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Exclusive Interview with Mr. Huan Chen of CreditEase

by Peter Renton on December 4, 2013

 CreditEase logo

[This Is the second article in a two part series on CreditEase, the world’s largest p2p lender. The first article provided some background on the p2p lending market in China and CreditEase. Here we delve into some specifics about CreditEase to help understand how p2p lending works in China.]

When I was introduced to Mr Huan Chen, Chief Strategy Officer of CreditEase, I jumped at the chance to do an email interview. Here are his unedited responses.

Q. How big do you think the peer-to-peer lending industry is in China? How many platforms are there?

China’s P2P industry quite different from the US market, we can see many new startups into the industry every month, therefore we don’t know exact the number of P2P platforms in China, some people estimate that there are 1000+ companies in the field. Again, we also don’t know the market size in China, it might be about 20-30 bln USD in this year.

Q. Can you please explain your business model for our US readers. 

Basically, our P2P model is quite similar to the US p2p players. The platform develops both potential borrowers and lenders, assess creditworthiness of the borrowers and then underwrites loans, sets the loan size and determines interest rates. The platform charges both borrowers and lenders a service fee.

What makes it different from the US market is that P2P platforms in China mainly use a sales force to acquire clients [borrowers]. The personal loan/personal credit market is still very new in China, banks have not historically offered personal credit loans, and there is no similar marketing channel in China as targeted direct mail in US, so platforms needs to build a direct sales model in order to target and educate potential customers.

Q. Who are the typical borrowers and typical lenders?

The target customer differs from the US since most of our borrowers are underserved individuals and micro-business owners who can’t borrow from the banks. Many of them don’t have any credit history with banks. That is why we think that the P2P industry is quite helpful for the development of inclusive finance in China.

The purpose of borrowing is quite different as well.  As we know, LC’s borrowers mainly borrow money for debt consolidation but in China, they mainly borrow money for business purpose.  Even if they are salary workers, they might use the proceeds on their side-businesses or businesses run by their family.

The lenders in P2P platform in China are mainly individuals. They are typically part of what is called the mass affluent with an average of over 200,000 yuan ($32,000) invested. We also partner with trust companies in China as institutional lenders.

Q. Can you share what kind of lending volume you are doing in US dollars in the past year and the past month? 

Roughly, our lending volume is about 2 times of LC’s.

Q. How fast are you growing?

The past 3 years was a 200% CAGR (compounded annual growth rate).

Q. Is CreditEase profitable?

We have been profitable for many years.

Q. I have heard your company has offices in over 100 locations and you do a lot of face to face transactions. What percentage of your business is done online versus offline?

As I explained in the first question, we build our own sales and service team covering over 100 cities to acquire and service our clients. For our lenders, actually wealth management clients, we provide full-range wealth management service to them, including asset allocation consulting, P2P, insurance policies, mutual funds and etc. Even though we have our offline service network, our transactions are online.

Q. Regarding your online business – do borrowers and investors come to www.creditease.cn or do you have regional websites?

Currently, we have two kinds of transactions, both are online. In the first one, people can visit Yirendai.com to register as users and do borrowing or lending transactions.  Our second Internet platform, Yinongdai.com, is quite similar to Kiva.org.  It helps poor people in Western China. We have another kind of transaction that is done through an internal platform to match borrowers and lenders, where lenders get to know whom their money is lent to as well. Currently the latter one accounts for most of our volume.

Q. What is the credit system like in China? Are there credit bureaus with information on borrowers?

We don’t have a mature credit system. The People’s Bank of China, central bank of China, runs a credit reporting system which is quite similar to credit bureaus in the US. But currently it only shows the credit records at banks, and only banks can access to it. Consumers can also have their own credit report printed out at PBOC’s branches. Usually, p2p companies ask clients to submit their credit report in hard copy.

Q. Can you tell us how you make underwriting decisions? How do you set the interest rates for the borrowers?

We make underwriting decisions mainly based on credit models developed by our risk modeling team. In 2011, we partnered with Fair Isaac China to develop our first data-based application scorecard. Currently, all scorecards are developed and monitored by our own team. Based on our scorecard, we have a rating system for borrowers, which is our foundation for setting interest rates. But currently we simplified the pricing model to only use some demographic parameters to set the interest rates, which is also more acceptable by borrowers.

Q. What is the average loan size and loan duration?

The average loan size for CreditEase is about $7,000 USD, the average duration is about 24 months.

Q. What is the range of interest rates and the average interest rate?

The total cost, including interests to lenders and service fee to platform, ranges from 8-26% annualized.

Q. What is the annual default rate?

Our default rate is about 2-3%.

Q. You have received funding from some big name backers such as Morgan Stanley and Kleiner Perkins. Why did you seek capital from US firms?

US VCs are very active in China market, especially for early-stage investment, and it is also quite common for a Chinese startup to seek funding from US firms.

Q. You recently expanded into wealth management services for high net worth individuals. Does this mark a transition away from being a peer to peer lending operation?

Business models of P2P companies in China naturally include wealth management operations in itself. The wealth management market in China is also very new, and when we service our lenders with our P2P model, we found they are also very eager for a full-range of wealth management services. Expanding from P2P lending to wealth management doesn’t mean we will move away from the P2P model, we will have more financial products to meet our clients’ demands, P2P is still a quite unique and attractive offering.

Q. What percentage of a portfolio do you recommend your wealth management clients have in peer to peer loans?

For our wealth management, we still suggest they take a small portion of their investment amount in P2P loans. 

Q. What does the future hold for CreditEase? You seem to be expanding beyond just offering peer to peer loans – where do you see the business going?

While we are expanding our service offerings, CreditEase still focuses on providing inclusive finance services for underserved people and wealth management services for mass affluents, by adopting Internet and mobile Internet technology.

{ 13 comments… read them below or add one }

Dan B December 4, 2013 at 10:05 pm

Interesting……………but off the top of my head, I would have also asked another 30 questions like these……………

Given that the majority of borrowers are stating that they intend to use the loans to start or run businesses, & the inherent volatility of such enterprises in a still developing economy, what is the projected default rate when the Chinese economy slows in the next few years? 5%? 10%? Or higher?

What does your average lender earn today? What scenario will have to occur in order for your average lender to experience a negative year to year return?

What provisions have your company made to deal with the inevitable failure of some of the 1000+ p2p operations, in terms of spillover effect?

Given the almost ingrained & widespread mistrust among the populace of central authority, court system, law enforcement, government & the banking system etc., in China, what steps have p2p companies in China taken to prevent an attempted massive run on your companies the moment it is perceived that something may be amiss or that invested money may not be safe?

What liquidity do your lenders have? Is there an active secondary market like Folio in the US?

Is your company involved at all in short term loans through the junket operators that “finance” gambling trips to Macau? Do you know of smaller operations that are?

Dan B. (Portuguese, born in Macau, before it became SAR.) in case Mr Huan Chen is curious.

I have many more, (less pleasant questions) but I just remembered that I’m not getting paid right now, so that’s all the readers get.
I also have a bunch of pleasant softball questions, but I wouldn’t want to elbow my way into your domain, Peter :)

Reply

Peter Renton December 5, 2013 at 7:45 am

All good questions Dan. Thanks for sharing.

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Dan B December 6, 2013 at 12:27 am

No doubt,……………but will we be getting any responses?

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Peter Renton December 6, 2013 at 7:12 am

Dan, I have made Huan Chen aware of your questions, I obviously have no control as to whether he answers them or not.

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Huan Chen December 6, 2013 at 8:42 am

Wow, so many questions. I like pleasant questions, let’s keep the unpleasant ones private :D.

China is a very different market, we visited LendingClub in last Sept, and also invited CRO of LendingClub to participate in an event in Beijing in Oct, we exchanged many ideas on P2P business. Maybe we can share more about China market and CreditEase in coming LendIt Conference.

Ok, the answers to the questions. Although the majority of the loans go to the borrowers for business purpose, we don’t support them to use the money to start the business, that’s what angel investors does, not for lender. The borrower need to have an existing business to be qualified for application.

Recently there are some bad news about P2P sectors in China already, for example, some P2P websites just closed suddenly after only one-month operation, media also warned lenders to pay close attention on new platforms. We are trying to build our branding and trusts among our lenders, and to increase our transparency, such as publishing some audited business data to public. We hope it can be helpful.

The lenders’s earning is about 10% annualized, there is no third-party secondary market for P2P in China, platforms are building their own market for lenders to list their loans.

For gambling in Macau, interestingly, we had a debate on whether we should open a branch in Zhuhai (in Guangdong, very close to Macau), so far, we still haven’t open it.

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Peter Renton December 6, 2013 at 6:14 pm

Thanks Huan. I appreciate you responding to these questions here.

Bohb Daishi December 9, 2013 at 2:48 am

I am very surprised that Huan followed up on most of Dan’s questions. The fact that he took the time to respond lends credibility for their business. It will be interesting to see how China’s p2p market will factor in when these companies start to consolidate.

RawRaw December 5, 2013 at 10:24 am

Always skeptical of financial data coming from China.

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Peter Renton December 5, 2013 at 4:51 pm

It is true China does have an opaque financial system. But I am confident these numbers from CreditEase are reasonably accurate. They have been corroborated from several sources.

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Chris December 5, 2013 at 10:45 am

Peter, one again, well done on informing your audience. These past two articles really opened my eyes to the type of P2P progress being made in China – I had no idea. Articles such as these are good reminders that P2P participants need to be thinking about (and mindful of) what the technology is doing outside of one’s own home country. After all, I think I read somewhere that we are all living in a global economy nowadays? =)

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Peter Renton December 5, 2013 at 4:55 pm

I think China is a fascinating market. I expect in the coming years this asset class will become a truly global one. Just like you can buy stocks, bonds, sovereign debt and real estate from pretty much all developed countries I expect investors in consumer and small business credit will be able to do the same one day. And that day may not be too far off.

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Tsengzong Yang December 5, 2013 at 11:43 am

1. Can we starting our own branch network company in the US?
2. Is P2P some day will be legal doing business in the US?

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Peter Renton December 5, 2013 at 4:59 pm

I am not sure what you mean by a “branch network company”. Do you mean can you open a US branch of a Chinese p2p lending company? If that is your question the answer is possibly but it is not easy. Regulations differ dramatically between countries and you would have to adhere to all the US regulations.

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