Yirendai, a Chinese online consumer finance marketplace, intends to move into the wealth-management space – and compete against the biggest internet finance companies in China – as it navigates through new regulation, shareholder problems and questions over the industry’s stability.
Fang Yihan, CEO at the Beijing-based company, told DigFin that the company’s goal for 2020 is to have provided Rmb100 billion of transaction volumes, up from the Rmb39 billion done so far (there is now Rmb24 billion worth of outstanding loans on its peer-to-peer platform).
She says it is possible to grow volumes by 40% to 50% annually because the market is big and growing, even as new regulation is hastening a consolidation in which Yirendai hopes to emerge a winner.
But the company, a majority-owned unit of CreditEase, is looking to do more than be an online marketplace for consumer loans. It is aiming to become the technology leader in online wealth management.
“No one has figured out how to do it right,” Fang said. Not even Lufax, the company’s bigger rival? “Not even Lufax,” she said. “We want to develop something more intelligent online: that’s our play.”
New business models
This would require far more investors and borrowers participating on Yirendai’s lending platform, as well as improvements in the quality and maturity of transactions. Fang says the company also wants to use customer data to provide features and tools in addition to investment products, such as news, membership rewards and personal apps, such as in wellbeing.
And of course becoming a wealth-management player would involve cross-selling more products from parent CreditEase, a P2P for lending to small enterprises, which also has a wealth-management business offering global asset allocations to rich people in China.
A first step toward expanding Yirendai’s business is the launch of Yirendai Enabling Platform, in which it provides customer data and technology to other P2Ps or, potentially, to banks. This data includes insights into protecting against fraud, as well as customer acquisition and user behavior. Fang says YEP is now in beta mode with three partners, who she declined to name.
She notes that Yirendai’s business model caters to borrowers who are salaried workers in second-tier cities, who already have credit cards. This is a relatively high-end segment, but many ineligible customers visit the website regularly – and these are the kind of referrals Yirendai could make to YEP partners, via a matching engine.
Doubts about P2P
Beyond the company’s own ability to execute, it faces a number of challenges. Broadly, these are doubts about the sustainability of China’s P2P industry, and investor doubts about the company’s business model.
In August 2016, the People’s Bank of China coordinated a regulatory response to the rise of internet finance. It addressed concerns about outright frauds and Ponzi schemes among P2P providers, which at that point had mushroomed to over 4,000 in number.
The law is meant to become effective August this year, but only a handful of P2Ps appear to be ready to meet that deadline. Already the number of platforms has fallen to around 2,000, with more consolidation likely, particularly among those that won’t be able to meet the regulatory standards. These rules include the need for a third-party custodian, information disclosures, and bans on platform executives or shareholders on lending on their own P2Ps with their own capital. There are also limits on the loan size to a given borrower (Rmb200,000) and on total lending to an individual borrower (Rmb 1 million).
Fang, who sits on the China Internet Finance Association which is collecting data and information disclosure from online lenders, says about 30 platforms have submitted such details. She says Yirendai will meet the deadline.
The threat of fraud
But most P2Ps will not, and although the government will probably extend the deadline, many companies will never be able to fulfill these requirements. Consolidation is already underway, and the imposition of regulation seems likely to hasten that process. One equities analyst who follows the sector told DigFin this event raises the potential for more fraud and instability, if some of these companies close without giving money back. Such a scenario could deliver a black eye to the entire industry.
Fang acknowledged the concern but said, “Hopefully consolidation will be smooth.”
She notes that the industry has already survived scandals such as Ezubao, a Ponzi scheme that stole $7.6 billion’s worth of investor money. “I don’t think there will be scandals bigger than that,” she told DigFin during a private interview held during a conference organized by The Economist.
Fraud hasn’t gone away, although it doesn’t always originate from dodgy P2P companies: last year, Yirendai was hit by fraudulent emails disguised as coming from its bank. The malware led to a Rmb80 million theft, which the company had to write off. Fang says this experience has led the company to invest in better cybersecurity and forced management to take such issues seriously.
Moreover, the industry generally seems to be becoming safer. The average return to investors across China P2Ps has declined over the past year, from 15% to 9.85%. “The market is already more rational,” Fang said.
Fang says the company maintains what it calls a ‘quality insurance fund’, which is funded from revenues and now stands at Rmb1.3 billion. It’s a rainy-day fund in the event of fraud or defaults. Currently Yirendai’s charge-off rate on loans is 8%, and Fang says the fund can weather default rates as high as 15%: at that point, the company can still return investors’ principal.
The new regulations haven’t addressed such funds, although future iterations may, so Yirendai is working with lawyers to come up with better structures, perhaps segmenting the fund by time period, or by quality of loan.
She also says Yirendai would be positioned to survive an industry crisis because of its higher-quality borrowers: the company argues that so long as employment in cities remains stable, which is also a government political priority, the business model is robust.
Yirendai’s average investment return is 7.5% over a 12-month period. The fact that it’s below the industry average is a sign that lenders trust the platform: they use it because it is seen as better quality, Fang says.
That may be true of lenders on the platform, but it doesn’t appear to be true for shareholders. Yirendai is the first Chinese fintech company to list in the U.S., going public on NYSE in December, 2015 (an achievement highlighted on Fang’s business card).
However, the investor base has shifted almost entirely from long-only mutual funds to quant players riding the stock for momentum. “Quant shareholders are a big issue for us,” Fang said, citing profit-taking, stock volatility, and a small free float, as reasons for fundamental-based fund managers to abandon the stock. She also acknowledges that the incoming regulation from PBoC has also unsettled U.S.-based investors. She says the stock should benefit if more Chinese fintechs list, as China Rapid Finance did this year. “That will lead to more analyst coverage,” she said.
CreditEase: handicap or strategic advantage?
The final question analysts have about Yirendai is its relationship with its parent, CreditEase. DigFin has seen some stock analyst complaints posted online to the effect that Yirendai’s reliance on loans originated from CreditEase is crimping its own ability to scale.
Fang, however, says Yirendai wants to do more business with its parent, not less. It has a three-year contract that expires in 2019, in which Yirendai pays CreditEase a flat fee for a certain number of referrals. “Our credit modeling and approval is more efficient,” she said.
In particular, Yirendai values lead generation from CreditEase’s offline points of sale. CreditEase, although an online marketplace lender, also has 70,000 physical lending points across the country.
She argues that it is this offline side to the parent that gives Yirendai an advantage against Lufax (partly owned by Ping An) and BAT (Alibaba, Baidu and Tencent) – particularly when it comes to collection.
“We use [CreditEase’s offline business] for all of our loans,” she said, “not just those that CreditEase originates. Collection is hard, and it helps to do it offline.” BAT and other internet finance companies rely entirely on online collection, which limits the mix of products they can offer safely, she says. “This is our advantage against BAT.”
But taking on such huge competitors is not something that can be realized quickly. “We need to keep growing our track record, add referrals, and build trust.”
For Yirendai and its competitors, the biggest of those challenges looks to be trust: as the first wave of regulation makes its impact felt, the sector’s resilience is likely to be tested.
Lu Global reverses the Lufax story
Lufax began as a P2P and became a wealth manager – in Singapore, it’s the other way around.
Lu Global, a wealth-management fintech in Singapore, has just launched a marketplace to enable its customers to trade the same products they bought on the company’s website.
Kit Wong, CEO at Lu Global, says the company has developed its consumer-facing business and is now selling both funds and structured products.
But it believes some clients want to get out of these positions, particularly structured notes. Instead of having to hold them to maturity, they can now see if other users in the Lu system are willing to buy them (at a discount).
Wong says the firm, which has a capital markets services (CMS) license in Singapore, serves about 300,000 customers. Some are resident in Singapore (where the business can only market to accredited investors), others are from outside, who can be either professional investors or retail.
The biggest segment of investors are mainland Chinese, who already know the Lufax brand, but there are also a lot of Taiwanese and Hongkongers, and a growing number of Southeast Asian users, Wong says.
The peer-to-peer marketplace has just gone live, so it has no volumes to speak of. Lu Global does not take positions in this secondary trading environment – it merely matches its existing customer base in case users want to make trades among themselves.
Lu Global declined to state its assets under management. Wong says the largest number of products are mutual funds, issued by the likes of BlackRock and Pimco – but the biggest volumes are in structured products.
He believes this may have to do with economic and political uncertainty in the region, which is spurring demand for products with known outcomes and terms.
But such products only pay out upon maturity – and the same destabilizing factors may be leading more investors to want to cash out early, even if they do so at a loss. But providing a marketplace not only gives them access to liquidity (assuming there’s a buyer on the other side) but also lets them sell at a better rate.
The launch of this product is a strange parallel to parent Lufax’s journey. Shanghai-based Lufax began as a peer-to-peer marketplace for loans, a business it has since exited, before it became a wealth-management provider.
Lu Global built itself first as a marketplace for wealth products – but now it’s expanding into P2P trading.
Half of Invesco’s China sales now via digital
But as the PRC joint venture learns how to distribute digitally, Invesco remains unsure of robo’s role in Asia.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. See also strategies from AllianceBernstein and BEA Union Investments. Go here for more insights into digital asset and wealth management.
Invesco is using its joint venture in mainland China, Invesco Great Wall, to figure out digital distribution.
The business now manages about $50 billion of assets, of which about 80% is retail, making it the fourth-largest Sino-foreign fund house in China. Over the past two years, half of retail inflows have come from new digital channels, as opposed to the traditional reliance upon banks, says Andrew Lo, senior managing director and Asia-Pacific CEO of Invesco in Hong Kong.
This is in keeping with a broader trend in the global mutual funds industry, which is shifting from one based on products to one focused more on investment solutions. “There’s an emphasis on designing outcomes for clients, such as through asset allocation or structuring,” to combine types of risk and asset classes.
That’s driven both by client demand as well as market volatility and challenges to active fund houses to deliver alpha (outperformance) on a net-free basis, compared to ultra-affordable passive investments tracking a benchmark.
That’s been an emerging story for the funds industry over the past decade. But on top of that is a new wrinkle: the ability to use technology to speed up operations and to reach more people.
“Technology is now changing the distribution landscape,” Lo said. “In China, it’s having quite an impact on reaching retail investors.”
For now this has been a story unique to mainland China, where existing bank channels (which dominate funds distribution in most Asian markets) are not well developed, and where regulation favors digital disrupters like Ant Financial.
The power of digital was evident in Ant’s success with money-market funds (under an affiliated fund house, Tianhong Asset Management), but it has now extended to equity and quant products onshore – products that Invesco’s J.V. now sells through fintech channels, including Ant, East Money Information, JD.com (Jingdong) and Snowball Finance (Xueqiu).
This has not been straightforward, however. Fund management companies are designed to cater to bank distributors, and are built on old-fashioned tech.
“We learned how to do digital marketing,” Lo said. “It’s very different to traditional distribution. It’s iterative, it changes fast, and you have to listen to customer feedback.” Partnering with digital channels has also required a different sense of product design, and to rebuild the company’s operational process to support round-the-clock digital sales and support.
Lo says the experience will be increasingly relevant as other markets digitalize, although they may need to be tweaked, depending on local regulation, client behavior and distributor demands. “Some things we can learn and apply elsewhere as the world goes digital,” Lo said.
The onshore funds market manages about Rmb14 trillion (almost $2 trillion) in total assets among 135 asset managers authorized to sell to retail clients, of which are 44 Sino-foreign JVs.
But most of these JVs are run by the local partner, with foreign shareholders having less influence. They are limited to stakes no greater than 49%, and local partners are often banks or other powerful institutions. One analyst told DigFin that local fund houses are not particularly bold when it comes to digital channels; and even if they are, the lessons don’t flow to the foreign partner.
But Invesco Great Wall’s case is different. Both Invesco and Great Wall Securities own 49%, with two other shareholders holding another 1% each. Given that Great Wall Securities has its own in-house funds business, it has been willing to let Invesco drive the business. (Beijing has recently permitted J.P. Morgan Asset Management to take a 51% stake in its funds J.V.) Invesco Great Wall is also among the oldest funds JVs in China. It is today led by Shenzhen-based CEO Ken Kang Le.
In China, Invesco is leading the way in digital opportunities. Elsewhere it seems to be running with the rest of the herd. In the U.S. and the U.K., it has made digital acquisitions: Jemstep, a B2B robo-advisor that services U.S. bank distributors, and Inteliflo, a British platform to support financial advisors.
“We haven’t found the right use case in Asia,” Lo said. Onboarding a digital B2B (of B2B2C) platform needs scale, but Asia is fragmented, with each market requiring its own business and compliance needs.
“Digital transformation is still evolving,” Lo said. “My guess is it can be like it is in China, where it’s a real thing that has become a major part of the industry.” But what that looks like elsewhere remains hard to know – or at least hard for justifying a business case.
New China distribution not just for money-market funds
Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.
Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.
China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.
Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.
It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.
But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.
MMFs: less big
Lo thinks this is changing, however.
The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.
Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.
Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.
“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”
In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.
Accessing the mainland market
BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.
This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).
Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.
Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.
“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”
The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.
New ways of doing business
Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”
Marketing was not the only part of business that had to adjust.
“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.
There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.
Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.
BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.
It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).
This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.