P2P Lending in China
I have been fascinated and in love with the concept of P2P (peer-to-peer) lending for over 3 years, including writing numerous business plans, studying various models across different countries, working in what has become the largest and most successful peer-to-peer lending company in the world based in China, to now, founding my start-upwww.pandai.cn, which is an online P2P lending company that is the only destination in China that will allow you to build credit.
First, I would like to address the overall state of the industry in China from my experiences and point-of-view. A common misconception when viewing China or in fact, any country, is banks are the typical means to financing. This is especially not true in China. If we see that bank lending is capped at 7.5 trillion RMB a year, and then notice from several news and research reports that estimate P2P lending (民间贷款) to be between 4-8 trillion RMB a year (I believe it is leaning towards the 8T). With the majority of bank lending going to state-owned enterprises, MNC’s, mortgages and other forms of collateralized loans, since bank credit products are extremely limited as compared to other developed economies; consumers are forced with no choice but to turn to non-bank financing alternatives. A very small percentage of their loans are given to small businesses or typical consumers, and if loans are granted, they’re structured indirectly via guarantee companies. It’s a known saying that to get a loan from a bank, you need to prove you have money to get money, thus defeating the purpose, not to mention, service amongst banks is generally sub-par across the board. For example, a friend wanted to buy a new car by taking a loan from the bank, which would’ve taken 2-3 weeks to process and in that time she would’ve lost the booking on the new Volkswagen. So, she paid for the car in cash and when she went back to the bank to ask for the loan, they would not process it, as she needed to prove use of funds. In short, the inefficiency, risk averseness, strict policy and lack of expertise has created this huge underground private lending market.
Then, there is always the question of policy risk, a favourite question amongst investors, which I’ve heard for the past 3 years during which, multi-million dollar companies have been created in China backed by prominent private equity funds and investment banks. P2P lending is fully legal and protected by contract law; this is despite the Wu Ying case in Wenzhou and despite Hahadai.com (another P2P lending company) going bankrupt, which both sent stirs throughout the industry. Each time the People’s Bank of China, China’s central bank, still came out and proclaimed P2P lending to be fully legal, moreover, Wen Jiaobiao, China’s Prime Minister, has also publicly expressed his support for the industry and even proclaimed that Wu Ying should not have the death sentence. These are strong statements that should be held in high regard. Even more so, after the Wu Ying and Wenzhou cases, the local government in Wenzhou came out with new policy to support the industry and allow wealthy individuals to lend up to $3M of their wealthy in the private lending market, i.e. these underground banks. These stirs also affected www.pandai.cn, where six months ago most of the online payment companies did not wish to offer their services to us, to now where they are contacting me directly – a clear indication of support for the future prospects of this industry.
The policy and laws as they stand are solid, though the means to regulate P2P lending is still unsure and subject to much debate. Sources in the PBOC say they are keeping an eye on the industry to see how it develops. Though as window guidance to policy decisions, we can extrapolate what happened in the online payment industry. Up to about 2009, if you crosschecked the law with online 3rd party payment company practices, such companies as Alipay and Tenpay were clearly operating illegally. Nonetheless, they still operated anyways on the notion that a) they knew this industry had to and must exist, and b) policy would be updated to comply and be a competitive economy on a global level – the same can be inferred for P2P lending. Since then, policy and regulations have caught up to regulate the online payment industry and has now made the barrier to entry in the market almost impossible. In conclusion, my current views are the policy is as follows:
1) A similar policy change will come about in regards what happened in the payment industry at some point in the future, which means there is always going to be trade-off for risk rewards dependent on when you enter the industry.
2) The government will be supportive to those who are conducting P2P lending responsibly. They keyword is ‘responsibly.’ Peer-to-peer lending is a beautiful concept, it’s essentially financing in its purest form, the old school way and it’s nothing new. Only one thing has changed to 500 years ago, which is the Internet that has allowed it to grow in a mass scale. Such sites are in over 20 countries across the world. It is pure, devoid of CDO’s (Collateralized Debt Obligations), derivatives and other forms of leverage, and it’s helping to redistribute wealth between the rich and the poor, which is in line with government goals.
3) For now, the government will leave the industry to self-regulation and make decisions on a case-by-case basis. Wu Ying deserved to go to jail, in short, she amassed a 700M RMB loan portfolio and was promising investors 80% return on investment, which means the total cost of loan to the borrower is exorbitantly high and not socially responsible. Despite this, I still wish to pose a few questions. Why intervene in a market, which is thriving by itself? How do you regulate this market? Would regulations mean potentially shutting down a 3.5-8 trillion RMB economy or forcing this market to become more underground and less transparent? What options does the government really have? It’s simply a choice between sacrificing growth for regulation or letting the private market take its course and develop on its own.
4) There are different financial structures available at the moment, which eliminate the policy risk though these steps must be taken with caution from a strategic standpoint. We, at pandai.cn, are cautious.
5) China is quickly turning into a consumer economy every day. Credit is the single most powerful tool to stimulate such behaviour and must be done in a responsible and sustainable manner. Thus my third point is ever more so relevant, not to mention the notion of transparency. China needs fair standards, which comply on a global level, for consumer credit disclosure seeing that most consumers don’t understand the real costs of a loan and can be easily tricked into taking overpriced loans, which lets the underground market thrive. We place very high importance on transparency and fair disclosure at pandai.cn.
A Thriving Market
Right now, there is an estimated over 100 companies at least conducting P2P lending in China, both online and offline such as ppdai.com, my089.com and CreditEase. So how is pandai.cn different? I prefer to answer this question from a more philosophical level. From the outside, most, if not all P2P lending websites look more or less the same. That is, because just like Groupon models, they have directly copied each other and maybe changed the colour scheme, more so, they have blindly copied western P2P lending business models, which I believe will not work in China as proven through the failure of hahadai.com.
Moreover, I know this from firsthand experience since at my previous company I designed their online P2P lending website, and pandai.cn is actually the second P2P lending website I have designed. The subtle but large difference is that when I designed pandai.cn, we built it from the inside out and not from the outside in, which means we started with designing the credit risk system and then building the website on top of it, as opposed to what 99.99% of the other companies have done, which is getting a cheap outsourcing site to carbon copy other existing sites such as hahadai.com with minor tweaks to the business model. I do not believe those sites are acting responsibly at all and the saying: “the blind leading the blind” is an accurate description, though I am saddened when thinking about the implications and impact to the consumer should they fail.
We, on the other hand, have researched numerous methods in different countries (India, China, South Africa, Kenya and USA) to understand different credit risk models on unbanked, under banked and banked individuals (the three main populations of any economy), as well as having firsthand experience to see what has worked in China to build our credit risk system. Through doing this, we believe we have a firm infrastructure advantage, which will for example, allow our borrowers to build credit, price our products according to risk and be more transparent. We have been given a strong vote of confidence from experts in the industry, whom wish to use it for SaaS solutions to other lending companies as part of their consulting services. Simply said, we have approached the problem by asking what does China need, and our answer is:
1) Efficient world-class financial services with great customer care
2) Provide products and services that are simple and easy to understand
3) Responsible lending: we approve loan requests that customers can afford
4) A transparent organisation that allows its customers to hold us accountable
5) A destination to allow consumers to build credit and borrow at fair rates, not market driven rates
But more than anything, we think long-term and have strong values that transcend into our products where we will always see ourselves as 老百姓 (ordinary folk) who provide world class consumer financial services to the 老百姓.
About the Author
Roger Ying has previous entrepreneurial experience where he co-founded a web 2.0 company in 2006 which was subsequently sold before he attended Stanford for master. Whilst at Stanford. University he has been involved in numerous projects consulting for consumer finance start-ups and Fortune 500 companies, including helping Intuit map the online consumer finance space, which led to the acquisition of Mint.com. During his masters, Roger interned at Cybernaut Venture Capital in Hangzhou, where he mainly conducted due diligence on the financial services industry in China. His fascination for the consumer finance industry in China led him to join a consumer finance start-up called CreditEase in the corporate development department, where he witnessed its explosive growth in one and a half years, and which subsequently received investments from KPCB China, Morgan Stanley and IDG.
With his passion for online consumer finance, Roger started www.pandai.cn, an online peer-to-peer lending company, which is the only company in China that will allow you to build credit. He has been quoted in the Financial Times, and featured in TechCrunch and TechNode.
Roger holds a BS in Electrical Engineering from UC San Diego with a minor in Management Science, and an MS in Management Science from Stanford University focusing in finance, design and entrepreneurship.
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