Tang Ning, founder and CEO of CreditEase, China’s first and largest P2P lending platform, in a wide ranging and fascinating interview talks about the birth of 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.
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Here is the transcript of the video.
Emmanuel Daniel (ED): I’m very pleased today to be able to speak to Tang Ning, the founder and the chairman of CreditEase. In some ways and in some measurements to be seen as one of the world’s largest, if not the world’s largest, P2P lending platform today. It’s a business that he started ten years ago, and it’s grown in remarkable ways, and he’s experimenting with new initiatives.
So we want to capture from you today, Tang Ning, what have you been learning and what is this beast that you have created, and how do you think it will evolve and disintermediate or disrupt financial services as we know it to be today? So, I’m very, very happy to be able to speak to you. In fact, I speak less with bankers today and more with people like yourself. One way to do this conversation is to take us back to the original idea that you had.
How it started
Tang Ning (TN): Sure. So, that’s 2006, ten years ago. The company is ten years old. We invented P2P marketplace lending model in China at the time.
ED: Where did you borrow the idea from? Did the platform exist already? Was there something called the cloud at the time?
TN: It was just a homegrown innovation. We had no idea there was P2P in the UK and in the U.S. We used a different term, a Chinese term meaning P2P but in Chinese. Later on, we imported this P2P term from outside. The opportunity at the time was that I was an angel investor, helping young companies do well. And one of the companies I had invested in was a training company helping college graduates to pick up marketing skills. Some students were asking us for tuition support because they couldn’t afford about RMB10,000 tuition. I asked around for banks to help them because I told the banks these would be your future ideal customers. When they really needed your help; yeah, that’s the best time.
ED: Where was this? Which province?
TN: That was in Beijing. Unfortunately, none of the banks I talked to at that time were in the position to help. 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 institutions were not in the position to help?
ED: So, at that point did you see yourself as a money lender business? At that point without any reference to what it is today, did you see yourself as a money lender?
TN: It was actually a platform to begin with. Because on the platform there was me and later on more and more individual lenders and individual borrowers. If you look at the platform today, there are already institutional investors, lenders. But in the beginning, only individuals. Now we work with banks and trust companies on the platform to lend.
ED: So, when you say platform, it wasn’t a cloud-based platform as we know it today? It was probably very manual at that point in time.
TN: It was a matching platform. We utilised the technology from day one to the extent that people were familiar with it at the time.
ED: Did you build the technology yourself?
TN: Yes, we built the technology on our own.
ED: Do you now sell that technology to others who want to do the same?
TN: We haven’t done that. We believe the China market is very big. We’ve got interest from all over the world for such technology support, opportunity but we haven’t done that.
ED: I want to come to a point where I am going to ask a lot about your technology and the platform that you have, the data that you’re gathering and so on. What were the disciplines and risk management that you were learning from at that point in time? Just listening to you, I can see micro finance as a potential equal model, which already existed at the time. So where were you learning from?
Managing risks in P2P platforms
TN: Actually, as the inventor of the model, we see three major risks about it. One is the so-called platform risk, meaning some bad guys can use this model to take people’s money away. There have been some such incidents in China in the past year or two. That’s because at the beginning, a clients’ money and the platform’s funds were actually together. So, some bad guys could literally just take clients’ funds away.
ED: You mean you actually did the fulfillment on the platform? It wasn’t offline? It was the borrower and the lender?
TN: It was electronic payment system. So, it’s like one guy from Beijing could lend to someone from Wuhan, for example.
ED: So, he transfers money into your platform and then your platform transfers it to the borrower?
TN: We worked at the beginning with some third-party payment players but now we work with banks. I was talking about risks associated with this model.
ED: In the first place, yes.
TN: Now we work with banks as the custodian, as escrow partners so all the funds actually go through banking systems.
ED: Is that your preferred way to work today? Because banks can be slow, banks can be expensive. If there were other similar partners who could do it for you cheaper, would you prefer that? Or is there a value in terms of working with the bank?
TN: Definitely because that way we can reduce or eliminate the integrity risk so that platform owners can not take away clients’ funds. So, client funds and the platform’s own funds are separate right now. 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. So, that’s the first risk.
The second risk is a borrower repayment risk, credit risk, fraud risk. The third risk is on the lender-investor side; some problems happened earlier this year in the U.S. mainly because there were some problems on the funding side. Some hedge funds got out of this marketplace lending space resulting in some trouble for those leading platforms. So I think the second risk –
ED: The credit risk.
TN: Yes, it’s particularly tricky in China because we don’t have a well- established credit system. And also, you see today more and more transactions take place online, which suggests a higher credit risk. At the beginning, it was mainly offline.
ED: So, the credit risk is done offline, so you actually call people, you manually intervene?
TN: A good part of that is done that way. Still, we need human being interaction. But more and more, transactions take place online. Four years ago, our subsidiary company, Yirendai 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. So this is a leading innovation in the world. That subsidiary company subsequently went public last year.
ED: I wanted to ask you about that because I want to know what’s the difference between listing that publicly and then keeping the parent company private in that way. But just still building on your story, you started with student loans?
ED: At which point did you get to critical mass and you were able to have the confidence to try other lending customer bases? The reason I ask is because if you look at some of the newer players in the UK and Europe, they tend to be very, very successful in a localised environment; automobile borrowers in Manchester, that kind of thing. But you seem to have been able to push this to become nation-wide and you’ve now gone into mortgages; car loans, wealth management, rural areas so micro finance?
TN: I think several thoughts. One is that we follow our customers. For example, those students, after graduating from training schools, went to companies and became salary workers. Then they had the needs to borrow to buy suits and to rent, for example so some consumption needs. Some became part-time micro entrepreneurs, buying and selling things online. Then we identified that need so we moved to salaried workers. Once we established a solid base in the city, we moved to rural areas.
But we’ve been very strategic, very prudent when we do that. Because when we first moved to rural areas, we had a partnership model; it’s actually a philanthropic platform helping very poor, rural, female borrowers to get help from urban philanthropic lenders. So, we worked with local micro lenders.
ED: Who already had data and already had information and so on. So, this followed the customer model. You now say that you have about two million borrowers?
TN: Yes, we’ve served over two million.
ED: You track them, you trace them?
Scaling up CreditEase
ED: You keep in touch with them over the years and you go back to them to give them ideas on borrowing. But China is 1.5 billion people. Why was there no temptation to scale even bigger than two million?
TN: Actually, we’ve been growing quite fast and also it takes time to fine tune the risk management system to better understand our consumers. We believe the future market opportunity is huge. We’ve built a solid foundation.
ED: Your original investors put in about $20 million. Have they been adding to that? What is your total investment in the business itself?
TN: I think it’s about that, yes.
ED: You were able to grow retaining –
TN: Actually, the company didn’t need that money. All the institutional investors are world leading VC PE (venture capital, private equity) firms like IDG, like Kleiner Perkins China Fund, like Morgan Stanley Private Equity. They’re all my friends because I did angel investment work before CreditEase and many of the companies I had supported before later on raised the money from these leading VC PEs. So, when they first learned about my venture, they wanted to join. Frankly speaking, I don’t think they had a very concrete idea what this P2P would later on become.
ED: But when you look at the assets under management, lending volume $842 million, that’s a large amount for a $20 million initial investment.
TN: We’ve been around for ten years.
ED: The numbers alone tell me you’ve been cautious in growing. Although it is large numbers, you haven’t exploded yet. You’re still growing organically.
TN: Yes. My sense is this business; we need to do very prudent management. If we want to grow the volume, we can lend to many, many more people. But for a new product to prove itself, it takes six to 12 months. So, we need to be very prudent. When big volume comes, there’s a red flag. There might be some fraud situations so we need to be very careful.
ED: This difference between CreditEase and Yirendai, why the distinction?
TN: Yirendai is a subsidiary company of CreditEase. We started that innovation, that subsidiary five years ago to do online lending. In the first few years of the past decade, much of the work in the industry – most of it– was done offline, face-to-face; information collection, verification and so on. 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.
ED: Were you looking over your shoulders? By that time you had some of the Western players already gone online and online had become real.
TN: Actually, China is leading in mobile internet.
ED: Mobile, yes definitely. But the original online?
TN: Most of our borrowers right now on the Yirendai platform moved to mobile. PC percentage has gone down tremendously so it’s all mobile right now.
ED: Is there a difference in borrowing culture from when it was physical and then it was online and then mobile? Are there things that work on mobile better than online and physical?
TN: I would say several consumer insights. One is that of course online is quicker.
ED: And mobile is even quicker.
TN: Yes, mobile is even quicker, right. For urgent needs, for business opportunities that come and go quickly it’s much better to do it online. Secondly, online is of higher risk so fraud can happen easier online. So, our anti-fraud technology needs to be better for online.
ED: When you say anti-fraud, is that detecting fraudulent calls coming in? Is that something you developed?
TN: Yes, like false identification and so on.
ED: Phone numbers?
TN: Yes. So, we work with partners. We also build the so-called knowledge graph. For example, in the manual days, if one guy has been identified as fraud, we try to trace the parties that he has dealt with. But if you do one degree, that’s very easy. If you do two degrees, it can be very complicated and three degrees is impossible. With analytics we can do multi-dimensional tracing and tracking.
ED: Having said that, you do have hundreds of outlets across the country to originate the borrowers and also the lenders?
TN: Not now. Lenders are all online.
ED: Because the institutional side is so strong?
TN: Yes. And also, individual lenders come to us online.
ED: So, the lender part is a lot more sophisticated but the borrower part, do you sense that there’s competition evolving?
Offline operations essential to support the online business
TN: I’m not going to say one side is more sophisticated. I think it’s more like it will be forever a good part of the lending work will be done offline. One, certain segments we just don’t have all the data so we have to do face-to-face verification. And secondly, many types of transactions involve title management, for example like a car loan, mortgage loan. So, we cannot do that online.
ED: Not in China, at least. How does that affect the cost-to- income ratio of your business? So much of the due diligence and the credit checking is offline; what is the cost-to-income ratio of the online business right now?
TN: I think in terms of online acquisition and offline acquisition cost comparison, it’s about the same right now for a couple of reasons. One is that the online data quality is still not very good. It’s not like in the U.S. where bureaus produce very orderly, easy to use data.
ED: Is that a barrier for entry for your competitors as well? Because as you perfect the art of credit risk management, and the fact that there’s not enough technology and not enough data, does that make it a difficult barrier to entry for competitors?
TN: I definitely believe so because we have built upon the past ten years’ of accumulated highly valuable data. This kind of transaction data, default data, fraud data is way more valuable than the so-called big data.
ED: Today, city commercial banks in China especially, if not the big four banks, have been going after the same customers as you have. They’ve been building their retail customer base, they’ve been building their student loan base, they’ve been building their small business lending and so on. So, is there competition or is the market still in its growth phase? Also, what is it you do cheaper that I’m sure the banks have their credit process and it is manual; why is it cheaper when you do it rather than when the banks do it?
TN: It’s actually quite different in China than in the U.S.
ED: The approach.
TN: In the U.S. the credit system is rather established. In China, it’s not.
ED: Yes, even for the banks.
TN: There is a huge population not well covered traditionally by banks. In the U.S., such innovations make the industry better; marginally better. But here in China, there’s a huge vacuum for us to fill so we build up new industries. For example, we don’t find banks covering such segments. Certain risk segments they do not cover. So, there’s a clear segmentation strategy.
ED: I noticed that you have a joint venture or a relationship with FICO and the FICO score. These are traditional old-school credit risk type of approach; they give you a score and stuff like that which is what the U.S. used to be, and it’s been criticized dramatically. What can FICO do today that is different from the way that they used to do it?
TN: It’s not a joint venture. We don’t have this type of business operation with FICO. We were among the first in China to work with FICO many years ago to co-develop some risk management modules.
ED: Did you get anywhere?
TN: Yes. But now all of the risk management work we do on our own. Also, I’m not sure. The FICO system has lost much of its value. It’s actually quite helpful when it comes to consumer credit evaluation.
ED: Do you make a big deal out of the cloud-based; they call it the big data. Do you make a big deal out of the kind of information that you get for credit scoring?
TN: Yes. Our experience is that such data are quite important. So yes, they are helpful in terms of helping us draw a better consumer profile and they can be helpful for some anti fraud. But they can’t work on a standalone basis.
ED: Right because the criticism of big data is that it’s ephemeral; it moves it keeps moving. So, you can’t close someone on a seven-year car loan based on what his Weibo looks like.
TN: Yes. They can be helpful with some light applications, like a value of RMB100 ($14.38) or RMB200 ($28.76). But for a loan as much as say $10,000, our average loan size, such data on a standalone basis are not that helpful. We have to work together with traditional data.
Operating in a more regulated environment
ED: You come across to me as someone who has been doing this carefully and this following the customer bit comes across very strongly. But you did get into trouble when the regulators finally published the rules for peer-to-peer lending and you had a few lawsuits and stuff like that. Where did you think it was coming from and what were the holes that needed to be plugged?
TN: Actually, as industry leaders we benefitted from this regulatory cleanup. After August, the industry is cleaner, more healthy we expect. Actually, many of the regulatory measures came from industry best practices. So, we were not caught by surprise when the rules came out. Actually, I mentioned this a couple weeks ago in Peru when I joined a panel in Lima during the APEC event, talking about how government and company innovators work together to promote financial innovation.
Actually, the Chinese regulators have been doing this so-called smart regulation. They listen to industry voices carefully and they incorporate industry best practices into law making and rule making. To give you one example, CreditEase was the first working with banking institutions to do bank custodian escrow partnerships. This helps reduce the integrity risk. Later on, that became the P2P marketplace lending regulation.
ED: The regulation itself. How would you describe your current partnership with banks? China is unique in that credit is not reaching out to enough of the marketplace.
TN: Yes, exactly.
ED: How long do you think this phenomenon will continue and at which point do you think the banks will start figuring it out? And also, very important; even as you are building this outreach or this distribution capability for credit which is what keeps credit very expensive in China, especially to the people who need it most; the corporates that don’t need it, they get lots of credit. It’s a moving target because the interbank market is being developed; the cost of credit is probably going to go up on a global basis and so on. How do you think the cost and the distribution of credit business is going to evolve?
TN: My sense is the following. One is that I think yes, the access to capital like from SMEs, rural people and so on, that challenge is global. It’s not that in other countries this issue is over and in China it’s very unique challenge. No, I think this issue is always there and not fully addressed. In China, financial innovators by utilising innovative business models and technology are doing a good job helping grassroots innovation, grassroots entrepreneurship and so on.
We have applications allowing people to borrow through mobile phones; for SMEs to borrow through PC, mobile phone and so on utilising alternative data sources and so on. So, I think it’s getting better and better. And also the credit system is getting better and better. We are hoping in the coming years, not too far away, the central bank will start to incorporate such data accumulated by companies like us.
ED: Right. In fact, although you’re big by P2P standards, you’re still very small by bank lending standards. You could be easily absorbed by one bank. In that sense, your business may well be a proof of concept rather than a model by itself. At which point do you think that P2P might actually be truly an industry by itself? At the moment, it’s still very parallel to banking and there’s always the risk that banks, by working with you, will just say one day why don’t we just acquire you and make you an origination point for our business?
TN: A couple thoughts. One is that this business model has been around for a decade. So, it’s a trillion dollar market right now in China and the regulatory guidelines that came out three months ago made it an industry. In the U.S. and in the UK, I think marketplace lending also sees great promise. So, we are confident this industry will continue to do well.
ED: What are the other connecting points in this business that you think you need to put in place to make it a full supply chain? I noticed that you’re going into payments as a business. So, you want to build a payment infrastructure, or you already have a payment infrastructure?
TN: A couple of thoughts on business model expansion. One is that we will offer more and more products and services and to serve the population. The first app is a loan business, a loan product. But they also need insurance. They also need wealth management integrated in payments.
ED: By the time you reach there, the regulator has actually made it very clear that they want to see Chinese walls between these different businesses.
TN: Yes, very clear separation but we work with partners. For example, we work with insurance companies to
ED: On the same platform?
TN: No, different.
ED: Here’s where it becomes very interesting because you have become the very conglomerate that on a global basis they are trying to separate. And also, to be fair to the banks, they’ve learned a bit about selling insurance online, for example that actually not all insurance sells well online. Life doesn’t because the relationship part is important and so on. You don’t have to recreate some of this learning. And on top of that, this integrated relationship model, don’t you think you’re going to have a bit of resistance?
TN: It’s actually quite different in China’s case.
ED: The regulation clearly says you can’t integrate.
TN: We have this multi product like relationships with small businesses. For example, small businesses that don’t have a good idea about insurance coverage but they really need insurance protection. So we work with insurance companies to provide suitable products and services to small businesses. So, that’s a separate insurance agency business, different from the P2P platform.
ED: But for that you already need to put in place salespeople, and that’s something which banks are suffering from today. They’ve got too many salespeople; it’s very manual.
TN: Not necessarily. We can do it online. For example, the insurance or other financial services are just a second step. The third step is like other enabling services. For example, we help small businesses better run their internal management, do better training, manage their finances better, manage their customer relationships better. It’s a cloud infrastructure. So, there are different modules on the cloud. The small business owner can take the right one for him. That way, we help him run the business better, at the same time accumulate very valuable business data. So, this is a clear direction of business expense.
Getting into the wealth management business
ED: Now that you’re going into mobile in a big way, what did you learn from Ant Financial or Alibaba’s Yu’e Bao the fund management product that they had, which grew very, very quickly? But today I think the banks also have a similar product. They’re coming from the payment side, from the small business support side, from the supply chain industry and you’re coming from the credit side. So, what are the opportunities for massive scaling which are different from the different industries?
TN: This question is very relevant to our second expansion strategy, which is about the lenders’ side, the investors’ side. Now CreditEase Wealth Management is a national leader in wealth management. When we talk about wealth management, we talk about three main segments; high end, high net worth individuals, mass affluent middle class, and the so-called small and very small customers, investors. Yu’e Bao is more for small, very small customers.
ED: In fact it’s like a money market or even like a current account?
TN: Yes, it’s a product. It’s not a wealth management. It’s not asset allocation. Our strategy is that when we serve the lenders, we’ve identified all three segments and the people have different needs. For high net worth individuals, they ask for asset allocation, the whole suite; comprehensive help. So, we now do that with human financial advisors. And the middle piece, the mass affluent population looking for rather a simpler version of asset allocation, so we do that with robo advisor but that’s a portfolio, not just individual products.
But for smaller investors, the very small investor community is about a product, like a P2P product or an insurance product or a money market fund product. Different segments have different needs and are served differently.
ED: The way you’re saying it to me, it seems to be that by reducing the cost of delivery, you’re actually making it more available across to the different segments. Your first cost of delivery that has been taken out of the picture is the distribution cost and the reaching out to customer cost. But there is a second cost of delivery, which is advice and personalisation. What do you like about robo advisors and what do you not like about robo advisors?
TN: Actually, take one step back talking about China’s wealth management industry. It’s very new. It’s actually people have no real good idea about asset allocation. Very different from the U.S. market. Here, people are focused on buying individual products, even for high- end customers. So, the first thing we do is to teach people about asset allocation. Of course, for a very small investor, it’s not that helpful; their fund size is too small. But for the middle market like middle class people and for high-end clients, asset allocation is a must. They are getting to understand this concept through our investor education.
ED: But sometimes it’s actually when the products are sold down the line and when you have the small investor who is at the product level, all he wants to see is capital gains or dividends; that the money should just keep going up, basically. And if it doesn’t, you’ll get a stampede outside your door. And that’s China, too because people don’t understand enough and it’s all new. It will go through a whole cycle of misunderstanding before it becomes accepted.
TN: I think things are getting better. One is that in the past, there’s more like a fixed income product. If an investor buys fixed income products, he can get double digit return. But those days are long gone. Secondly, banking takes a much bigger share in China; much bigger than capital markets.
ED: You’ve been learning robo advisors. Tell me what you’ve been learning about robo advisors and how much of it are you already experimenting with?
TN: We started that half a year ago, launching it at the tenth anniversary of the company. What we’ve learned is that one is about asset allocation, and it takes time to get that idea across and get people to understand. You’re right in saying that people are more inclined to do this fixed income kind of investment because the visibility on return is much clearer; like 7% or 8%. Although, the underlying piece that can be risky is people tend to think they have fixed income so they don’t yet fully understand asset allocation.
So, we need to do some very good investor education. And also, the past several months there have been a lot of black swans like the British exiting from Europe, the U.S. election, and so on. So, people are learning that market fluctuations can be quite risky. But our robo (robo-advisor) has done a very good job; much better than some index funds.
ED: So, the robo serves you as a company or your customers?
TN: The customers.
ED: With robo, the customer actually imagines that he’s smart; that he can make those decisions himself.
TN: Mainly it’s a portfolio based on customer risk appetite and risk preference and the financial life objectives. So, it’s a portfolio.
ED: Banking traditionally is an asset-based industry where the banks carry the assets on their books and then they put capital in there. The world that you are building is supposed to be an asset-free industry. Some of the regulation that is coming through in the West is putting back that asset responsibility on the platform. They expect you to carry liquidity, they expect you to carry capital and they also expect you to carry credit risk. Although really, you are a matching platform in that sense. Do you think the day will come when financial services is entirely a platform game?
TN: Probably not. Different models will coexist; that’s my sense. For example, even today asset management business, the so-called asset light or the asset manager is not responsible for the outcome or gain or loss. If the investor is not happy, he just leaves; withdraws funds. So, it’s not all like the banking model. But the banking model has its own intrinsic value advantages so I think yes, different models will coexist.
How will P2P platform and business model evolve?
ED: I want to end this conversation by asking you – there’s so much more we can talk about but this multi-product approach that you’re taking, the regulator has said no guarantees, no mismatch of funds, liquidity. There are very thin lines between the three responsibilities. You might be able to hold it as an institution because you have integrity but a lot of other institutions will not be able to do that.
In fact, that’s the problem that Lending Club got into and a lot of new P2P players when they get off the ground, they have to fake the origination process. They have to pretend there’s demand. And then when the information is more and more transparent on their websites, then you find the take-up is like the chicken and egg problem; do you grow your business first or do you get your customers first?
Is it a difficult game that you play and do you think that you will have the internal integrity to be able to make that distinction?
TN: I think one; the regulatory framework has been in place to solve the issues you just identified. So, I think we have a good regulatory framework; central level, provincial level, industrial association working together to make financial innovation really work in China. We definitely need a more comprehensive, more inclusive financial system. So, there are a lot of benefits associated with financial innovation. I do believe we have had a good start and there will be new pieces coming, for sure.
There are new types of innovation and they will go through probably a similar process, like third-party payment and marketplace lending models industries have gone through such as financial advisor, crowdfunding, the insurance tech, even block chain. So, I am confident as an innovator and entrepreneur; the benefits are way more significant than risks.
ED: The regulator can change the game on you; the market can change the game on you. If interest rates go up, half your lenders, the institutional investors in a way will evaporate and then you’ll have to rethink and maybe rebuild the borrowing side rather than the lending side.
TN: We can dynamically adjust the rate so we will see how the rate environment changes. Also, we have a robust wealth management business which is also very stable and fast growing.
ED: The Western players in P2P whom I’ve spoken to are very curious about this approach of taking on wealth management in addition to P2P. But if you look at some of the changes taking place in Facebook, WeChat and so on, China is unique where an organisation like you can actually scale very quickly.
TN: I think the biggest reason in the U.S. that they are already wealth management giants so serving a population knowledgeable about allocation, in China it’s a vacuum; it’s new. We have the team, we have the capability and we have the captive customer base so it’s quite strategically intuitive for us to do that.
ED: So Tang Ning, that vacuum is what describe how you’re growing right now. And this is a conversation that we must have several times in the next few years because what you’re learning is very important not just for China but a lot of the developing world as well as the developed world where these dynamics between the platforms that are evolving as well as the customer base and what you understand about the customer is an ongoing, amazing story.
TN: Sure, I’d love to.
ED: Thank you very much for spending time with me today.
TN: Thank you.
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