Bike-Sharing Can't Make Money, So Deposits Got Called a Business Model. What Happens When You Do the Math?

The numbers look big at first glance. Work them out and they don't amount to much.

Less than two months into 2017, and the money is flowing again in the bike-sharing wars. Mobike announced a $215 million round just before Chinese New Year, and then The Wall Street Journal reported that ofo was preparing a new $150 million round at a $1 billion valuation.

An industry that looks close to impossible to make money in has taken in nearly $1 billion in six months.

Money that gets burned has to show some return eventually. Tian Jiangchuan, an investor in the rival bike-sharing company Youbai Bicycle, said in an earlier interview that besides the fee for each ride, interest on user deposits was one of the imagined ways bike-sharing might turn a profit.

Plenty of people think this way. Mobike and ofo have never discussed any plan to make money off deposits, but a good deal of outside analysis counts deposits as a revenue source for them anyway.

It isn't just bike-sharing. When JD.com announced it was moving into finance in 2012, an executive said the lag between the moment a customer places an order and the moment the supplier gets paid could itself become a financial business: "If you project 100 billion yuan in annual sales, that's 300 million yuan a day, and keeping just a 1-billion-yuan risk reserve in the account is enough to keep the company running normally — the rest of the money can all be put to work."

In theory, a lot of companies could use money like this to make money: the gyms where we pay a lump-sum membership fee, the e-commerce sites where we buy prepaid cards, the car rental firms that want a deposit before you drive off, and of course Alipay.

But can that money really become income large enough to keep a company running?

Bike-sharing has collected plenty of deposits, but it's nothing next to what the companies spend

Public figures from App Annie put 5.12 million people on Mobike's bikes every month. If each of them paid the 299-yuan deposit, Mobike is holding 1.5 billion yuan.

As long as a user keeps riding, that 299 yuan sits in Mobike's account. Until you ask for it back, the company can in theory use it to make money.

But the deposits are not Mobike's assets, so even if it invests them, the money would normally go into low-risk, short-term, principal-protected corporate wealth management products sold by banks and trust companies.

As China's economic growth slowed last year, parking spare cash in short-term wealth management products became the lowest-risk option for companies with idle money on hand.

Figures from Wind Info show that Chinese listed companies put a record $110 billion of idle cash into wealth management products in 2016, nearly half of it in short-term products with terms of one to three months.

A corporate wealth manager at Industrial Bank told QDaily that most of what non-financial corporate clients buy from the bank are corporate-account products.

On February 15, the three-month corporate products Industrial Bank was offering had a minimum investment of 500,000 yuan, with annualized returns of 4.1% for the principal-protected version and 4.4% for the one that isn't.

Returns at that level are ordinary across banks. Take one product on sale at China Merchants Bank: a corporate product rated "stable" for risk, with a 78-day term and an expected return of 4.1%.

Trust companies pay a little more. Ping An Trust and China Resources Trust told us their latest three-month products, with a minimum investment of 1 million yuan, carry annualized returns of around 4.8% and 5%.

Say Mobike bought a three-month corporate product from a bank at an annualized 4%. On that math, its deposit pool would earn it roughly 5 million yuan a month.

That might not even cover the cost of bikes wearing out.

By Mobike's own public figures, it had put at least 580,000 bikes on the streets of 13 cities by the end of 2016, Beijing, Shanghai, Guangzhou and Shenzhen among them.

Mobike hasn't disclosed how fast its bikes wear out, but fellow operator Qibei Bike says GPS-equipped bikes built for a relatively long life currently attrite at about 1% a month. At that rate Mobike loses around 5,800 bikes a month. At roughly 1,000 yuan apiece for Mobike's cheapest model, that is more than 10 million yuan gone every month.

The profit on the deposits doesn't even cover upkeep. And that leaves out research, building the bikes, and salaries.

Mobike is already the biggest bike-sharing company in China, and ofo collects only a third as much per user. If companies their size can't turn a profit on deposits, smaller ones will find it harder still.

Beyond bike-sharing, plenty of other industries have eyed the same pool of money

Investing deposit money is a subject that comes up in industry after industry.

Start with housing rentals. YOU+, a co-living apartment brand for young renters founded in 2011, had to lease entire buildings and renovate them wholesale in its early days, all of it very expensive.

In 2015, YOU+ began working with wealth management platforms on products that securitized its leases. In practice it used tenants' rent as collateral to buy fixed-income products, and used the returns to defray its costs.

YOU+ collects rent on a "two months' deposit, one month's rent" basis, which works out to 9,000 yuan per tenant per month in rent and deposit combined. Put into a product returning 4% a year, that money would earn YOU+ just 30 yuan a month per tenant, one-hundredth of the rent it collects from the same person.

Some smaller startups describe the money deposits throw off as a business model outright. Jiagei Wo is one; it raised 1 million yuan in April 2016. Jiagei Wo's CEO, Wang Le, said in an interview that the company would run a finance business on the deposits that pile up during payment cycles. Zu Lifang, a furniture-rental startup, has the same idea as Youbai Bicycle's investor: profit off the deposit pool.

A little arithmetic shows those returns aren't as impressive as they sound.

Car rental is another business that takes a deposit up front. Renters hand over several thousand yuan before they can drive away.

Take CAR Inc.'s short-term rental business. Its report for the first nine months of 2016 shows the short-term fleet had reached 96,000 vehicles by September.

Assume that over those nine months every one of the 96,000 cars was rented once, 96,000 rentals in all. At 5,000 yuan a rental, that is 480 million yuan sitting in the account. At 4% interest, it would bring in about 1.6 million yuan a month.

The number sounds respectable. But from January through September last year, CAR Inc.'s operating costs plus vehicle depreciation came to 96.6 million yuan, an average of 10.73 million yuan a month. Living off deposit investments would do CAR Inc. very little good.

Besides car and apartment rentals, prepaid cards — consumer cards, annual memberships — can in theory build up a sizable pool of idle money as balances accumulate.

Before Alipay caught on and before the government tightened its anti-corruption rules, prepaid consumer cards were seen as a third-party payment tool capable of pooling enormous sums.

These cards come in two kinds: single-use cards a business issues itself, like gym cards and hair-salon cards, and general-purpose cards backed by third-party payment licenses that work at contracted merchants, like the Deshi Card or the Lianhua OK Card.

Take the Lianhua OK Card, issued by Bailian Group. At the end of 2015 the book balance of its general-purpose and single-use cards together came to 7.6 billion yuan. Typically 3% to 5% of such a balance never gets spent, which leaves a pool of up to roughly 380 million yuan.

380 million yuan sounds like real income. Invested at 4% a year, it would return about 15.2 million yuan. But Bailian Group's net profit in 2015 was 1.19 billion yuan, so that 15 million and change amounts to 1.2% of it.

Making money off prepaid balances has turned up in the fitness industry over the past two years too. Gyms sell annual memberships in volume and try to earn a return on the balances that build up.

The 2016 Fitness Trainer Career Development Report counts a 20% rise in the number of fitness clubs in 2015, to 4,425, with membership that year reaching 6.6377 million.

Take a 2,000-square-meter community gym near Beijing's Fourth Ring Road. Getting it going takes nearly 7 million yuan over the first six months for rent, repairs, equipment and staff. If a gym that size sells 2,500 annual memberships a year at an average of 3,000 yuan each, and puts the resulting balance into a product returning 4% a year, it earns 10 yuan a day per member.

If it can't keep signing up new members, it won't earn even that 10 yuan. For a traditional gym, annual memberships are the main source of revenue, but the money doesn't come easily. It's still simpler to sell more cards to members who won't keep working out.

From something as small as renting a bike up to renting apartments, renting cars, running gyms, the companies eyeing this money are the ones that have to sink huge sums into the business first. And the extra money that deposits and annual cards throw off returns very little, nowhere near enough to keep these asset-heavy companies going.

The pool of idle money that gets talked about most belongs to Alipay and e-commerce

When a user pays a Taobao seller through Alipay, the money doesn't land in the seller's account right away. Alipay settles only once the buyer confirms the goods arrived.

The money that pools in between sits at a custodian bank, and 90% of the interest it earns goes to Alipay.

Alipay's daily transaction volume in 2016 was 10.6 billion yuan. If every transaction sat at the payment institution for seven days, at 4% annual interest that would come to an extra 2.968 billion yuan a year.

The real income is lower, because not every Alipay transaction settles after seven days.

Alibaba as a whole booked 55.227 billion yuan in net profit in 2016. Whatever this pooled money can earn is tiny next to that.

For e-commerce companies, the value in that pool isn't the interest, it's the cash flow. Amazon is the story people bring up most. When an Amazon customer pays on the site, the money doesn't go to Amazon's suppliers right away. This is the financial strategy Bezos has hammered on since the company went public: don't chase growth in earnings per share, chase sustained growth in free cash flow per share.

Amazon calls this cycle a negative cash conversion cycle. By working the lag in its payment terms, Amazon keeps a pool of free, liquid capital on hand for investment and expansion, without borrowing from banks or issuing more stock. In September 2016 that lag stood at 18 days.

But the steady cash flow holds only as long as the company keeps growing. If Amazon stopped growing, it couldn't hold its strong hand over suppliers, stretch its payables, and keep drawing on that cash flow.

Now Alibaba and JD.com, which used to pool large sums this way, are each pushing a credit product of their own, Huabei and JD Baitiao.

If a buyer finishes a purchase on an e-commerce site with Baitiao or Huabei, the payment cycle flips. It used to be that a buyer paid early in the month and Alipay or JD.com settled with the seller at the end of it. Now, if the buyer puts the purchase on credit through Huabei or Baitiao, she can wait until the end of the month to pay, while Alipay or Baitiao still has to settle with the seller on time.

These two credit-card-like products currently carry interest-free periods of 41 days for Huabei and 30 for Baitiao. The money no longer stays with the platform.

Like a credit card, Huabei and Baitiao draw more people into spending ahead of their means and buying more, which lets the platform earn more interest on the repayments.

One reason for the shift is that for both companies, profiting off a pool of idle money earns far less than getting more people to spend and collecting the installment fees some of them pay.

Making money off deposits and annual fees is harder now than it used to be

Most companies not only can't count on pooled money for a meaningful profit; over the past two years the whole thing has gotten harder.

In early January this year, the People's Bank of China issued new rules on customer reserve funds. From April, reserves held by payment institutions must all be deposited centrally at the central bank or partner banks, and they earn no interest. Third-party payment institutions including Alipay are expected to lose 11% of their income as a result.

As credit cards have spread in China, some industries where deposits used to pool money have started using credit-card services instead.

In car rental, for instance, companies now mostly use a credit-card pre-authorization to freeze part of the balance on the customer's card; when the car comes back, the bank releases the hold automatically. No cash deposit, no pool. Hotels have taken up the same pre-authorization model.

Beyond credit cards, Zhima Credit's push into one sector after another has cut into the pool as well.

In hotels alone, Alibaba launched its "Credit Stay" service back in 2015. Users with a Zhima Credit score of 600 or above can check into partner hotels without a deposit. "Credit Stay" partnered early with large chains and groups such as Huazhu, Home Inn and Plateno. Today, Alibaba's Fliggy works with nearly 100,000 hotels.

The deposit-free model "Credit Stay" introduced has shrunk the money hotel deposits used to tie up. Online travel agencies such as Trip.com Group and eLong still offer prepaid booking, but the business travelers who bring hotels the most revenue mostly book rooms with free cancellation, and those bookings tie up nothing at all.

Even in bike-sharing, the industry currently talked about most for making money off deposits, Zhima Credit is slowly moving in. Huang Weixiang, CEO of Xiaobai Bike, told QDaily that people in the industry are studying new credit systems that would use Zhima Credit in place of deposits.

More and more companies entering the market are using deposit-free service as their main pitch to users.

Qibei Bike, Xiaobai Bike and Yong'an Xing have all already plugged Zhima Credit scores into their bike-sharing services.

For a large company with money to spare, idle cash on the books can be put into short-term wealth management products to hold its value, or to cover a temporary gap.

But it isn't a business model, and it can't save a company already in decline.

Cover image: Mobike