As I have said before China is by far the largest marketplace lending market in the world. In fact, it is so large, the loan volume in the rest of the world combined would not even come to 50% of the volume happening in China today. But it is not just about size. China is also the most important country in the world with more innovation happening there than just about anywhere else.
My guest on this episode of the Lend Academy Podcast is Yihan Fang, the CEO of Yirendai. Full disclosure, I own a small number of shares in Yirendai, as they are a public company traded on the NYSE. Yirendai was spun out of CreditEase as their online lending arm a few years ago and were the first Chinese marketplace lending platform to do an IPO in the U.S. They are a fascinating company and Yihan provides unique insight into her company and to the Chinese market.
In this podcast you will learn:
- The origins of Yirendai and how it was incubated inside CreditEase.
- When and why Yirendai was spun-off from CreditEase.
- Some background on all the divisions inside CreditEase.
- The typical borrower who comes to Yirendai for a loan.
- How Yirendai has broken new ground in China.
- The different channels they use to obtain borrowers.
- The typical size, rate and term of their consumer loans.
- How these borrowers use their loan proceeds.
- How Yirendai differentiates themselves from their competitors.
- Who the typical investors are who participate on their platform.
- The average amount each of their 200,000 investors deploy on their platform.
- How their investor product works and details of their risk protection fund.
- How their business model works as far as revenue.
- A breakdown of their institutional investor interest.
- Why they decided to do an IPO in New York rather than Shanghai or Hong Kong.
- The impact of the new marketplace lending regulations in China.
- Yihan’s perspective on the fraud that has happened in China.
- Details of their new Yirendai Enabling Platform that they launched at LendIt.
- What areas Yirendai will focus on in the coming years.
You can watch Yihan’s LendIt USA 2017 presentation here which was referenced on the show.
Download a PDF of the transcription of Podcast 97 – Yihan Fang.
[expand title=”Click to Read Podcast Transcription (Full Text Version) Below”]
PODCAST TRANSCRIPTION SESSION NO. 97: YIHAN FANG
Welcome to the Lend Academy podcast, Episode No. 97. This is your host, Peter Renton, Founder of Lend Academy.
(music)
Peter Renton: Today on the show, I am delighted to welcome Yihan Fang, she is the CEO of Yirendai. Yirendai is a Chinese platform, Chinese marketplace lending platform, it’s been around for quite a few years.
Before I go any further, I should also say that I own a small position, I own equity of Yirendai because they are traded on the New York Stock Exchange under the ticker YRD so I wanted to get that out of the way.
I first met Yihan back at the very first LendIt event in New York where we noticed we had a small number of Chinese people who had made the trek to New York for our very first event. We did no marketing in China whatsoever, but they came to us and we started a conversation and they’ve been instrumental I think in putting China on the map here in the United States and obviously the first IPO of a Chinese marketplace lending platform that happened. In the show we dig into Yirendai, we dig into who their borrowers are, who their investors are, what’s their business model and what’s coming down the track. Hope you enjoy the show!
Welcome to the podcast Yihan.
Yihan Fang: Hi, Peter, thanks for having me.
Peter: Okay, so let’s get started and give the listeners a little bit of background about yourself and particularly what you did before you just came to CreditEase.
Yihan: Yeah, before I start, I want to point out I am a big fan, a loyal listener of your podcast.
Peter: Oh, thank you.
Yihan: I’m really happy to be here today.
Peter: That’s good to hear.
Yihan: Yeah, I joined CreditEase about six years ago after meeting our Founder and CEO, Mr. Ning Tang in New York because I was in the New York area for some years studying and then working in internet companies on product management. I was in charge of web products for Ask.com for some years. Ask.com is currently an IAC company.
Peter: Okay, and then what made you decide to come work at CreditEase then?
Yihan: Yeah, actually when I met Ning in New York in 2011, I was not thinking of joining a financial company. I’ve been in New York for so many years and had lots of friends on Wall Street, but never thought I would enter the space. I was actually trying to start some internet startup companies and I know Ning was an angel investor so I was talking to him about my project and then at the dinner table he was lobbying me for his thing in China so I got quite interested so I went. First I joined as an adviser, but then became a formal employee of CreditEase.
Peter: Okay, and so CreditEase obviously has been around for quite some time, over ten years now, and Yirendai looks like it was created shortly after you joined CreditEase. Can you tell us about the process of why Yirendai was started, why it wasn’t part of CreditEase, why CreditEase decided to spin it off?
Yihan: Yeah, yeah, when I joined CreditEase actually I was an adviser for going online for CreditEase. At that time CreditEase was running for about five years and Ning always had a vision that this business of peer to peer lending needs to go online, but in China it’s very challenging so he said, why don’t you take a look and see what we can do to bring this peer to peer lending online. At that time actually in China there was no like internet…in China we called fintech “internet finance” and there was no internet finance, there was no fintech, this word in the US either so we were just trying to bring the business online.
It was developing, developing and now here we are. So when we were first developing Yirendai inside CreditEase like other new businesses in CrediEase it was always operated quite independently and with more of an internet company culture. After a few years, we grew to a stage where business looked quite good so in 2014, we spun off from CreditEase.
Peter: Okay, okay, so the difference being that Yirendai is totally online, it’s 100% online. Is that correct?
Yihan: Yes, exactly.
Peter: Okay, okay, so then many people who’ve been to LendIt, who listen to Lend Academy also know Mr. Ning and he’s quite…he’s spoken at LendIt, I know he’s very famous inside China as well. He’s obviously the CEO of CreditEase, does he have a role at Yirendai as well?
Yihan: Ning actually is the Board Chairman of Yirendai. He works closely with our management team on key strategic discussions.
Peter: Okay, that sounds good. I know that CreditEase now has obviously gone far beyond just a peer to peer lending platform. I know there are many different divisions and businesses like wealth management and that kind of thing so can you maybe just tell the listeners a little bit about what CreditEase does today, all the different pieces of it. Let’s just start off with that. What does CreditEase actually do today?
Yihan: Yeah, sure. Today, CreditEase actually covers a broad range of financial services. On the financing side, it provides services to consumers, small business, real estate, auto; it also has a leasing business. On the investor side, CreditEase’s wealth management provides wealth management and we just started asset management last year and it provides services to high net worth individuals.
CreditEase also has the CreditEase Fintech Investment Fund which is a venture fund investing in growth stage fintech companies in China and globally. It also has a credit fund, called the CreditEase Offshore Private Credit Fund. It focuses on high quality private credit including consumer and SME loans and recently they just invested in some US lenders.
As you mentioned, CreditEase is both online and offline, it has over 40,000 employees including over 20,000 loan officers in branch offices and over 4,000 financial advisers so it reaches customers using both online and offline ways. We call it “high tech and high touch.”
Peter: Right, that’s something that’s very different, I think, to the model in China than the model in the US. Whereas none of the new fintech companies have that many employees, none of them actually have physical or branches or hardly any I would say so that’s a difference.
So you have 20,000 loan officers you said, they operate in cities all over China and their whole focus is sitting down face-to-face with the borrower and obviously making sure they are who they say they are and doing verification, that sort of thing.
So how does Yirendai sort of plug in there? You said Yirendai is 100% online, does it find all the borrowers online as well as investors or is it using some of CreditEase and the fact that they can find all of these borrowers offline and then bring them online there? Can you explain how it works?
Yihan: Yeah, Yirendai is an end-to-end online platform. We focus on personal unsecured lending for urban salary workers. The reason we chose urban salary workers is actually because first, these people have huge needs that are not satisfied by existing financial solutions. Their credit quality is, in general, pretty good and very importantly, they use the internet a lot so we are able to collect some of their data online.
So when we started really the credit infrastructure was not there and we had to use a lot of alternative data we collect online and that’s where our innovation really started. We built the first end-to-end lending mobile app in China and currently it’s the biggest in China and we also were the first ones to extensively use online data for risk management and we were able to provide loan products within minutes.
Peter: Right, right, so today are you getting…I mean, what percentage of your borrowers come through the app? Is it 100%, what percentage would you say?
Yihan: Yeah, in terms of customers actually, we have multiple ways to source customers so our app is the biggest source so for online acquisition we actually have three major parts.
One is partnership, we partner with other mobile apps such as apps where people manage their personal finance, where people search for loans and some consumer vertical consumption scenarios as well.
The second biggest way is online advertising such as search and apps download, ad distribution channels which is big in China. Also, native ads has become a very big tool.
Thirdly, we leveraged CreditEase offline sales networks as well. Currently, about 43% of the borrowers are sourced from the CreditEase offline sales network.
Peter: Okay, so CreditEase will find the borrower, they will verify, and do the information offline and they’ll pass you the information and then you can place it online and the investors can invest that way. So I see, that makes sense.
Yihan: Yeah.
Peter: So you said these are urban people typically, they’re not very well served right now. Can you just give us a sense of the typical loan terms like the size of loan, the rate, the length of the loan, that sort of thing?
Yihan: Yeah, average size is around 60,000 RMB with two to three years of tenure and we have a risk-based pricing system which gives full prices currently ranging from 18% to 30+% APR.
Peter: So the lowest is 18%, is that what you said?
Yihan: Yes.
Peter: Okay, okay, and then 60,000 RMB…what’s that, about $9,000 or thereabouts?
Yihan: Yeah.
Peter: So it’s not that much smaller than the typical borrowers over here.
Yihan: Let me describe a typical borrower.
Peter: That would be helpful.
Yihan: Yeah, our borrowers are typically young working professionals, a few years into work, between 25 to 35, mostly guys and we require them to have some credit history, for example, a credit card. These loans are actually relatively big capital needs such as weddings, home remodeling where there’s no way for such a borrower to get enough funding from other financial institutions, especially unsecured loans.
Peter: Right.
Yihan: So currently we have these four ways and most of our borrowers are the highest APR because the costs are quite high including customer acquisition and risk management.
Peter: How competitive is it? Like if someone is going to pay 18%, you said most of them are paying more than 30%, why do they come to Yirendai and…I mean, they’re now obviously…we all hear about how competitive the Chinese market is, what is it that’s unique to Yirendai that attracts these people to your platform?
Yihan: Yeah, actually online lending has become like more…a lot more players entered this space I think in 2014, but if you look at most online lenders one type is like…for example, Ant Finance and Tencent. They’re actually tapping into more of the bank customers which are the lower APR, maybe 18% or lower, so they are, I think currently at least they’re more competing with the banks. Most of the other peer to peer online platforms types are doing shorter tenure and smaller loans with higher APR, higher than ours.
I think Yirendai with all these years of experience, because our loans are bigger, so we look at very big data. We collect lots of data and our models are quite complicated compared to other new online lenders because other new online lenders…the majority of them serve customers who borrow like a few thousand RMB for a few months. To a new player, it is easier for them to verify their risk models and improve in a shorter period of time and most of their borrowers, I believe, don’t have a credit card.
We target customers who have credit cards, but whose credit card limits are not enough. I’ll give you an example, one of our customers…he had a wedding in Hainan with about 100,000 RMB cost, but his wife had a credit card and there was no way for him to borrow money from banks without collateral. He makes about 8,000 RMB per month as a subway security worker so that’s our typical customer.
Peter: Okay, got it, that makes sense. So you’ve kind of isolated a section of the market that hasn’t been and continues to not be all that well served. I want to just switch over to the other side of the marketplace and talk about the investors because…I know that you still in China there’s a huge number of investors that many of the platforms have. Can you just talk about who are the typical investors that are funding these loans?
Yihan: Yeah, we target online mass affluent who we define as investor assets from 600,000 to 6 million RMB. So our typical investor is about 40 years of age, both male and female and they are familiar with mobile phone payments, online transactions.
Peter: How much typically do they put on the platform? Is there an average investor size?
Yihan: Yes, that’s a very good question actually, we pay close attention to our investor quality, currently we have about 200,000 investors that are currently investing on our platform and our AUM, Assets Under Management, per investor, is over 80,000 RMB and is increasing because investors tend to repeat and add more sums once they like us. We really target the mass affluent instead of, you know, everybody.
Peter: Right, right, and do you offer these people like a target return. I know there’s been a lot of talk in China about guaranteed returns so what do you offer the investors? What do you tell them before they sign up that they can expect when it comes to returns?
Yihan: Yeah, what we offer to investors actually is the tool. When we first developed the website, we actually offered individual loans, but there is so many loans it’s actually hard for anyone to manage so we give them an automatic tool for our investors to automatically pick loans and reinvest from every loan repayment and we give a lock up period for each investor based on their needs.
For example, after 12 months we give you the opportunity to exit if there are new investors to take over. So from the investor side it looks like, you know, simple portfolio management. For example, if I want to invest 100,000 RMB for 12 months, the tool would do the job. Of course, if there are no new investors to take over, you will have to hold the loans until maturity. So, currently, more than 90% of our investors choose this tool and we offer on average after 12 months about 7.5% in return.
Peter: Okay, so then what is the model then for you because obviously the pure marketplaces here in the US, they make a borrower origination fee, they make a service fee on the investors, the ones doing retail investment and that’s the extent. I mean, what is the revenue model then for Yirendai, are you making money on the borrowers and on the investors? Can you explain that for us?
Yihan: Yeah, we actually charge transaction fees on borrowers and management fees on investors by providing the tool. Those are our two major revenue sources and we’ll also have new revenue sources.
Peter: Sure, I’m just trying to get a sense then. You said you…like 7.5% return to the investors for the tool that you use and you said 18% borrower interest rate that has say a 3% default rate, where’s the rest of that spread going? Is that going to Yirendai, I mean, I’m just trying to work out how the economics all work.
Yihan: Yeah, so our major cost, one is the customer acquisition for both borrowers and lenders and altogether is about 8% to 9% for customer acquisition.
Peter: Okay.
Yihan: And also, currently, we have a risk protection fund which is about 7% of each loan. The funding cost, actually, the 7.5% is also there and then it’s operation cost so currently our ROE is 5%.
Peter: Okay, so you said something there about like this sort of provision fund…like they have this in the UK. So, 7% of the money goes into this protection fund so that in case someone defaults the investors still get their money and this fund goes to support the investors. Is that correct?
Yihan: Yes, that’s how it works now and because our investors are mostly individual investors so we need some protection there. So this is not like a 100% guarantee, the responsibility is on the platform, but we might improve the fund mechanism where we are currently working with the regulators on a newer version of the protection.
Peter: Do you work with institutional investors or are you 100% retail?
Yihan: Yeah, we are working with institutional investors. Actually in 2015, we had a round of securitization of RMB 250 million and last year we had a lot of private institutional investors who (inaudible) of 300 million. Currently, we’re actually working with multiple banks, institutional money and there will be news coming out soon.
Peter: Okay, what percentage do you think roughly of the investors that come are institutional versus the individual investor?
Yihan: Currently, you know, even though 300 million this year is actually still a small portion of our scale, so we are definitely trying to test everything out and we’re trying to have more diversified funding sources. Going forward, I definitely expect to do a lot more, but I still think the individual investors would be a major source in the coming few years.
Peter: Okay, so I want to talk a little bit about your IPO. You IPOed at the New York Stock Exchange I guess well over a year ago now, 18 months ago roughly, why did you choose the NYSE instead of IPOing in Shanghai or Hong Kong or somewhere like that?
Yihan: Oh, that’s a good question. At that time we did think a lot, but we thought first NYSE or NASDAQ already listed Lending Club and OnDeck and we think the US stock market is actually more educated on marketplace lending. Also, Ning and a few other management members all had experience in the US and we’re actually somewhat more familiar and comfortable with the US capital markets and we think it is a good place to list.
Peter: Okay, certainly it’s done quite well for you. Compared to OnDeck and Lending Club, you guys are doing phenomenally well based on your stock price as of recently anyway.
Yihan: Thanks.
Peter: So I want to talk just a little bit about the state of marketplace lending in China. I mean, the CBRC came out with regulations six or eight months ago, can you just tell us what’s the state of the industry? What’s been the impact of these new regulations?
Yihan: Yeah, over about ten years marketplace lending has evolved, we think from emerging where it was more of a land grabbing situation to fast growing where many players entered the space wildly with almost no barriers. So now we think the industry is currently in an optimizing stage. The new regulations will definitely have a positive impact on consumer protection which is super, super important because the customer sentiment has not been the best we want in the past two years due to some, you know, scandals. At the same time, you also have the impact of a higher entry barrier for fintech companies to be in this space which I think is a good and necessary thing.
Peter: And then I need to ask you a little bit about the fraud that gets reported from time to time and it seems like it’s been awhile since we’ve had anything significant in China, but a lot of people that I talk to kind of dismiss China a little bit and they say, oh, there’s too much fraud there. Obviously, you’re talking to US investors, you have your analyst calls, your quarterly calls now, I mean, what do you tell people about the fraud that has happened in China?
Yihan: Yeah, there are actually two kinds of fraud, one is fraudulent platforms which is really, really bad and the other one is like fraud risk which is also a very big challenge in China for fintech companies but this is actually normal in a country where there is a huge demand while credit infrastructure, regulation and maybe some laws are not in place.
Yeah so when we talk to investors we think really the market opportunity is quite different in China and that’s very important to understand. So in the US, opportunity is more top-down where better customer experience solutions make the existing system better and more efficient while in China, in addition to all of these, the opportunities also include this big unmet and underserved demand so that’s very important to understand. For marketplace lending, I think China’s leapfrogging which is very similar to like mobile payments. We started late, but leapfrogged, I think, more advanced than in the US now.
Peter: Yeah, I’d agree with that. Okay, before I let you go, I want to talk just a little bit about LendIt which is now…I can’t believe it’s already four weeks ago, but you were on stage there at LendIt, you launched the Yirendai Enabling Platform, can you explain what that is exactly? Is this really a strategic shift for Yirendai?
Yihan: Yeah, sure, yeah, Yirendai Enabling Platform is a platform where we share three things, data collection, anti-fraud intelligence and online customer acquisition capabilities with our partners. Through this platform we really want to address a few pain points for the industry.
One is the really high fraud cost as we mentioned. Because Yirendai has quite a lot of experience in identifying fraud, we want to share with partners so that fraudsters will have fewer places to attack and make money. Data collection is also similar, you know. We’ve built proprietary technologies to collect all different kinds of data, high quality data…credit models can be more accurate and the approval rate can be higher because, currently…usually, at least for us the approval rate is still on the lower side and it’s not a good experience for customers.
The other big pain point is very high cost for customer acquisition. You know, in China there is no good bureau data for marketing and that makes targeted marketing very challenging, and for financial services, each company actually is serving a different segmentation. For Yirendai, we are currently the biggest online platform for our segmentation and our app has about 100,000 new registered users every day. Unfortunately, we cannot serve all of them. It is not that they’re not good, but it might be qualified for other products so that’s why we want to share the borrowers with other online lending platforms that have different products serving different segmentations, the cost can be shared both for Yirendai and others.
Peter: So with the Yirendai Enabling Platform are you going to be selling to other online lending platforms? Also, what about banks, are you going to be selling this sort of…all of your intelligence to banks as well?
Yihan: Yes, actually we already got some attention from banks on both data and anti-fraud as well as customers. We are actually serving customers slightly lower than banks. There are many other online platforms serving like lower quality customers so we really think all these together would give us a better customer experience because, currently, customers have to pay high APR because of all these high costs for customer acquisition and risk management. So we want to help make the industry become better and, of course, we’ll be able to have some additional revenue streams. Only if the industry is good, we can do good business.
Peter: Yeah, yeah.
Yihan: In terms of shifting strategy, this is part of our partnership strategy. We’re not shifting.
Peter: So what are you working on right now, I mean, what’s next for Yirendai?
Yihan: Yeah, the market is still huge in China and there are so many opportunities. In the next few years we want to focus on two areas.
One is really to continue to have extended and healthy growth. We already set a target of 100 billion in 2020, this will include a lot of brand building work, optimizing our own products and the conversion and customer experience and the big thing is partnership. We want to come up with more consumer finance, industry solutions, banks and deeper partnerships with big internet giants in China as well as through the Enabling Platform to share the users.
The second area will be customer engagement. We want to engage our customers for both borrowers and investors, so as a technology driven company we are developing tools and services to build relationships with borrowers, not only during the loan, but also before and after the loan services and to engage our potential customers as well. Our goal is for Yirendai to become the one go-to place for online lending. For investors, we have a big and excellent investor base now and we are offering more services such as investor education tools that connect their healthy lifestyle with healthy investments and cross selling other financial products and services.
These two are our main focuses, but they are a lot to do, but we are super excited for the years to come.
Peter: Yeah, there’s lot to do. Okay, on that note we’ll have to leave it there, Yihan. I really appreciate you coming on the show today.
Yihan: Thank you very much.
Peter: Okay, see you.
Yihan: See you.
Peter: I’ve been saying this for some time now. My partner, Jason Jones has as well that China, it’s not just the largest market in the world. It clearly is that when it comes to this industry, but I would say it’s also the most important. There’s more innovation happening in China, there’s more investor dollars in China than in any other country in the world and I think if you’re serious about this industry, you should be starting to pay attention to China. China is going to be an important player in the West over the coming decade, I think you’re going to see more and more presence from China and starting a relationship now with this fascinating country, I think, would behoove everybody in the industry.
So on that note before I sign off, I want to give a quick plug to our next event for LendIt which is actually Lang Di Fintech 2017. It’s coming up in China on July 15 and 16th, in Shanghai. Details are on the LendIt website, go to LendIt.com and click on the China tab. You can find out all the details about that event. We expect to have close to 2,000 people, we’re going to have lots and lots of Westerners coming.
We also have the LendIt Executive Tour which is a seven day event. This year, actually, we’re expanding it a little bit. It’s going to start in Macau, go to Hong Kong, Beijing and Shanghai and we’ll culminate in the Lang Di Fintech event. If you’re serious about China, I think you should be coming to one or both of those events.
Anyway on that note, I will sign off. I very much appreciate you listening and I’ll catch you next time. Bye.[/expand]
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