在2017年3月刊《亚洲银行家》杂志中，主编Foo Boon Ping先生亲自执笔，在CEO Interview专栏中撰写了题为“Regulation has made us a stronger industry”的人物专访报道，报道共3P篇幅，其中观点与评论穿插，将唐宁的创业经历与宜信历史娓娓道来。
Regulation has made us a stronger industry
Tang Ning, founder and CEO of CreditEase, China’s first and largest peer-to-peer (P2P) lending platform, in a wide ranging and fascinating interview talks about the online lending business, why it expanded into wealth management, the introduction of robo-advisors and how the regulatory framework and business model will evolve.
——By Foo Boon Ping
CreditEase started operations in 2006, at the very beginning of the peer-to-peer (P2P), or marketplace, lending phenomenon.Zopa, perhaps the first of these online lenders had started just one year earlier in 2005 in the UK. However, there is little in common between how the business developed in the West, primarily in the US and UK, and China. “We invented the P2P marketplace lending model in China,” said Tang Ning, founder and CEO of thecompany. “It is a homegrown innovation,” he added.
Tang had started his career as a venture capitalist. One of the companies that he had invested in was a private educational and training company that helped college graduates pick up marketing skills. Seeing the trouble that some students who couldn’t afford the tuition fees, RMB10,000 ($1,450) had to go through to get proper financing, he saw a gap in the market and promptly proceeded to fill it.
“I asked around for banks to help them because these would be their ideal future customers. When they really needed help, that’s the best time to get them. They were telling me that consumer credit risk was very high. There wasn’t a mature, well established credit system in China. So, what to do if those institutions were not in the position to help?” he recollected.
That was how he started the online lending platform that matches individual lenders with individual borrowers who the banks did not care to serve. However, today it has evolved to where the lenders are no longer individuals but institutions; banks andtrust companies.
Technology has a big role to play in bringing these two groups together, mainly in the speed and simplicity in assessing and scoring the risk level that the borrowers represented, pricing them accordingly and finally matching them with lenders who were willing to invest at the appropriate risk-return level, all through the internet.
At least in concept this was how it was supposed to work. However, reality isn’t as simple. It is particularly tricky to accurately assess the credit risk of potential borrowers given the lack of a well- established credit system in the country.
“In the first few years, much of the work in the industry – most of it– was done offline, face-to-face; information collection, verification and soon. But we had an idea if it could be done online, consumer experience would be much better. It would be much better for SMEs and salaried workers to be able to borrow real-time online,” Tang explained.
Now, transactions take place online. In 2012,CreditEase set up a subsidiary company, Yirendai, to focus on online lending. Since them, Yirendai has also launched the industry’s first mobile borrowing app to enable borrowers to borrow through mobile phones, and get credit approval instantly, and also funding real-time. The subsidiary company subsequently went public in 2014 with a listing on the New York Stock Exchange.
Poorstock performance and increased regulation
However, listed P2P lenders such as LendingClub, On Deck and Yirendai, are going through a rough patch. They are performing poorly in the market, amid concerns about their prospects in a rising interest rate environment and their exposure to riskier credit segments, which are either below or just above subprime. The misspelling by Lending Club of wrongly riskclassified assets to an institutional investor uncovered in May 2016 did much to harm investor’s trust and confidence in such automated platforms.
In China, the lack of supervision has allowed the sector to grow rapidly along with a number of frauds and scams, including Ezubao,reportedly China’s biggest P2P platform but which later turned out to be a Ponzi scheme that defrauded close to a million investors of about $8.2 billion over two years.
Chinese authorities have from August 2016 introduced tougher rules on the industry, curbing the amount of loans that they can issue, also barring them from selling investment products and collecting deposits or the pooling of funds collected from customers.
Today, protecting the integrity of the marketplace platform, what Tang described as a “platform risk:, is the industry’s top priority. Tang acknowledged that the risk existed previously because clients’ money and the platform’s funds were actually kept together. Today, steps are being taken to mitigate this risk.
“Now we work with banks as the custodian, as escrow partners so all the funds actually go through the banking system. This way we can reduce or eliminate the integrity risk so that platform owners cannot take away clients’ funds. And also, all the borrowers’ and lenders’ identification can be checked by banking partners. Otherwise there can be fake borrowers, which is also an integrity risk.”
He continued, “we need very prudent management if we want to grow the volume. For a new product to prove itself, it takes six to 12 months. So, we need to be very prudent. When big volume comes, it is a red flag. There might be some frauds so we need to be very careful.”
He feels that the industry has benefited from the regulatory clean-up; “After August, the industry is cleaner and healthier as we expect. Many of the regulatory measures came from industry best practices. So,we were not caught by surprise when the rules came out.”
Describing the reform as part of the Chinese authorities’ smart regulation, Tang said that the regulators have been listening carefully to industry voices and incorporating industry best practices into law making and rule making.
“CreditEase was the first to work with banking institutions to do bank custodian escrow partnerships. This helps reduce integrity risk. And it later became the P2P marketplace lending regulation,”he claimed.
Evolving the business model
Despite, the poor performance of Yirendai’s stocks, Tang believes that the P2P lending proposition is still a strong one. “The challenge to access capital faced by SMEs and the rural population, is global. It is not China’s unique challenge. This issue is always there and not fully addressed. In China, financial innovators by utilising innovative business models andtechnology are doing a good job helping grassroots innovation and grassroots entrepreneurship,”he asserted.
And he sees the potential of P2P platformsplaying a bigger role to provide financial access as part of the state’sfinancial inclusion programme, leveraging the data that they are able togenerate and analyse.
“We have applications allowing people to borrow through mobilephones; for SMEs to borrow through PC, mobile phone and so by utilizingalternative data sources. And hence the credit system is getting better. We arehoping in the coming years, not too far away, the central bank will start toincorporate such data accumulated by companies like us. This business model hasbeen around for a decade. It’s a trillion-dollar market right and theregulatory guidelines that came out has made us a stronger industry,” he said.
Tang sees CreditEase’s mission as leveraging the data of customers and meeting their needs as they unfold andsuch a business model is ripe for expansion, even beyond P2P lending. “We willoffer more and more products and services to serve the population. The firstapp was a loan product. But they also need insurance. They also need wealth management integrated in payments,” he elaborated.
Continuing, he said: “We have amultiproduct relationship with small businesses. For example, small businessesthat don’t have a good idea about insurance coverage but need insurance protection. We work with insurance companies to provide suitable products and services to small businesses. So, that’s aseparate insurance agency business, different from the P2P platform.”
The next step in CreditEase’s growth strategyis to expand deeper into financial services, including insurance and wealth management.It is also providing more enabling services to small businesses. For example,to help them better run their internal management, training, finance and customer relationship management.
“It’s a cloud infrastructure. So, there are different modules on thecloud. The small business owner can take the right one for him. That way, wehelp him run the business better, at the same time accumulate very valuablebusiness data. So, this is a clear direction of business expansion,”he said.
Getting into the wealth management business
CreditEase Wealth Management is the company’snewly set up wealth management subsidiary that serves three distinct customersegments: the high net-worth individuals, mass affluents and the smallinvestors.
“Our strategy is to identify three segments with different needs. Forhigh net-worth individuals, they ask for asset allocation, the whole suite;comprehensive help. We now do that with human financial advisors. And themiddle piece, the mass affluent population is looking for a simpler version ofasset allocation, so we do that with robo-advisors and that is a portfolio, notjust individual products.
But for the small investors, it is about a product, likea P2P product or an insurance product or a money market fund product. Differentsegments have different needs and are served differently,” he explained.
Given China’s relatively nascent wealthmanagement industry and tendency for investors, even the high net-worth, to beinterested in products and focus on yields and returns, Tang wants to move themto think more about asset allocation and risk diversification.
“The first thing we do is to teach people about asset allocation. Of course, for a small investor, it’s not that helpful; their fund size is toosmall. But for the middle market and high-end clients, asset allocation is amust. They are getting to understand this concept through our investor education.”
China’s lack of depth in the financial marketsand instruments, coupled with strict control over interest rates, have seen theemergence of a burgeoning industry of fixed income or money market funds, such as Alibaba’s Yu’E Bao, that are relatively short-term and high-yield productsthat promised much higher returns than the interest on bank deposits.
Their popularity was perhaps best demonstrated by the success of Yu’E Bao, which atits peak garnered $100 billionin investments from these small investors overa nine-month period between 2013 and 2014, making it the world’s fastest if not biggest money market fund. Products such as Yu’E Bao benefited from the differences between rates on the interbank lending or money market and bankdeposits, at the expense of the banking system and proved to be not sustainableas interest rates started to be liberalised.
However, it did affect the developmentof the wealth management industry in shaping investors’ understanding andwarping their perception about risks and returns. However, these products havenow become less popular as issuers can no longer sustain the high rate of returns as money market rates begun to normalise and deposit rates were alsoliberalized.
“Things are getting better. In the past, if an investor bought fixed income products, he can get double digit return. But those days are long gone.What we’ve learned is that for asset allocation it takes time to get that ideaacross and get people to understand. You’re right in saying that people aremore inclined to do this fixed income kind of investment because the visibilityon return is much clearer; like 7% or 8%.
Although there is underlying risk,people who have fixed income don’t yet fully understand asset allocation. We needto do some very good investor education. And in the past several months, there havebeen market volatility with events like Brexit and the US election. So, people arelearning that market fluctuations can be quite risky. Our robo-advisor has donea good job; much better than some indexfunds.” Tang explained.
The company launched its robo-advisor service,Toumi RA, in 2016 to mark its 10th anniversary. It is an automated portfolioallocation platform that matches customer risk appetite, risk preference and financialobjectives with a portfolio of investment options. He sees great potential forrobot-based services to grow amongst the mass affluent investors in China and isalso sanguine about the prospect of the P2P sector in the country.
“The regulatory framework has been in place to solve the issues thathave been identified and to make financial innovation really work in China. Wedefinitely need a more comprehensive, more inclusive financial system. So,there are a lot of benefits associated with financial innovation. I do believewe have had a good start and there will be new pieces coming, for sure,” heconcluded.