882,963        485,461        51,958        2,151,941        (3,572,323     —    
Amounts due to related party
     —          —          —          1,984        —         1,984  
Deferred tax liabilities
     —          36,331        —          67,217        —         103,548  
Accrued expenses and other liabilities
     32,571        3,945        40        472,446        —         509,002  
Leasing liabilities
     —          521        —          42,775        —         43,296  
Total liabilities
     918,981        706,144        60,992        8,338,061        (3,572,323     6,451,855  
Total FinVolution Group shareholders’ equity
(3)
     8,363,306        7,949,999        7,980,614        4,630,376        (20,560,989     8,363,306  
Non-controlling
interest
     —          115,171        —          —          (48,147     67,024  
Total shareholders’ equity
     8,363,306        8,065,170        7,980,614        4,630,376        (20,609,136     8,430,330  
Total liabilities and shareholders’ equity
     9,282,287        8,771,314        8,041,606        12,968,437        (24,181,459     14,882,185  
 
12

Condensed Consolidated Cash Flows Information
 
    
For the Year Ended December 31, 2021
 
    
FinVolution
Group
   
Company
Subsidiaries
   
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
   
Consolidated
Variable Interest
Entities and
Their
Subsidiaries
   
Eliminations
   
Consolidated
Total
 
    
(RMB in thousand)
 
Cash used in operating activities under service agreements for Intercompany
(5)
     —         (534,943     (45     (2,313,224     2,848,212       —    
Cash provided by operating activities under service agreements for Intercompany
(5)
     —         2,290,805       22,419       534,988       (2,848,212     —    
Net cash provided by (used in) operating activities for Third-party
     (45,587     (716,930     (19,691     1,412,435       —         630,227  
Net cash provided by (used in) operating activities
     (45,587     1,038,932       2,683       (365,801     —         630,227  
Capital contribution to Group companies
(6)
     —         —         —         (22,432     22,432       —    
Collection of loans from Group companies
(7)
     846,737       186,283       256,537       389,043       (1,678,600     —    
Cash paid as loans extended to Group companies
(8)
     (238,254     (2,296,392     (92,801     (2,328,235     4,955,682       —    
Other investing activities
     —         326,328       —         1,668,517       —         1,994,845  
Net cash provided by (used in) investing activities
     608,483       (1,783,781     163,736       (293,107     3,299,514       1,994,845  
Capital contribution from Group companies
(6)
     —         22,432       —         —         (22,432     —    
Repayment of loans to Group companies
(7)
     (839,719     (285,119     (389,043     (164,719     1,678,600       —    
Cash received as loans from Group companies
(8)
     603,955       2,341,182       225,307       1,785,238       (4,955,682     —    
Other financing activities
     (310,221     967       —         69,454       —         (239,800
Net cash (provided by) used in financing activities
     (545,985     2,079,462       (163,736     1,689,973       (3,299,514     (239,800
 
13

Condensed Consolidated Cash Flows Information
 
    
For the Year Ended December 31, 2020
 
    
FinVolution
Group
   
Company
Subsidiaries
   
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
   
Consolidated
Variable Interest
Entities and
Their
Subsidiaries
   
Eliminations
   
Consolidated
Total
 
    
(RMB in thousand)
 
Cash used in operating activities under service agreements for Intercompany
(5)
     —         (101,577     (36,047     (2,143,205     2,280,829       —    
Cash provided by operating activities under service agreements for Intercompany
(5)
     —         2,088,211       54,994       137,624       (2,280,829     —    
Net cash provided by (used in) operating activities for Third-party
     (6,282     (105,519     (96,939     2,415,649       —         2,206,909  
Net cash provided by (used in) operating activities
     (6,282     1,881,115       (77,992     410,068       —         2,206,909  
Collection of loans from Group companies
(7)
     557,936       —         —         —         (557,936     —    
Other investing activities
     —         (263,706     36,545       1,268,657       —         1,041,496  
Net cash provided by (used in) investing activities
     557,936       (263,706     36,545       1,268,657       (557,936     1,041,496  
Repayment of loans to Group companies
(7)
     —         (557,936     —         —         557,936       —    
Other financing activities
     (636,936     (167,381     —         (2,286,962     —         (3,091,279
Net cash provided by (used in) financing activities
     (636,936     (725,317     —         (2,286,962     557,936       (3,091,279
 
    
For the Year Ended December 31, 2019
 
    
FinVolution
Group
   
Company
Subsidiaries
   
Primary
Beneficiary of
Consolidated
Variable
Interest
Entities
   
Consolidated
Variable Interest
Entities and
Their
Subsidiaries
   
Eliminations
   
Consolidated
Total
 
    
(RMB in thousand)
 
Cash used in operating activities under service agreements for Intercompany
(5)
     —         (10,178     (16,047     (239,476     265,701       —    
Cash provided by operating activities under service agreements for Intercompany
(5)
     —         156,745       82,731       26,225       (265,701     —    
Net cash provided by (used in) operating activities for Third-party
     8,474       (401,085     (32,800     209,889       —         (215,522
Net cash provided by (used in) operating activities
     8,474       (254,518     33,884       (3,362     —         (215,522
Collection of loans from Group companies
(7)
     86,471       —         —         —         (86,471     —    
Cash paid as loans extended to Group companies
(8)
     —         (31,920     —         —         31,920       —    
Other investing activities
     —         189,964       (36,545     (981,638     —         (828,219
Net cash provided by (used in) investing activities
     86,471       158,044       (36,545     (981,638     (54,551     (828,219
Repayment of loans to Group companies
(7)
     —         (86,471     —         —         86,471       —    
Cash received as loans from Group companies
(8)
     —         —         —         31,920       (31,920     —    
Other financing activities
     (401,400     150,001       —         2,000,911       —         1,749,512  
Net cash provided by (used in) financing activities
     (401,400     63,530       —         2,032,831       54,551       1,749,512  
 
14

For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future according to our dividend policy:
 
    
Taxation Scenario
(i)
Statutory Tax and Standard
Rates
 
Hypothetical pre-tax earnings
(ii)
     100
Tax on earnings at statutory rate of 25%
(iii)
     (25 )% 
Net earnings available for distribution
     75
Withholding tax at standard rate of 10%
(iv)
     (7.5 )% 
Net distribution to Parent/Shareholders
     67.5
 
Notes:
 
(i)
For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering timing differences, is assumed to equal taxable income in China.
(ii)
Under the terms of contractual arrangements, our PRC subsidiaries may charge the consolidated variable interest entities for services provided to the consolidated variable interest entities. These fees shall be recognized as expenses of the consolidated variable interest entities, with a corresponding amount as service income by our PRC subsidiaries and eliminate in consolidation. For income tax purposes, our PRC subsidiaries and the consolidated variable interest entities file income tax returns on a separate company basis. The fees paid are recognized as a tax deduction by the consolidated variable interest entities and as income by our PRC subsidiaries and are tax neutral.
(iii)
Certain of our subsidiaries and consolidated variable interest entities qualify for a preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective.
(iv)
The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the foreign invested enterprise’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied.
The table above has been prepared under the assumption that all profits of the consolidated variable interest entities will be distributed as fees to our PRC subsidiaries under tax neutral contractual arrangements. If, in the future, the accumulated earnings of the consolidated variable interest entities exceed the fees paid to our PRC subsidiaries (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), the consolidated variable interest entities could, as a matter of last resort, make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash in the consolidated variable interest entities. This would result in such transfer being non-deductible expenses for the consolidated variable interest entities but still taxable income for the PRC subsidiaries. Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that this scenario would happen.
 
 
(1)
It represents the intercompany services eliminated at the consolidation level, including technical development services and technical support services.
(2)
It represents the elimination of the income from investment among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries.
(3)
It represents the elimination of the investment among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries.
(4)
It represents the elimination of intercompany balances among FinVolution Group, equity subsidiaries, primary beneficiary of consolidated variable interest entities, consolidated variable interest entities and consolidated variable interest entities’ subsidiaries.
(5)
It represents the cash received and cash paid for intercompany services, including technical development services and technical support services.
(6)
Capital contribution at intercompany level.
(7)
Collection of loans from group companies, and repayment of loans to group companies.
(8)
Cash paid as loans extended to group companies, and cash received as loans from group companies.
(9)
In October 2017, one equity subsidiary and one consolidated variable interest entity’s subsidiary of FinVolution Group entered into a series of share purchase agreements with shareholders of HB micro lending company (“HB”). After the transactions, the Group was able to control HB. Goodwill and
non-controlling
interest were recognized in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations.” In this consolidated variable interest entity’s consolidating schedule, HB’s financial information was recorded in the Equity Subsidiaries. The Group applied equity method in accounting for the investment of consolidated variable interest entity’s subsidiary in HB due to it can exercise significant influence but does not have control. Total assets for HB were RMB256,405 and RMB256,390 as of December 31, 2020 and 2021. Total liabilities for HB were RMB158,799 and RMB92,145 as of December 31, 2020 and 2021.
 
15

Transfers of Cash within the Group
The following is a summary of cash transfers that have occurred between our subsidiaries and the consolidated variable interest entities:
 
    
For the Year Ended December 31,
 
    
2019
    
2020
    
2021
 
    
(RMB in thousand)
 
Cash paid by the variable interest entities to our subsidiaries under service agreements
     (239,476      (2,143,205      (2,313,224
Cash received by the variable interest entities from our subsidiaries under service agreements
     26,225        137,624        534,988  
Collection of loans by the variable interest entities from our subsidiaries for intra-group investing
     —          —          389,043  
Cash paid as loans by the variable interest entities to our subsidiaries for intra-group investing
     —          —          (2,328,235
Repayment of loans by the variable interest entities to our subsidiaries for intra-group financing
     —          —          (164,719
Cash received as loans by the variable interest entities from our subsidiaries for intra-group financing
     31,920        —          1,785,238  
Summary Risk Factors
Investing in our ADSs involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our ADSs. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Item 3. Key Information—D. Risk Factors.”
Risks Related to Our Business
 
   
We operate in China’s online consumer finance platform market, an emerging and evolving industry, which makes it difficult to evaluate our future prospects.
 
   
We change our business model for improvement from time to time, which may not be successful ultimately.
 
   
The laws and regulations governing online consumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.
 
   
Our cooperation with institutional funding partners may expose us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners.
 
   
Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
 
   
We collaborate with third-party trust management companies to set up trusts with other investors to extend loans through these trusts to borrowers introduced by us. We may be deemed to be an illegal financial institution under such trust arrangement, which may materially and adversely affect our business and financial condition.
 
   
If we are unable to retain existing borrowers or institutional funding partners or attract new borrowers or institutional funding partners, or if we are unable to maintain or increase the volume of loans facilitated through our platform, our business and results of operations will be adversely affected.
 
   
Interest rates of certain of our loan products exceed the statutory interest rate limit and therefore part of the interests is not enforceable through the PRC judicial system.
 
   
Any failure to comply with existing or future laws and regulations related to data protection, data security, cybersecurity or personal information protection could lead to liabilities, administrative penalties or other regulatory actions, which could negatively affect our operating results and business.
 
   
If our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.
 
16

   
Cyber-attacks, computer viruses, physical or electronic
break-ins
or similar disruptions of us or of a third party could result in disclosure or misuse of confidential information and misappropriation of funds of our borrowers and institutional funding partners, subject us to liabilities, cause reputational harm and adversely impact our results of operations and financial condition.
Risks Related to Our Corporate Structure
 
   
We are a Cayman Islands holding company with no equity ownership in the consolidated variable interest entities and we conduct our operations in China primarily through (i) our subsidiaries in China, (ii) the consolidated variable interest entities with which we have maintained contractual arrangements, and (iii) the subsidiaries of the consolidated variable interest entities. Holders of our ADSs hold equity interest in FinVolution Group, our Cayman Islands holding company, and do not have direct or indirect equity interest in the consolidated variable interest entities and their subsidiaries. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the consolidated variable interest entities and their respective subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the consolidated variable interest entities and, consequently, significantly affect the financial performance of the consolidated variable interest entities and our company as a whole.
 
   
If the PRC government deems that the contractual arrangements in relation to the consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
 
   
We rely on contractual arrangements with the consolidated variable interest entities for a significant portion of our business operations, and such contractual arrangements may not be as effective as direct ownership in providing operational control.
 
   
Any failure by the consolidated variable interest entities, shareholders of the consolidated variable interest entities or other parties to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
 
   
The shareholders of the consolidated variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
Risks Related to Doing Business in China
 
   
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.
 
   
A severe or prolonged downturn in the Chinese or global economy could reduce the demand for consumer loans and investments, which could materially and adversely affect our business and financial condition.
 
   
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs.
 
   
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
 
   
The PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline.
 
   
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCA Act, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Risks Related to Our American Depositary Shares
 
   
The market price for our ADSs may be volatile.
 
17

A.
[Reserved]
 
B.
Capitalization and Indebtedness
Not applicable.
 
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
 
D.
Risk Factors
Risks Related to Our Business
We operate in China’s online consumer finance platform market, an emerging and evolving industry, which makes it difficult to evaluate our future prospects.
China’s online consumer finance industry is new and may not develop as expected. The regulatory framework for this industry is also evolving and may remain uncertain for the foreseeable future. China’s online consumer finance industry in general remains at a rather preliminary development stage and may not develop at the anticipated growth rate. It is possible that the PRC laws and regulations may change in ways that do not favor our development. If that happens, there may not be adequate loans facilitated on our platform and our current business model may be negatively affected. As a new industry, there are very few established players whose business models we can follow or build upon. Potential borrowers and institutional funding partners may not be familiar with this new industry and may have difficulty distinguishing our services from those of our competitors. Attracting and retaining borrowers and institutional funding partners is critical to increasing the volume of loans facilitated through our platform. The emerging and evolving online consumer finance market makes it difficult to effectively assess our future prospects. In addition, our business has grown substantially in recent years, but our past growth rates may not be indicative of our future growth.
 
18

You should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving industry. These risks and challenges include our ability to, among other things:
 
   
navigate an evolving regulatory environment;
 
   
expand the base of borrowers and institutional funding partners served on our platform;
 
   
maintain our credit standards;
 
   
enhance our risk management capabilities;
 
   
improve our operational efficiency;
 
   
continue to scale our technology infrastructure to support the growth of our platform and higher transaction volume;
 
   
broaden our loan product offerings;
 
   
operate without being adversely affected by the negative publicity about the industry in general and our company in particular;
 
   
maintain the security of our platform and the confidentiality of the information provided and utilized across our platform;
 
   
cultivate a vibrant consumer finance ecosystem;
 
   
attract, retain and motivate talented employees; and
 
   
defend ourselves in litigation, and against regulatory, intellectual property, privacy or other claims.
If the market for our platform does not develop as we expect, if we fail to educate potential borrowers and institutional funding partners about the value of our platform and services, or if we fail to address the needs of our target customers, our reputation, business and results of operations will be materially and adversely affected.
We change our business model for improvement from time to time, which may not be successful ultimately.
We have ceased facilitating new loans with funding from individual investors on our platform since October 2019 and improve our business model through acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partners. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office and other regulatory authorities jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors.
In connection with this improvement, our business operations went through considerable changes, such as offering new products and services, adjusting our business process and model, hiring new employees and building up new departments, and collaborating with new business partners. We may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during the transitional period. Additionally, it is uncertain whether these efforts will eventually bring us benefits as we anticipated. If we fail to achieve some or all of the expected benefits of this business transformation, our competitive position, business, financial condition and results of operations could be materially and adversely affected.
 
19

Even if our business model transformation is implemented successfully as we planned, the actual costs incurred in this process may be substantially higher than we anticipated. There might also be other issues and negative consequences arising from our business transformation such as loss of borrower base, internal control issues, changes in employee structure as well as other unexpected consequences, any of which may have a material adverse effect on our competitive position, business, financial condition and results of operations.
The laws and regulations governing online consumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.
We started our business as an online lending information intermediary. In August 2016, the China Banking Regulatory Commission, or the CBRC, together with three other PRC regulatory agencies jointly issued the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, or the Interim Measures. The Interim Measures, among other things, defined online lending information intermediaries as financial information intermediary companies that facilitate loans online between persons, including individual, companies and other organizations. The Interim Measures further introduced a record-filing and licensing regime and provided general obligations and certain prohibited activities of the online lending information intermediaries. Pursuant to the Interim Measures, local financial regulatory authorities may conduct onsite inspections or inquiries from time to time and instruct us to rectify our business operations that are deemed not to be in compliance with the Interim Measures.
In December 2018, the National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Guidance on the Classification and Disposal of Risks of Online Lending Information Intermediaries and Risk Prevention, or Circular 175. Circular 175 refers to normal intermediaries as large-scale online lending information intermediaries that are strictly in compliance with relevant laws and regulations and have not demonstrated any high-risk characteristics. Circular 175 reiterates relevant regulatory requirements by providing that normal intermediaries should strictly control and manage the business scale and the number of investors. Circular 175 further tightens the regulation of the industry by requiring institutions other than normal intermediaries, including shell intermediaries with no substantive operations, small-scale intermediaries, intermediaries with high risks, and intermediaries that are unable to repay investors or otherwise unable to operate their businesses, to exit the online lending information intermediary industry.
In November 2019, we noticed that several internet media reported that the National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Guidance on Pilot Transforming Online Lending Information Intermediaries into Micro Lending Companies, or the Pilot Transforming Guidance, pursuant to which the qualified online lending information intermediaries may apply to be transformed into micro-lending companies, with operations nationwide or in a single province only. In order to be qualified for being transformed into a micro-lending company with nationwide operations, an online lending information intermediary must, among other requirements, (i) have a registered capital of no less than RMB1.0 billion, (ii) have no material violation in the existing and unsettled business, (iii) have good financial conditions, (iv) have a custodian bank system that has handled all transfers of funds between the investors and the borrowers in the past one year, (v) have no material administrative or criminal penalty imposed on it, its controlling shareholders or its principal executives in the past two years, and (vi) have good financial technology capabilities. Furthermore, the companies that have had ceased the online lending information intermediary business are unqualified for being transformed into micro-lending companies. We are unable to verify the authenticity and accuracy of those media reports. If those media reports are authentic and accurate in terms of the content of the Pilot Transforming Guidance and we decide to transform from an online lending information intermediary into a micro-lending company, Shanghai PPDai will have to make adjustments its business operations to comply with the Pilot Transforming Guidance. In addition, even if we were to make adjustments our business operations to comply with the Pilot Transforming Guidance, we could not rule out the possibility that the regulatory authorities would deny our application and Shanghai PPDai could not be transformed into a micro-lending company as expected.
In addition, the 13
th
National People’s Congress approved the Civil Code of the PRC on May 22, 2020. Upon the effectiveness of the Civil Code of the PRC on January 1, 2021, the PRC Contract Law, the General Provisions of the PRC Civil Law, and the General Principles of the PRC Civil Law had been abolished and replaced, while their provisions are generally incorporated into the Civil Code of the PRC with certain changes and supplements. It remains unclear with respect to the relevant interpretations and implementations of certain provisions of the Civil Code of the PRC and how these provisions of the Civil Code of the PRC will apply to our business operations. For example, pursuant to the Civil Code of the PRC, usurious loans are explicitly banned, but a clear definition or interpretation of “usurious loans” is not provided. We cannot rule out the possibility that certain of our operation activities would be deemed to violate or not fully comply with the Civil Code of the PRC If that happens, our business, results of operations and financial condition would be materially and adversely affected.
 
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Due to changes of laws and regulations governing online consumer finance, we have ceased facilitating new loans with funding from individual investors on our platform since October 2019 and improve our business model through acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partners. In 2019 and 2020, in order to reduce the outstanding balance of loans invested by the individual investors and improve our business model, we used our quality assurance fund, which was historically set aside as a protection mechanism for the individual investors when borrowers defaulted in principal and interest repayments, to repay the outstanding loans to individual investors who were covered by the quality assurance fund before the respective maturity dates. On January 14, 2022, the Shanghai Financial Stability Coordinating Joint Conference Office, the Shanghai Online Lending Risk Rectification Office and other regulatory authorities jointly announced that Shanghai PPDai, among others, had declared the termination of its business operation as an online lending information intermediary and fully settled all related legacy loan products funded by individual investors.
In addition, on January 21, 2013, the State Council promulgated the Stipulations for Regulating Credit Reference, which provides that any person or organization that conducts personal credit reference business without approval of the competent credit reference administrative department of the State Council may be subject to penalties, including cessation of business operations, confiscation of illegal gains, imposing fines from RMB50,000 to RMB500,000, and even criminal liability. On September 27, 2021, the PBOC issued the Measures for Regulating Credit Reference, which came into effect on January 1, 2022 and stipulates that, among others (i) the credit information refers to the following information that should be legally collected and used for financial activities: basic information, loan information, other relevant information and analysis and evaluation information generated from the foregoing information of enterprises and individuals for identifying their credit status; and the credit reference business refers to the activities of collecting, sorting, storing and processing the credit information of enterprises and individuals, and providing them to the information users; (ii) a license for individual credit reference business issued by the PBOC is required for engaging in the individual credit reference business, and the licensed credit reference agency shall report to the PBOC with respect to its cooperation with any information provider for collecting, sorting, storing and analyzing individual credit information; (iii) the financial institutions are not allowed to cooperate with any commercial entity that does not hold a credit reference license to obtain credit reference service; and (iv) any persons that engage in the individual credit reference business without a license for individual credit reference business will be given an
18-month
grace period starting from January 1, 2022 to complete the necessary compliance rectification. Currently, we provide borrower referral and preliminary credit assessment services to our institutional funding partners, and the information shared by us with such institutional funding partners with due authorization may be deemed as the credit information. If the preliminary credit assessment services provided by us to our institutional funding partners would be deemed by the regulatory authorities as the credit reference business, we may be required to obtain a license for individual credit reference business from the competent regulatory authorities or change our business model, pursue cooperation with the licensed credit reference agencies and filing of the relevant cooperation agreement with the PBOC or its provincial branches. If we cannot obtain the regulatory approval or find licensed credit reference agencies to cooperate with or complete the cooperation agreement filing in a timely manner, we may be deemed as violating the applicable laws and regulations of credit reference services, which may subject us to penalties, including cessation of business operations, confiscation of illegal gains, imposing fines from RMB50,000 to RMB500,000, and even criminal liability, and we may cease to share borrowers’ personal information directly with the institutional funding partners, which may materially and adversely affect our business, financial condition and results of operations. As of the date of this annual report, we have not been subject to any penalties from the PBOC or any of its branches related to our cooperation with the institutional funding partners. Our origination, servicing expenses and other cost of revenue may increase or we may change our current business model if we start to cooperate with licensed credit reference agencies, which may affect our financial performance and results of operations. Furthermore, we rely on certain data partners to collect credit information of borrowers for credit scoring and fraud detections. If these data partners’ business is deemed as credit reference and they are unable to obtain the regulatory approval or complete the filing, we cannot assure you that we will be able to find an alternative in a timely and cost-efficient manner, or at all. Any of these occurrences could result in reputational damage, regulatory intervention and diminished ability to operate our business, which could adversely impact our business, financial condition and results of operations.
 
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The laws, regulations, rules and governmental policies are expected to continue to evolve in our industry. We are unable to predict with certainty the impact, if any, that future legislation, judicial interpretations or regulations relating to the online consumer finance industry will have on our business, financial condition and results of operations. To the extent that we are not able to fully comply with any new laws or regulations when they are promulgated, our business, financial condition and results of operations may be materially and adversely affected.
If our practice is deemed to violate any PRC laws and regulations, our business, financial condition and results of operations would be materially and adversely affected.
The National Internet Finance Rectification Office and the National Online Lending Rectification Office jointly issued the Notice on Regulating and Rectifying “Cash Loan” Business, or the Circular 141, in December 2017, outlining general requirements on the “cash loan” business conducted by various institutions. The Circular 141 specifies the features of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, unsecured, and no qualification requirement on customers, among others. The Circular 141 also sets forth several general requirements with respect to “cash loan” business, including but without limitation: (i) the aggregated borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People’s Court; (ii) all relevant institutions shall follow the “know-your-customer” principle and prudentially assess and determine the borrower’s eligibility, credit limit and
cooling-off
period; (iii) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model; (iv) all institutions are prohibited from extending any loans to any persons without repayment source or repayment capacity, or loans with no designated use of proceeds; (v) funds from banks cannot be used for “cash loan” or “campus loan”; and (vi) in the case where a financial institution participates in the “cash loan” business, any third parties are not allowed to charge borrowers any interests or fees. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on lending activities.”
In the operation of our consumer finance platform, borrowers on our platform are required to specify their uses of loan proceeds. To ensure a full compliance with existing laws, regulations, rules and governmental policies relating to the online consumer finance industry, we have implemented various policies and procedures to conduct our business and operations. For instance,
 
   
for the loan portfolios funded by our institutional funding partners, such as commercial banks, we discontinued to charge any fees from the borrowers directly. Instead, we started to collect fees mainly from third-party guarantee companies and, if applicable, our institutional funding partners for our services;
 
   
we require the borrowers to select their loan applications one of the specified permissible uses of loan proceeds, such as consumer finance, travelling, medical expenses, house improvements; and
 
   
we adopted several measures to identify college students and try to prevent them borrowing money from our platform. However, we cannot assure that those measures are able to identify all college students on our platform.
However, due to the lack of detailed implementation rules and interpretations by the local authorities, we cannot be certain that our past and existing practices would not be deemed to violate any laws, rules and regulations that are applicable to our business. For instance,
 
   
our calculation of the aggregate borrowing cost of the loans on our platform might be challenged by relevant government authorities and be deemed to be incompliant with relevant rules and regulations; and
 
   
our cooperation with institutional funding partners through Shanghai Erxu, a subsidiary of one of the consolidated variable interest entities, has exposed us to and may continue to expose us to additional regulatory uncertainties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our cooperation with institutional funding partners may expose us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.”
 
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Due to the lack of interpretation and implementation rules and the fact that the laws and regulations are rapidly evolving, even if we have implemented above measures, we cannot assure you that we will be in full compliance with existing and future laws and regulations, nor can we assure you that we would not be required by regulatory authorities to make further rectifications to our business in the future. As of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations, including those governing the online consumer finance industry in China. If our practice is deemed to violate any laws, regulations and rules, we may face, among others, regulatory warning, correction order, condemnation, fines and criminal liability. If such situations occur, our business, financial condition, results of operations and prospects would be materially and adversely affected.
Our cooperation with institutional funding partners may expose us to regulatory uncertainties and we may be required to obtain additional government approval or license due to our cooperation with institutional funding partners.
In 2019, 2020 and 2021, the loan origination volume funded by institutional funding partners on our platform in China was RMB51.0 billion, RMB64.1 billion and RMB133.6 billion (US$21.0 billion), representing 62.0%, 100.0% and 100.0% of our total loan origination volume in the same year. Due to the lack of a comprehensive and effective regulatory framework and clear and unambiguous application and interpretation of relevant laws and regulations, our cooperation with institutional funding partners has exposed us to regulatory uncertainties. We carry out our cooperation with institutional funding partners through Shanghai Erxu, a subsidiary of one of the consolidated variable interest entities, Shanghai Zihe. Shanghai Erxu primarily provides services to our institutional funding partners, such as borrower referral and preliminary credit assessment, and facilitate their participation in our online lending business.
The current laws and regulations do not explicitly require any regulatory approval, record-filing, or financial license for the type of business activities conducted by Shanghai Erxu. However, we cannot assure you that the regulatory authorities will hold the same view as ours or the business practice of Shanghai Erxu will be deemed to be in full compliance with all applicable laws and regulations. For example, if the preliminary credit assessment services provided by Shanghai Erxu to our institutional funding partners are deemed by the regulatory authorities as the credit reference business or information provision activities, Shanghai Erxu may be required to obtain a license for individual credit reference business, or alternatively, pursue cooperation with licensed credit reference agencies and submit the relevant cooperation agreement with the PBOC or its provincial branches. See “Item 3. Key Information—D. Risk Factors—The laws and regulations governing online consumer finance industry in China are developing and evolving and subject to changes. If our business practices are deemed to violate any existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.” Given the evolving regulatory environment of the consumer finance industry, the regulatory authorities may issue new regulatory requirements, introducing a new licensing regime to regulate the type of business activities that Shanghai Erxu has been carrying out. If such new regulatory rules are promulgated, we cannot assure you that we would be able to obtain such new license or other regulatory approval in a timely manner, or at all, which would materially and adversely affect our business and our ability to continue our operations. As of the date of this annual report, we have not been subject to any material fines or other penalties under any PRC laws or regulations, including those governing the online consumer finance industry in China. However, if the governmental authorities adopt a stringent regulatory framework on the online consumer finance industry in the future which may subject Shanghai Erxu or any of our PRC subsidiaries to additional requirements, such as
paid-up
capital requirements, record-filing with the relevant regulators or license requirements, our business may be materially and adversely affected. It can be costly to comply with relevant laws and regulations and if our business practice is deemed to violate any existing or future laws and regulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well.
In addition, Circular 141 further provides that financial institutions cooperating with third parties to engage in lending businesses (i) are not allowed to outsource any core lending business operations, such as credit assessment and risk management, to third parties, (ii) are not allowed to accept any credit enhancement provided by third parties without any license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks, (iii) should comply with the judicial interpretations by the Supreme People’s Court of the PRC regarding interest rates in private lending regarding the annual borrowing cost charged to a borrower, i.e. interests plus other fees, and (iv) should ensure that third parties do not collect any interests or fees from borrowers. To comply with relevant regulatory requirements, Shanghai Erxu has taken various measures in cooperating with our institutional funding partners. For example, Shanghai Erxu (i) does not collect service fees directly from the borrowers of the loans recommended to the licensed institutional funding partners; (ii) makes sure that the aggregate borrowing cost does not exceed 36%; (iii) involves licensed guarantee companies to provide guarantee to institutional funding partners for certain loans; and (iv) introduces borrowers and provides preliminary credit assessment services, as opposed to core lending business operations, to our institutional funding partners. If a borrower passes our preliminary credit assessment, we will introduce such borrower to our institutional funding partners. Borrower’s loan will be funded directly by our institutional funding partners if they decide to extend loans to such borrower after their independent credit review.
 
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However, other relevant laws and regulations are also expected to continuously evolve in this newly emerging industry in which we operate. It remains uncertain how the regulatory authorities are going to interpret and enforce these rules. We cannot assure you that our existing cooperation with the institutional funding partners will not be deemed to violate Circular 141 or any other applicable laws, rules and regulations. For example, the regulatory environment concerning the online lending information intermediary industry has been tightening. Several provincial regulatory authorities have ordered online lending information intermediaries in those provinces to exit the market. Historically, our institutional funding partners included third-party online lending information intermediaries. These third-party online lending information intermediaries generally matched the borrowers introduced by us with their investors on their platform. We cannot assure you that our cooperation with third-party online lending information intermediaries in the past would not be deemed to be a violation of relevant regulatory requirements in these provinces. Due to such regulatory uncertainties, we have ceased facilitating new loans for the third-party online lending information intermediaries since November 2019.
Furthermore, on July 12, 2020, the China Banking and Insurance Regulatory Commission, or the CBIRC, promulgated the Interim Measures for Commercial Banks Doing Online Lending Business, or the Interim Measures for Banks, pursuant to which the banks may collaborate with financing guarantee companies,
e-commerce
business companies, third-party payment companies and information technology companies in various online lending business processes and activities, including but not limited to client referral, joint loan origination, risk distribution, information technology and loan collection. However, when collaborating with third parties for online lending businesses, the banks are required to independently manage core risk control procedures, such as the credit assessment and contract conclusion, and should be responsible for post-loan managements. Each of the regional banks, which is an important category of our institutional funding partners, should (i) provide online lending services primarily to its local clients, (ii) be prudent to extend loans to borrowers who reside outside its region, and (iii) take appropriate measures to monitor the business operations when serving the clients who are located outside its region. The banks may not accept credit enhancements, in a direct or a disguised form, provided by a third-party partner without financing guarantee license or credit security insurance license. The banks shall adopt appropriate measures to monitor the use of loan proceeds. The banks should evaluate and review the online lending partners they collaborate with at least once a year and terminate the cooperation if any incompetency is identified. Further, on February 19, 2021, the CBIRC further issued the Notice of Further Regulating Online Loan Business of Commercial Banks, also known as Circular 24, which provides that the commercial banks shall independently carry out the risk management of online loans and are forbidden from outsourcing the material procedures of loan management. The outstanding balance of online loans extended by a bank in collaboration with third-party platforms should not exceed 50% of the bank’s total outstanding balance. Where a commercial bank and its joint lending partner jointly contribute funds to issue online loans, the funding contribution percentage of its joint lending partner shall not be less than 30%. Circular 24 further strengthens the requirement that commercial banks are strictly prohibited from outsourcing the material procedures of loan management, and local commercial banks from engaging in an online loan business outside the territory of their registered place. The requirements on the limit of 30% for the joint lending loans and the cross-regional prohibition came into effect on January 1, 2022. The
non-conforming
legacy loans that extended before the promulgation of Circular 24 may be settled on their relative maturity dates. With certain limited exceptions, the Interim Measures for Banks and Circular 24 apply to the consumer finance companies and trust companies when they conduct online lending business. As our institutional funding partners include commercial banks, consumer finance companies and trust companies, they are required to evaluate and review us as required by the Interim Measures for Banks. If any of our institutional funding partners identifies any incompetency of us in such evaluation and review, it may terminate the cooperation with us and our business and operation results would be adversely and materially affected. Furthermore, we act as an intermediary between institutional funding partners and borrowers, and we cannot assure you that all the institutional funding partners we cooperate with have been and will be in strict compliance with the Interim Measures for Banks and Circular 24.
 
24

On December 31, 2021, the PBOC, the CBIRC and five other regulatory authorities jointly published the Administrative Measures for Online Offering of Financial Products (Draft for Comments), or the Draft Offering Measures, which stipulates that, among others, (i) except otherwise explicitly stipulated by the laws or regulations, a financial institution cannot authorize other organizations to offer its financial products; (ii) without approval from the competent financial regulatory authorities, any third-party internet platform cannot get involved, or get involved in a disguised form, in the online offering of financial products, including but not limited to, procedures of interactive consultant with the consumer, know-your-customer, sales contract conclusion, or fund transferring. The third-party internet platform cannot participate, or participate in a disguised form, in sharing the revenue generated from the financial business; (iii) the third-party internet platform cannot illegally crack, hold, nor store customer information and business data; (iv) the “online offering” is defined as commercial promotion and recommendation activities of the financial products on the internet platform, including but not limited to exhibiting the financial product information and the financial institution’s brand name or logo, providing sales channel for consumers to purchase financial products. The “financial products” includes deposit products, loan products, asset management products, etc. that are designed, developed, or sold by financial institutions; and (v) a transition period of 6 months would be given to the existing
non-compliance
activities before the effectiveness of the draft. As uncertainties remain regarding when the Draft Offering Measures would be adopted and become effective, and to what extent we would be subject to the Draft Offering Measures, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. If we cannot rectify our business model in a timely manner, or at all, the regulatory authorities may levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.
Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.
Pursuant to Circular 141, a bank, a trust management company, or a consumer financial company participating in loan facilitation transactions may not accept credit enhancement services and similar services, such as committing to assume default risks, provided by a third party which has not been licensed or approved to provide such services. In addition, pursuant to the Regulations on the Supervision and Administration of Financing Guarantee Companies promulgated by the State Council on August 2, 2017, or the Financing Guarantee Rules, any entity operating “financing guarantee business” is required to obtain an approval from the local regulatory authorities. If any entity operates financing guarantee business without such approval, it may be subject to penalties, including termination or suspension of business, fines ranging from RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law. In October 2019, the CBIRC, together with eight other regulatory agencies jointly promulgated the Supplemental Rules to the Administration of Financing Guarantee Companies, or the Supplements to the Financing Guarantee Rules, which provides that any entity providing client referral or credit assessment services to the lending institutions may not provide financing guarantee services in a direct or a disguised form without the regulatory approval. If any entity operates financing guarantee business without appropriate approval, its business operations will be banned by the regulatory authorities and it will be required to properly settle existing business.
In our collaboration with institutional funding partners, we introduce borrowers to our institutional funding partners and provide our institutional funding partners with our preliminary credit assessment on the creditworthiness of such borrowers. Our institutional funding partners independently review such borrowers’ loan requests and decide whether to extend loans to such borrowers and, if yes, the maximum amount of credit available for such borrowers.
 
25

We have engaged licensed third-party financing guarantee companies to provide financing guarantees to a majority of the loans funded by our institutional funding partners. If any borrower defaults, a third-party financing guarantee company is obligated to repay the full overdue amount to the corresponding institutional funding partner. After the financing guarantee company repays the full overdue amount, we are obligated to purchase creditor’s right from the third-party guarantee companies at a price equal to the repayment it made to the institutional funding partner. Under certain circumstances, we also provide security deposits through third-party financing guarantee companies for loans funded by certain institutional funding partners as an additional quality assurance commitment. Apart from licensed third-party financing guarantee companies, we also cooperate with third-party insurance companies to provide quality assurance commitments to our institutional funding partners. Under this arrangement, if any borrower introduced by us defaults, our institutional funding partners are able to seek insurance compensations under the insurance policies from third-party insurance companies. In some cases, if the overdue amount exceeds the insurance coverage, the remaining overdue amount will be repaid by the third-party guarantee companies engaged by us.
Despite our efforts to reduce regulatory risks, we cannot assure you that relevant regulatory authorities would not interpret or view the quality assurance commitments we provided to our institutional funding partners as an operation of financing guarantee business without approval. If relevant government authorities take the view that the quality assurance commitments we provided to our institutional funding partners is a provision of financing guarantee business without approval, we would be subject to fines and/or other administrative penalties mentioned above. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services.” As a result, our liquidity, business, financial condition and results of operations will be materially and adversely affected. If we do not provide quality assurance commitments to our institutional funding partners due to regulatory restrictions, we may not be able to maintain our institutional funding partner base and our cooperation with third-party guarantee companies, and our liquidity, business, financial condition and results of operations will be materially and adversely affected.
We have incorporated three financing guarantee subsidiaries, Fujian Zhiyun Financing Guarantee Company, or Fujian Zhiyun, Zhiyun (Tianjin) Financing Guarantee Company, or Tianjin Zhiyun, and Hainan Shenxin Financing Guarantee Company, or Hainan Shenxin, in 2019 and 2020. In some cases, one of our own financing guarantee subsidiaries provides financing guarantee services directly to our institutional funding partners for the loans funded by them. Under the Financing Guarantee Regulations, the maximum amount of outstanding guarantee liabilities of a financing guarantee company may not exceed ten times of its net assets. As of March 31, 2022, the net assets of Fujian Zhiyun, Tianjin Zhiyun and Hainan Shenxin were RMB1,504.1 million (US$236.0 million), RMB757.8 million (US$118.9 million) and RMB271.9 million (US$42.7 million), respectively.
It is obvious that the maximum amount of outstanding guarantee liabilities that can be provided by our own guarantee companies cannot meet the needs of all of our institutional funding partners. We will have to continue to engage properly licensed third-party guarantee companies to provide quality assurance commitments to our institutional funding partners. As a result, the above regulatory risks still exist.
On December 31, 2021, the PBOC published the Regulations on the Local Financial Supervision and Administration (Draft for Comments), or the Draft Local Financial Regulation, which stipulates that, among others, (i) the local financial organizations should primarily serve their local clients; (ii) the guidance for local financial organizations to carry out business outside provinces where they are registered should be made by the State Council or financial regulatory authorities designated by the State Council; (iii) six types of financial organizations, including financing guarantee companies and micro-lending companies, are deemed as local financial organizations; (iv) transition period will be given to the organizations carrying out business outside provinces before the effectiveness of the draft by the relevant financial regulatory authorities; and (v) organization carrying out business outside provinces without approval of the competent provincial regulatory authorities may be subject to penalties, including correction orders, confiscation of illegal gains or fines, cessation of business operations, and revocation of business license. Currently both the third-party guarantee companies engaged by us and our own guarantee companies provide services to the borrowers nationwide. As uncertainties remain regarding when the Draft Local Financial Regulation would be adopted and become effective, and to what extent we would be subject to the Draft Local Financial Regulation, we cannot assure you that we will be able to comply with such regulations in all respects in a timely manner, or at all, and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities.
As of the date of this annual report, we have not been subject to any administrative penalties due to cooperating with our institutional funding partners.
 
26

We collaborate with third-party trust management companies to set up trusts with other investors to extend loans through these trusts to borrowers introduced by us. We may be deemed to be an illegal financial institution under such trust arrangement, which may materially and adversely affect our business and financial condition.
We collaborate with third-party trust management companies to set up trusts with other investors to extend loans to borrowers introduced by us. In some cases, we invest in subordinate tranches and other investors invest in senior tranches. The Measures for Banning of Illegal Financial Institutions and Illegal Financial Business Operations, or the Measures for Illegal Financial Institutions, promulgated by the State Council on July 13,1998, provides that the establishment of financial institution and the operation of financial business should be subject to the approval of the People’s Bank of China, or the PBOC. Pursuant to the Measures for Illegal Financial Institutions, extending loans without the approval of PBOC is deemed as illegal financial business operation and the entity extending loans without the approval of PBOC is deemed as an illegal financial institution. The online consumer finance industry is new and developing rapidly, and the regulatory environment has evolved since the promulgation of the Measures for Illegal Financial Institutions. There are uncertainties as to the interpretation of the Measures for Illegal Financial Institutions as well as whether such laws and regulations are applicable to us or our business. Although the trust management companies that administrate the trusts have been licensed and approved by the financial regulatory authorities to extend loans and we believe that the trust management companies are the lenders of the loans, we cannot assure you that the financial regulatory authorities will hold the same view as ours. Our investments in the trusts may be deemed to be extending loans to the borrowers and we may be deemed to be a lender under this trust arrangement. As a result of such trust arrangement, we may be deemed to be an illegal financial institution or operating illegal financial business, which may subject us to penalties, including confiscation of illegal gains together with a fine from one time to five times of the illegal gains, or a fine of RMB100,000 to RMB500,000 if there are no illegal gains, and criminal liability if the violation constitutes a criminal offense.
In addition, the Supreme People’s Court, the Supreme Peoples’ Procuratorate, the Ministry of Public Security, or the MPS, and the Ministry of Justice jointly issued the Guidance on Several Issues for Illegal Lending Regarding Criminal Case, or the Guidance on Illegal Lending, on July 23, 2019, which provides, among others, that (i) if any entity or individual is engaged in extending loans to the unspecified public individuals consistently for the purpose of profits and without the approval from the regulatory authorities or outside its business scope, which disturbs the stability of financial markets, such entity or individual may face a criminal charge of unfair competition and may be imposed criminal liability in accordance with the applicable laws and regulations; “extending loans to the unspecified public individuals consistently” refers to extending loans to entities and individuals no less than ten times within two years; and (ii) if the actual annual interest rate of the loans extended by such entity or individual exceeds 36%, it would be deemed as an aggravated circumstance when such entity or individual face the abovementioned criminal charge of unfair competition. The Guidance on Illegal Lending is new and does not provide a clear definition to calculate the actual annual interest rate, and it is still unclear how the regulatory authorities will interpret and implement it in the future. We cannot rule out the possibility that regulatory authorities may deem our operation activities under the trust arrangements as unfair competition and impose criminal liability on us. If that happens, our business, results of operations and financial condition would be materially and adversely affected.
If we are unable to retain existing borrowers or institutional funding partners or attract new borrowers or institutional funding partners, or if we are unable to maintain or increase the volume of loans facilitated through our platform, our business and results of operations will be adversely affected.
The loan origination volume on our platform in China was RMB82.2 billion in 2019, RMB64.1 billion in 2020 and RMB133.6 billion (US$21.0 billion) in 2021. To maintain the growth momentum of our platform, we must continuously increase the volume of loans by retaining current participants and attracting more users whose financing needs can be met on our platform. If there are insufficient qualified loan requests, institutional funding partners may not be able to deploy their capital or their investors’ capital in a timely or efficient manner and may seek other investment opportunities. If there are insufficient funding commitments, borrowers may not be able to obtain capital through our platform and may turn to other sources for their borrowing needs. If we are unable to attract qualified borrowers and sufficient funding commitments or if borrowers and institutional funding partners do not continue to participate in our platform at the current rates due to any change we may be required to make to the way we conduct our business to ensure compliance with existing or new PRC laws and regulations or due to other business or regulatory reasons, we might not be able to increase our loan transaction volume and revenues as we expect, and our business and results of operations may be adversely affected. Normally the borrowers find us by downloading our mobile applications from application stores or from the
pre-installed
mobile applications or submitting loan requests on our website. In response to the general regulatory environment, the operators of application stores or mobile application distributing channels may adjust their application exhibition policies or even remove our mobile applications from their application stores or distribution channels, which may materially and adversely affect our ability to engage new borrowers.
 
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We have ceased facilitating new loans with funding from the individual investors on our platform since October 2019 and improve our business model through acquisition of better quality borrowers and transition of our funding sources from individual investors to institutional funding partners. Currently, our institutional funding partners primarily include commercial banks, private banks, consumer finance companies, micro-loan companies and trust management companies. Historically, a small portion of the loans on our platform were funded by some third-party online lending information intermediaries. Considering the regulatory uncertainties faced by third-party online lending information intermediaries, we have ceased facilitating new loans for third-party online lending information intermediaries since November 2019. If we are unable to retain our existing institutional funding partners or attract new institutional funding partners, or if regulatory authorities promulgated new laws and regulations to regulate, limit, or even prohibit our collaboration with the institutional funding partners, our business, results of operations and financial condition will be adversely affected. As of December 31, 2021, we had cumulatively cooperated with 63 institutional funding partners in China. The loans funded by the institutional funding partners typically have fixed terms from six to twelve months.
Our success is dependent upon our ability to maintain and expand our cooperation with institutional funding partners on reasonable commercial terms. If the governmental authorities further tighten the regulations on the online consumer finance industry, our institutional funding partners would become more selective in choosing partners for referring borrowers and facilitating loans for them. The competition we face would become even more intensely. Our cooperation with institutional funding partners is not on an exclusive basis. If we fail to continuously meet their requirements or needs, our financial institution partners may stop cooperating with us and turn to our competitors, which may also materially and adversely affect our business, financial condition and results of operations.
If our existing and new products and services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.
We have devoted significant resources to, and will continue to emphasize on, upgrading and marketing our existing products and services and enhancing their market awareness. We also incur expenses and expend resources upfront to develop, acquire and market new products and services that incorporate additional features, improve functionality or otherwise make our platform more desirable to borrowers and institutional funding partners. New products and services must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.
Our existing and new products and services could fail to attain sufficient market acceptance for many reasons, including:
 
   
borrowers may not find terms of our products, such as costs and credit limit, competitive or appealing;
 
   
our failure to predict market demand accurately and provide products and services that meet this demand in a timely fashion;
 
   
borrowers and institutional funding partners using our platform may not like, find useful or agree with, any changes;
 
   
defects, errors or failures on our platform;
 
   
negative publicity about our loan products or our platform’s performance or effectiveness;
 
   
views taken by regulatory authorities that the new products, services or platform changes do not comply with PRC laws, regulations or rules applicable to us; and
 
   
the introduction or anticipated introduction of competing products by our competitors.
 
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If our existing and new products and services do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.
Our international expansion may expose us to additional risks.
Our business currently primarily focuses on the PRC market. We are currently also expanding our business in the overseas market. In December 2018 and June 2019, we established two subsidiaries in the Philippines, and one of them is authorized to operate as a lending company and the other is authorized to operate as a financing company. In December 2019, we established a subsidiary in Indonesia, which has received a license for Technology and Information Based Financial Lending Institution
(peer-to-peer
lending license) from the Financial Services Authority of Indonesia. In January 2020, our subsidiary in Singapore received the Capital Markets Services License from the Monetary Authority of Singapore to conduct regulated activities in dealing in capital markets products in Singapore.
Our overseas business operations are subject to increasing regulatory scrutiny, in particular the areas of data privacy protection, interest rate cap and collection practices. While we strive to comply with all applicable laws and regulations and work closely with the regulatory authorities in the regions that we operate, we have limited experience in these markets and differences in interpretation of relevant laws, regulations, and/or policies. As a result, we may incur substantial compliance costs attributed to compliance costs, such as investigation, caseation of operation and administrative measures and penalties.
Our overseas business operations subject us to additional risks and uncertainties. While our income from international operations is not yet material to our company as a whole, our current or future international expansion may expose us to additional risks, including general economic and political conditions internationally and the changes of global macroeconomic environment. In addition, we will face complex local regulatory environment that we are not familiar with. As a result, we may incur substantial compliance costs to carry out our business operations in the overseas market and still be subject to potential litigations, regulatory proceedings, penalties or incur other costs. As we have very limited experience in operating our business in the overseas market, our products may not be accepted by users in the overseas market, we may be unable to attract a sufficient number of users, fail to anticipate competitive conditions or face difficulties in operating effectively in the overseas market. In addition, trade barriers, such as import and export restrictions, customs duties and other taxes, competition law regimes and other trade restrictions, as well as other risks such as political instability may also expose us to additional risks and uncertainties if we expand our business in the overseas market.
Interest rates of certain of our loan products exceed the statutory interest rate limit and therefore part of the interests is not enforceable through the PRC judicial system.
The
all-in
borrowing cost, including the interest rate and the total expense paid by the borrower for the borrowing, is highly regulated by the Supreme People’s Court and different regulatory authorities. According to the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private Lending Judicial Interpretations, in the context of lending activities between individuals, entities or other organizations that are not licensed financial institutions, (i) if the interest rate of a loan exceeds 36% per annum, the exceeding part of the interest rate is invalid and void, and (ii) if the interest rate of a loan exceeds 24% per annum but is no more than 36% per annum, the exceeding part will be treated as natural obligation—valid but not enforceable in the PRC judicial system, while the enforceability of the 24% per annum part will not be affected.
On August 4, 2017, the Supreme People’s Court promulgated the Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases, which provides, among others, that the claim of a borrower under a financial loan agreement to adjust or cut down the part of interest exceeding 24% per annum on the basis that the aggregate amount of interest, compound interest, default interest, liquidated damages and other fees collectively claimed by the lender is overly high should be supported by the PRC courts. For loans facilitated at annual rate between 24% and 36% historically or in the future, if any of such loans become delinquent, we will not be able to enforce part of the interest that exceed 24% through PRC judicial system. As a result, our institutional funding partners may suffer losses, which would damage our reputation and harm our business. Were these to happen, our reputation, results of operations and financial condition would be adversely affected.
 
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According to the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, promulgated by the Internet Finance Rectification Office and the Online Lending Rectification Office in December 2017, in the context of “cash loan” business operated by various types of institutions, the aggregated borrowing costs of borrower charged in forms of interests and all kinds of fees should be annualized and subject to the upper limit on interest rate of private lending set forth in the judicial interpretations issued by the Supreme People’s Court. When Circular 141 was promulgated, the then effective upper limit on interest rate of private lending was 24% per annum as judicially protected by the court, while the range of 24% to 36% per annum was deemed as natural obligation and the exceeding part of 36% per annum was deemed as illegal.
On August 20, 2020, the Supreme People’s Court issued the Decision on Amending the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases, which is further amended by the Supreme People’s Court on December 29, 2020, or the Private Lending Judicial Interpretation Amendment, which amended the upper limit of private lending interest rates under judicial protection. According to the Private Lending Judicial Interpretation Amendment, the upper limit of interest rate for
one-year
private loan would be capped at four times that of the loan prime rate at the time of the establishment of the agreement, or the Quadruple LPR Limit. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on lending activities” for more details. The aforementioned
one-year
loan prime rate refers to the
one-year
loan market quoted interest rate issued by the National Bank Interbank Funding Center on the 20
th
of each month starting from August 20, 2019, and the
one-year
loan market quoted interest rate issued by the National Bank Interbank Funding Center on April 20, 2022 was 3.7%.
Based on the latest Quadruple LPR Limit, the ceiling would be lowered to 14.8% from 24% under the previous judicial interpretation in 2015. We cannot assure you that the
one-year
loan market quoted interest rate and the Quadruple LPR Limit will not decrease further in the future.
According to the Private Lending Judicial Interpretation Amendment, (i) in terms of lending activities between individuals, entities or other organizations that are not licensed financial institutions, if the interest rate of a loan exceeds the Quadruple LPR Limit, the exceeding part will not be supported and enforceable in the PRC judicial system; and (ii) the Quadruple LPR Limit does not apply to the disputes arising out of loans funded by financial institutions or its branches which are licensed by financial regulatory authorities.
On January 21, 2021, the Response Letter to the Guangdong High People’s Court Relating to the Inquiry on the Scope of Application of the Private Lending Judicial Interpretation Amendment issued by the Supreme People’s Court, or the Supreme Court’s Response Letter, further clarifies that seven types of financial organizations, including micro-loan lending companies and financing guarantee companies, are deemed as financial institutions licensed by the financial administrative authorities, and any disputes arising out of their financial business activities should not apply to the Private Lending Judicial Interpretation Amendment. However, as the regulatory authorities have wide discretion in administration, interpretation and enforcement of the laws and regulations, we cannot rule out the possibility that the regulatory authorities may hold different opinions on whether Quadruple LPR Limit applies to the loans funded by financial institutions on our platform. In that case, for loans facilitated at or above the Quadruple LPR limit become delinquent, we may not be able to collect parts of the interest that exceed the Quadruple LPR limit through the PRC judicial enforcement. As a result, our institutional funding partners may suffer losses, which would damage our reputation, results of operations and financial condition. According to the Supreme Court’s Response Letter, we believe that the Quadruple LPR Limit stipulated in the Private Lending Judicial Interpretation Amendment does not apply to the financial institutions. However, we cannot assure you that the regulatory authorities share the same view as ours. Currently, substantially all of our institutional funding partners that we cooperate with for funding new loans origination on our platform are financial institutions licensed by financial regulatory authorities.
On March 31, 2021, the PBOC released its No. 3 announcement in 2021, or the PBOC No. 3 Announcement, which stipulates, among others, that the annual interest rate of a loan should be the annualized form of ratio calculated based on the percentage of all expenses charged from the borrower for the borrowing to the principal actually borrowed by this borrower. The expenses charged from the borrower include the interests and the various expenses directly related to the borrowing. If the loan is repaid in installments, the remaining principal after the deduction of the total repaid principal should be deemed as the actual borrowed principal when calculating the annual interest rate. Compound interest rate and simple interest rate are both allowed to be used to calculate the annual interest rate, provided that if simple interest rate is used, it should be explicitly disclosed to the borrower. The PBOC No. 3 Announcement applies to deposit-taking financial institutions, consumer finance companies, micro-loan lending company, and internet platforms providing loan application services like us. It is our view that the implementation of PBOC No. 3 Announcement is not retrospective.
 
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We have certain loans facilitated on our platform with an interest rate over 24% per annum. Before the promulgation of PBOC No. 3 Announcement, no rules or regulations explicitly defined the calculation method for the maximum interest rates permitted by the relevant laws. Upon the promulgation of No. 3 Announcement, we have changed our calculation method for the interest rate to the annual
all-in
borrowing cost as a percentage of the outstanding principal after deducting all installments that have been repaid. We have also explicitly disclosed the calculation method for the interest rate of the loans on our platform to our borrowers. As of December 31, 2021, the outstanding balance of loans facilitated on our platform in China with an interest rate over 24% was RMB16.4 billion (US$ 2.6 billion), representing 33% of the outstanding loan balance as of the same date. These loans had the terms ranging from one month to 24 months. In the event that any of such loans become delinquent, we may not be able to collect the portion of interests that exceed 24% per annum through PRC judicial enforcement. Furthermore, the portion of interest rate that exceeds 24% per annum may be determined to be invalid by the regulatory authorities, and we may have to adjust the interest rate accordingly, which may adversely and materially affect our results of operations and financial condition. Were these to happen, our reputation, results of operations and financial condition would be adversely affected.
It is our belief that our calculation for the interest rate is in line with the requirements in the PBOC No. 3 Announcement. However, we cannot assure you that our historical or current calculation method for the interest rate would be deemed to be in full compliance with the PBOC No. 3 Announcement. As the PBOC No. 3 Announcement is relatively new, there still exists great uncertainties with respect to its interpretation and application. We will maintain communication with the relevant authorities and closely monitor its enforcement.
Our introduction of new products and services may expose us to new challenges and more risks.
In 2020, we started displaying products of third-party online consumer finance partners on our platform, and the borrowers on our platform can submit loan applications and information authorization for these products through our platform. The third-party online consumer finance partners then can assess the borrowers’ creditworthiness and credit limits and match the borrowers with their own institutional funding partners or use their own funds to fund the loans if they are regulatorily competent to do so. We require the third-party online consumer finance partners to fully comply with all applicable laws and regulations, and the third-party online consumer finance partners should be fully responsible for any of their misconducts. However, as we have very limited control over those third-party online consumer finance partners, we cannot ensure their operations will be in full compliance with all applicable laws and regulations. If those third-party online consumer finance partners do not comply with any applicable laws and regulations and the borrowers are dissatisfied with their products displayed on our platform, our reputation and operation results could be adversely affected.
We operate in a market where the credit infrastructure is still at an early stage of development.
China’s credit infrastructure is still at an early stage of development. The Credit Reference Center established by the PBOC in 2002 has been the only credit reporting system in China. This centrally managed nationwide credit database operated by the Credit Reference Center only records limited credit information, such as tax payments, civil lawsuits, foreclosure and bankruptcy. Currently, this credit database is accessible to banks and market players authorized by the Credit Reference Center. In 2015, the PBOC announced that it would open the credit reporting market to private sectors with a view to spurring competition and innovation, but it may be a long-term process to establish a widely-applicable, reliable and sophisticated credit infrastructure in the market we operate. Currently, as an intermediary between institutional funding partners and borrowers, we do not have access to the Credit Reference Center. Our institutional funding partners decide at their own discretion if to check any borrower’s credit status at the Credit Reference Center as they conduct credit assessment independently. In general, the borrowers on our platform give general authorization to the institutional funding partners to check the borrowers’ credit status from and report the borrowers’ defaults to the Credit Reference Center. We have started data sharing with a credit reference agency licensed by the PBOC to provide individual credit reference service. However, the licensed credit reference agencies in China are newly established companies. Whether it can efficiently aggregate data from all different types of online databases with accuracy remains to be proven.
We are subject to credit cycle and the risk of deterioration of credit profiles of borrowers.
Our business is subject to credit cycle associated with the volatility of general economy. If economic conditions deteriorate, we may face increased risk of default or delinquency of borrowers, which will result in lower returns or losses. In the event that the creditworthiness of our borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be subsequently rendered ineffective. This in turn may lead to higher default rates and adverse impacts on our reputation, business, results of operations and financial positions. We cooperate with institutional funding partners through both capital heavy model and capital light model. Under the capital heavy model, we provide credit enhancement services to institutional funding partners through third-party guarantee companies or our financing guarantee subsidiaries. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Regulatory restrictions on institutional funding partners’ acceptance of credit enhancement may adversely affect our business and access to funding.” As our financing guarantee subsidiaries provide guarantee for certain amount of loans funded by institutional funding partners and the amount of payments payable by us to third-party guarantee companies depends on the amount of default loans, we are subject to credit risks for those loans funded by our institutional funding partners to our borrowers. If we are unable to accurately assess the creditworthiness of the borrowers on our platform or if we fail to accurately anticipate and manage the delinquency rates of the loans funded by our institutional funding partners, we will not be able to maintain our credit risk exposure within acceptable parameters. If we are unable to effectively collect these delinquent loans, our liquidity, business operations, financial condition and results of operations would be materially and adversely affected.
 
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We rely on our proprietary credit-scoring model in assessing the creditworthiness of our borrowers and the risks associated with loans. If our credit-scoring model is flawed or ineffective, or if we otherwise fail or are perceived to fail to manage the default risks of loans facilitated through our platform, our reputation and market share would be materially and adversely affected, which would severely impact our business and results of operations.
Our ability to attract borrowers and institutional funding partners to, and build trust in, our platform is significantly dependent on our ability to effectively evaluate borrowers’ credit profiles and likelihood of default. To conduct this evaluation, we utilize our proprietary credit assessment model, or the Magic Mirror Model, which is built based on data from multiple sources, including credit reference agency, and strengthened by our sophisticated artificial intelligence and advanced machine learning techniques. The Magic Mirror Model categorizes borrowers into different credit ratings according to their risk profiles, based on which our risk pricing system assigns them appropriate interest rates, credit limits and loan durations. However, the Magic Mirror Model may not effectively predict future loan losses. Subject to credit assessment result for each loan application, a borrower is allowed to take out multiple loans at a time on our platform if his or her existing loans are not in default and the total outstanding balance is within the approved credit limit for the type of loan the borrower applies for. Credit limits are set by loan products, and thus a borrower may have a credit limit for each type of loans on our platform. A borrower’s credit limit for a particular type of loan is determined considering a range of factors, including (i) the borrower’s credit level based on his or her Magic Mirror score—borrowers with better Magic Mirror credit scores are generally given higher credit limits, (ii) the borrower’s credit needs, such as the type of loans being applied for, (iii) the borrower’s credit limits and credit performance for other types of loans on our platform, and (iv) overall investment demand from investors. A new Magic Mirror credit score is generated each time a borrower applies for a loan, which may change the borrower’s credit limit for that type of loan. As such, it is possible that borrowers may take out new loans on our platform to pay off their other existing loans facilitated by us or for other purposes. Given the practical difficulty in tracking and controlling the usage of borrowed funds, we are not able to effectively prevent borrowers from “rolling over” their loans on our platform. Although the Magic Mirror Model looks less favorably upon borrowers who have high credit line utilization ratios, it may not be able to timely and accurately adjust down the credit rating assigned to a borrower if such borrower masks his or her deteriorating creditworthiness by refinancing existing loans with new loans on our platform. If we are unable to effectively classify borrowers into the relative risk categories, we may be unable to offer attractive interest rates for borrowers and returns for investors and effectively manage the default risks of loans facilitated through our platform. We continuously refine the algorithms, data processing and machine learning used by the Magic Mirror Model, but if any of these decision-making and scoring systems contain programming or other errors, are ineffective or the data provided by borrowers or third parties are incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans.
For loans funded by our institutional funding partners, the institutional funding partners will review borrowers’ applications and may rely on our preliminary credit assessment we provide to them and then decide if to extend loans to such borrower as well as the credit limit after their independent credit review. If any data provided by borrowers or third parties are incorrect or stale or our preliminary credit assessment service is not effective, our cooperation with institutional funding partners could be negatively affected. In addition, we bear credit risks for a substantial majority of the loans funded by institutional funding partners to borrowers introduced by us. If our ability to provide preliminary credit assessment is not as effective or efficient as expected, our liquidity, financial conditions and results of operations may be materially and adversely affected.
 
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In addition, if a borrower’s financial condition deteriorates after his or her loan application is approved, we may not be able to take measures to prevent such borrower’s default and thereby maintain a reasonably low default rate for loans facilitated through our platform.
Credit and other information that we receive from prospective borrowers and third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.
For the purpose of credit assessment, we obtain from prospective borrowers and third parties certain information of the prospective borrowers, which may not be complete, accurate or reliable. A credit score assigned to a borrower may not reflect that particular borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate borrower information. Additionally, once we have obtained a borrower’s information, the borrower may subsequently (i) become delinquent in the payment of an outstanding obligation; (ii) default on a
pre-existing
debt obligation; (iii) take on additional debt; or (iv) sustain other adverse financial events, making the information we have previously obtained inaccurate. To better assess borrowers creditworthiness, we joined the credit and information sharing system set up by the National Internet Finance Association of China. A participant of this sharing system can obtain a borrower’s credit information shared by other participants. However, this sharing system is still at the primary stage of development and there are a limited number of participants and limited amount information in this sharing system. As a result, we cannot determine whether borrowers have outstanding loans through other consumer finance marketplaces not participating in this sharing system at the time they obtain a loan from us. This creates the risk that a borrower may borrow money through our platform in order to pay off loans on other consumer finance marketplaces and vice versa. If a borrower incurs additional debt before fully repaying any loan such borrower takes out on our platform, the additional debt may impair the ability of that borrower to make payments on his or her loan and the investor’s ability to receive investment returns associated with such loan. In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress or insolvency of the borrower. To the extent that a borrower has or incurs other indebtedness and cannot repay all of his or her indebtedness, the obligations under the loans will rank
pari passu
to each other and the borrower may choose to make payments to other creditors rather than to investors on our platform.
Such inaccurate or incomplete borrower information could compromise the accuracy of our credit assessment and adversely affect the effectiveness of our risk management, which could in turn harm our reputation, and as a result our business and results of operations could be materially and adversely affected.
Loss of or failure to maintain relationship with our strategic partners may materially and adversely affect our business and results of operations.
We currently rely on a number of strategic partners in various aspects of our business. For example, in terms of user acquisition, we acquire a significant portion of our borrowers through a limited number of online channels from a limited number of our strategic partners. We rely on certain data partners to collect credit information of borrowers for credit scoring and fraud detections. We anticipate that we will continue to leverage strategic relationships with existing strategic partners to grow our business while pursuing new relationships with additional strategic partners.
Pursuing, establishing and maintaining relationships with strategic partners require significant time and resources as does integrating third-party data and services with our system. Our current agreements with partners generally do not prohibit them from working with our competitors or from offering competing services. Our competitors may be more effective in providing incentives to our partners to favor their products or services, which may in turn reduce the volume of loans facilitated through our platform. Certain types of partners may devote more resources to support their own competing businesses. In addition, these partners may not perform as expected under our agreements with them, and we may have disagreements or disputes with them, which could adversely affect our brand and reputation. If we cannot successfully enter into and maintain effective strategic relationships with strategic partners, our business will be harmed.
In addition, if any of our partners fails to perform properly, we cannot assure you that we will be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers and institutional funding partners, inability to attract borrowers and institutional funding partners, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.
 
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We have obligations to verify information relating to borrowers and detecting fraud. If we fail to perform such obligations to meet the requirements of relevant laws and regulations, we may be subject to liabilities.
Our business of connecting institutional funding partners and borrowers constitutes an intermediary service, and our contracts with institutional funding partners and borrowers are intermediation contracts under the Civil Code of the PRC, an intermediary that intentionally conceals any material information or provides false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s interests may not claim for any service fee for its intermediary services, and is liable for any damage incurred by the client.
We refer borrowers to our institutional funding partners. The institutional funding partners will review the borrower’s application and our preliminary credit assessment, and then decide if to extend loans to such borrower as well as the credit limit after their independent credit review. Our agreements with these institutional funding partners and borrowers may be deemed as intermediary contracts under the Civil Code of the PRC. Therefore, if we fail to provide material information to institutional funding partners and are found to be at fault, for failure or deemed failure to exercise proper care, to conduct adequate information verification or supervision, we could be subject to liabilities as an intermediary under the Civil Code of the PRC. We leverage a large database of past fraud accounts information and sophisticated rule-based detection technology in detecting fraudulent behaviors. Based on new data collected and fraudulent behaviors detected during our daily business operations, we update our database on an
as-needed
basis. As the laws, regulations, rules and governmental policies governing the online consumer finance industry are relatively new, it is still unclear to what extent online consumer finance platform should exercise care in detecting fraud. Although we believe that as an information intermediary, we should not bear the credit risk for institutional funding partners as long as we take reasonable measures to detect fraudulent behaviors, we cannot assure you that we would not be subject to any liabilities under the current laws, regulations, rules and governmental policies governing the online consumer finance industry if we fail to detect any fraudulent behavior. If that were to occur, our results of operations and financial condition could be materially and adversely affected.
We may be deemed to use our own fund to finance certain loans and therefore subject us to regulatory risks.
The Interim Measures prohibits online finance information intermediaries from investing in loans using their own funds unless otherwise stipulated by laws and regulations. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on online lending information intermediaries.” In 2019 and 2020, in order to reduce the outstanding balance of the loans funded by individual investors on our platform and improve our business model, we used quality assurance fund, which was historically set aside by us as a protection mechanism for the individual investors when the borrowers defaulted in principal and interest repayments, to repay outstanding balance of loans to individual investors on our platform who were protected by the quality assurance fund before the respective maturity dates. After repaying the outstanding balance of those loans, the borrowers continued to repay the remaining installments of principal and interest to our quality assurance fund. Such business practice might be regarded by relevant government authorities as investing in loans using our own funds, and therefore subject us to fines, penalties or other liabilities, which could materially and adversely affect our business, financial condition and prospects.
In addition, pursuant to the Measures for Illegal Financial Institutions, extending loans without the PBOC’s permission is deemed to be an illegal operation of financial business and the entity extending loans without the PBOC’s permission is deemed to be an illegal financial institution. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services—Regulations on illegal financial institutions and intermediaries.” In connection with our quality assurance commitments provided through third-party financing guarantee companies, we purchase creditors’ rights from third-party financing guarantee companies after these financing guarantee company repay the full overdue amounts to our institutional funding partners. After such purchase of creditors’ rights, the borrowers will continue to repay the remaining installments of principal and interest to us. We cannot rule out the possibility that relevant regulatory authorities may take the view that our such business practice constitutes an illegal operation of financial business without the PBOC’s permission and we may be deemed to be an illegal financial institution. If we were to find to violate the Measures for Illegal Financial Institutions, we would be subject to fines, penalties or other liabilities, which could materially and adversely affect our business, financial condition and prospects.
 
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Our failure to compete effectively could adversely affect our results of operations and market share.
The online consumer finance industry in China is competitive and evolving. We compete with financial products and companies that attract borrowers, investors, and institutional funding partners. We primarily compete with leading online consumer finance companies in China. In addition, with respect to borrowers, we also compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers and other consumer finance companies; with respect to institutional funding partners, our product offerings also compete with other products and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes.
Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have more extensive borrower or funding sources, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. Any of the foregoing could adversely affect our business, results of operations, financial condition and future growth.
In addition, our competitors may be better at developing new products, responding faster to new technologies and undertaking more extensive marketing campaigns. When new competitors seek to enter our target market, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or terms prevalent in that market, which could adversely affect our market share or ability to exploit new market opportunities. Also, since the online consumer finance industry in China is relatively new and fast evolving, potential institutional funding partners and borrowers may not fully understand how our platform works and may not be able to fully appreciate the additional customer protections and features that we have invested in and adopted on our platform as compared to others. Our pricing and terms could deteriorate if we fail to act to meet these competitive challenges. Furthermore, to the extent that our competitors are able to offer more attractive terms to our cooperation partners, such cooperation partners may choose to terminate their relationships with us. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our platform could stagnate or substantially decline, we could experience reduced revenues or our platform could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.
If we fail to promote and maintain our brand in a cost-efficient way, our business and results of operations may be harmed.
We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers and institutional funding partners to our platform. This depends largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our platform. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers and institutional funding partners in a cost-effective manner or convert potential borrowers and institutional funding partners into active borrowers and institutional funding partners on our platform.
Our efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
 
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Any negative publicity with respect to us, the online consumer finance industry in general and our third party partners may materially and adversely affect our business and results of operations.
Reputation of our brand is critical to our business and competitiveness. Factors that are vital to our reputation include but are not limited to our ability to:
 
   
maintain the quality and reliability of our platform;
 
   
provide borrowers and institutional funding partners with a superior experience on our platform;
 
   
enhance and improve our credit assessment and risk-pricing models;
 
   
effectively manage and resolve borrower and institutional funding partner complaints; and
 
   
effectively protect personal information and privacy of borrowers and institutional funding partners.
Any malicious or negative allegation made by the media or other parties about the foregoing or other aspects of our company, including but not limited to our management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely compromise our reputation and harm our business and operating results.
As the online consumer finance industry is a new industry in China and the regulatory framework for this industry is also evolving, negative publicity about this industry may arise from time to time. Negative publicity about China’s online consumer finance industry in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities. The PRC government has instituted specific rules, including the Interim Measures, Circular 141, the Interim Measures for Banks and its supplement, to develop a more transparent regulatory environment for the online consumer finance industry. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Online Consumer Finance Services.” Any players in China’s online consumer finance industry who are not in compliance with these regulations may adversely impact the reputation of the industry as a whole. Furthermore, any negative development in, or negative perception of, the online consumer finance industry as a whole, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on our ability to attract new borrowers and institutional funding partners. Negative developments in the online consumer finance industry, such as widespread borrower defaults, fraudulent behavior and/or the closure of other online consumer finance platforms, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by online consumer finance platforms like us. In 2019 and 2020, there were a number of reports of business failures of online lending information intermediary platforms in China, including some reputable ones. Furthermore, several criminal cases were reported to be charged against certain online lending information intermediary platforms. Although the market exits of these companies may result in more healthy and stable development of the online consumer finance industry, to the extent borrowers or institutional funding partners associate our company with these companies, they may be less willing to participate on our platform.
In addition, negative publicity about our partners, outsourced service providers or other counterparties, such as negative publicity about their loan collection practices and any failure by them to adequately protect the information of our borrowers, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.
Fraudulent activity on our platform could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease.
We are subject to the risk of fraudulent activity both on our platform and associated with borrowers, institutional funding partners and other third parties handling borrower information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, result in losses suffered by the investors, reduce the volume of loans facilitated through our platform and lead us to take additional steps to reduce fraud risk, which could increase our costs and expenses. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing were to occur, our results of operations and financial condition could be materially and adversely affected.
 
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Our current level of fee rates may decline in the future. Any material reduction in our fee rates could reduce our profitability.
We earn a substantial majority of our revenues from the service fees that we collect from the third-party guarantee companies or our institutional funding partners on the loans facilitated through our online marketplace and the fees that we charge from the borrowers as the guarantee fees. The fee rates may vary from different business models and third-party guarantee companies or institutional funding partners. Any material reduction in our fee rates could have a material adverse effect on our business, results of operations and financial condition.