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.