In late March, 2017 we learned that Chinese online lender China Rapid Finance filed to go public, hoping to raise up to $100 million. They will list on the New York Stock Exchange under the ticker symbol XRF and will be the second Chinese online lender to go public in the United States. Yirendai (YRD) was the first to go public in December 2015.
While there is great detail about their business and financials in their filing we’ll share a little bit here in case you’re not familiar with China Rapid Finance. The borrowers they focus on are what they call Emerging Middle Class Mobile Active (EMMA). This demographic totals 500 million Chinese citizens who lack any credit history but have an employment record. Because these borrowers lack credit data, they are not well served by the banks in China. According to the filing:
The growth of EMMAs’ lifetime customer value on our marketplace is just beginning. Our strategy is to serve EMMAs’ lifetime credit needs. We seek to facilitate more loans that are larger and have longer terms to higher quality borrowers and gradually lower borrowing costs to borrowers who have demonstrated favorable repayment behavior on our platform. We believe rewarding favorable repayment behavior will help us retain borrowers and that we will be able to generate increasing fee revenue from increased loan volumes from these higher quality borrowers.
Nearly 90% of all volume on the platform is to prime and near-prime borrowers. The company compares their borrowers roughly to FICO scores of between 660 and 720.
As you can imagine the lack of credit data leads to many challenges. The company is heavily weighted towards data scientists and has offices both in Shanghai and San Francisco. Using thousands of data points from alternative data sources which include information on work history, payments, e-commerce, telco, search, and social data the company is able to underwrite and price risk. The company has partnered with both Tencent and Baidu. Investors include affluent, high net worth and family offices who have seen historic returns in the low double digits.
The most interesting thing about China Rapid Finance is that they have underwritten more loans than many online lenders due to the small loan sizes and repeat borrowers. The loan sizes can be under $100 which means the company needs to be extremely efficient when deciding whether to provide a loan. China Rapid Finance has facilitated 10.7 million loans on the platform to 1.4 million borrowers.
Similar to many other platforms, China Rapid Finance is a pure marketplace, booking service and transaction fees from both borrowers and investors and does not hold loans on their balance sheet.
We have said many times before on Lend Academy that the Chinese online lending market is fascinating. Companies like China Rapid Finance have proved out a model, making small loans to a large population in an area where the banks either can’t or choose not to play. It’s an exciting time in China as more companies are approaching the public markets having thus far chosen to list in the US. As companies like China Rapid Finance file to go public we are getting a detailed look at their businesses. Their F-1 filing can be found here.