Is it realistic to buy things without paying?
As unrealistic as it seems, such a business model is being run in China. I was utterly surprised upon hearing about it from some relatives, and went ahead to conduct some research on the web. I found no information by running a Google search in English. Queries on Google and Baidu in Chinese returned some results, though most are posts and articles discussing the authenticity of the business.
Xinweilai (心未来) is an online platform that lets its members earn virtual E-coins by posting chicken soup messages on the website, playing puzzle games, recruiting more members etc. It is said to be the replica of another platform known as Wodeweilaiwang (我的未来网) which translates directly to My Future Web. Armed with these E-coins, consumers can then visit physical shops set up by the company to purchase goods. At the time of purchase, consumers need to pay with cash, and simultaneously their E-coin balances decrease at a 1RMB:1E-coin ratio. Around 15 days later, consumers will receive 100% cashback through a company portal. This can be cashed out to a bank account.
Xinweilai literally means Heart Future, with Heart being a homonym for New. It aims to foster a new shopping style that is supposedly beneficial for both consumers and suppliers. The general public can obtain daily necessities without spending any money eventually. Faced with the imminent increase in demand for goods, manufacturers profit.
Everything seems very rosy.
The obvious question which remains is: How does Xinweilai make money?
There are various speculations about the business model being one extensive Ponzi scheme in which cashbacks for earlier customers are paid for by later customers, or that it's just smart use of massive cash flows on the platform. The reality is unknown. It might even be a combination of both. I'm more inclined towards this theory, which I will elaborate on later.
The platform started in 2014. Without registering for an account, I can only see a simple website (http://www.xinweilai.hk/) which interestingly has a .hk domain. The legitimacy of the company is unknown or perhaps even irrelevant due to the loosely regulated Chinese market. Multi-level marketing is illegal in Mainland China, but apparently still prevalent. While researching, I found out, to my alarm, the Ezubao incident uncovered earlier this year - a Ponzi scheme involving a lender-to-lender online platform. The peculiarity of the scandal is that many victims used the platform thinking that it was backed by the government, due to successful media maneuvers such as commercials right before the news on state television. Xinweilai is definitely comparable in terms of its marketing coverage, for instance through promotional videos on WeChat, physical events at local sites, and especially by encouraging its 30 million members to develop their downline.
What makes me uneasy about Xinweilai is the exorbitant prices it charges for goods sold in the stores. All prices are set by the company and they are in general 5 to 10 times that of prices elsewhere. Depending on a member's rank, he or she can only purchase items below a certain price cap (max 50000RMB), but there is no limit placed on the number of products purchased. Moreover some forums claim that expensive items such as cars and houses can be paid for by installments. This makes me wonder what will happen if the company one day stops giving rebates. The consumer's loss would be at least 4 times the cost of the products he or she bought in the last two weeks, not to mention that the products may be totally unnecessary but were purchased since they were 'free' anyway.
I can see the idealistic future in which Xinweilai is able to sustain its mode of operation using profits from advertising on its platform.
Before going there, let's have a brief look at its revenue and expenditure. Xinweilai's main sources of revenue include product sales, advertising, investments, commission from manufacturers and franchisees, and fees. Expenditure consists cashback (same amount as sales), merchandise costs (approx 10-20% of sales), maintenance of stores, events and logistics. Due to the lack of a financial report, exact numbers are unobtainable. We assume for now that revenue from advertising and investments need to be comparable to merchandise costs in order for the company to break even. The exorbitant product prices hints that advertising revenue currently cannot totally cover expenditure. In actual fact, I'm not aware how much, if any, advertising is done on the online platform since surprisingly it is not one of the ways to earn E-coins. Then, we are left with the question if it is possible for investments using the cash flow on the platform to have a profit margin of at least 10-20%.
We all know that greater profits come with greater risks, but how comfortable would consumers be upon knowing that their money were put in high risk investments and that they risk not getting their money back. The possibilities now are that this is either a Ponzi scheme or that Xinweilai is dealing with high risk high return investments. Speculations that Xinweilai is giving rebates using deposit interests are impractical. The highest deposit interest rate in China is 3.75% at the Bank of Communications for a 5-year time deposit. Even if there is a special package for Xinweilai, would the rate go that much higher? The world's largest banks earn a profit margin between ICBC's 29% and BNP Paribas' 5% in 2014, so Xinweilai's investments have to be comparable to the best amongst the best financial institutions if these investments should be at the same risk level as the banks'.
I do not think that it is impossible for a company to earn that much profit to sustain a business model like Xinweilai's. For a platform with widespread usage, advertising is the obvious outlet as demonstrated by Alibaba and Baidu's over-40% profit margins. Furthermore, Xinweilai's platform is well-suited for this purpose as it can encourage people to consume commercials in exchange for E-coins, and earn according the cost-per-click and cost-per-view rates.
Should we embrace Xinweilai or wait and see? Use it at your own risk, literally. Treat it as an investment where you get merchandise as dividend, but do not be unprepared for a day when you may lose your capital. And if advertisements do not start popping up like wildfire, be very suspicious.
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