Dianrong, a Shanghai-based peer-to-peer lender, may be looking to expand its business lines outside of China: its CEO, Soul Htite, was promoting the company’s business model at recent government-supported fintech events in Singapore and Hong Kong. Htite says the company could replicate its business model because it doesn’t rely on a national credit bureau to assess risk.
How does Dianrong handle credit risk? Its platform matches investors with borrowers from small enterprises in services, which need trade financing, or supply-chain financing. These are typically companies that lack formal banking relationships, so its risk methodologies reflect that.
How many of the conditions that have enabled Dianrong to operate in China can it – or any other Chinese P2P platform – replicate abroad?
Here are the most important concepts in how the company does business.
- It’s not about vetting customers: Traditional lenders extend credit based on assessing borrowers’ financial statements. P2Ps build products based on what kind of real-time business data is available. It’s product-first, rather than customer-first.
- It is about real-time data: “We look at trends, not static and backward financial data, and match that to cashflow statements,” said Bryan Pang, Dianrong’s head of credit risk management. In retail, point-of-sale data is highly valued, and over time the platform can spot anomalies in a business’s daily patterns that serve as warning signals. (This is the part of the business model that would be the most difficult to replicate outside of China: are there enough SMEs in a sector to develop enough data? Are SMEs incentivized to share their data? Do they have as few choices as many unbanked SMEs in China faced?)
- Forget collateral: Collateral plays little to no role, because it’s user data that determines pricing and risk.
- It’s capital-light: The business requires relatively little capital, because if the network is sufficiently large, it mutualizes thousands of small investments. But liquidity management is still important: good P2P businesses match lending tenures to their funding. (This is another potential area of difficulty as P2Ps from China venture abroad – how do they amass a healthy balance of business?)
- KYC: Repeat business is vital to establish enough information about a customer to give them a reputation score, which Htite says is a goal. Loyalty is built by offering better terms to borrowers who build a good track record. Dianrong has tied up with micro-P2P lender Quark Finance to build a credit studio.
- Humans are vital: Dianrong and Quark have credit teams with hundreds of people each, but they’re not like risk officers at banks. Credit risk used to involve looking for faked financials; but now it’s about having people who know how to build data-based models. Large loans or unusual cases still require people to visit borrowers, however. (This is a third challenge for P2Ps looking to go abroad: engineering talent is hard enough to find in China, and scarcer elsewhere.)
- Classic notions of risk still count: A P2P’s definition of risk is the same as a bank’s, but online P2Ps must update their models constantly. They face intense competition and razor-thin margins. The upside to this continual iteration is they can price loans more flexibly. “The traditional wisdom applies, but we just have to run faster,” said Joe Guo, CEO of Quark Finance.