Over the past five years, more than $8.6 billion has been invested into VC-backed fintech companies in China. Beyond the investment dollars, the burgeoning development of China’s fintech landscape is becoming more visible globally.
In recent weeks, Ant Financial‘s Yu’e Bao surpassed JPMorgan’s US government money market fund to became the largest in the world, China Rapid Finance became the second Chinese P2P lender to go public on a major US exchange, and Ant Financial upped its bid to acquire MoneyGram, the second largest global money transfer provider.
One of China’s early fintech innovators is CreditEase. Established in 2006, CreditEase today offers services in wealth management and insurance, and is the majority owner of NYSE-listed online consumer lending platform Yirendai. CreditEase also operates a series of funds that include venture capital and private equity funds of funds, a credit fund to invest in loan assets of US-based alternative lenders, and direct investment funds. One such direct investment fund is the CreditEase Fintech Fund, which has invested in startups including Trumid, Upgrade, Nav, and Circle Internet Financial.
We hosted CreditEase CEO Ning Tang on a recent trip to New York to hear his perspectives on a number of topics, including cross-border investment, the future of China’s marketplace lending industry, robo-advisors, and more.
The interview has been condensed and edited for length.
On the state of marketplace lending in China
Two fintech sectors — payments and marketplace lending — are more mature than others in China, as they have been around for over 10 years, have massive scale, and operate within robust regulatory frameworks and ecosystems.
We think that, over the next decade, sectors like crowdfunding, robo-advisors, insurance tech, blockchain and blockchain-driven applications will emerge. Some are behind marketplace lending by 3 years, some by 5 years, and some are behind by even 10 years, but I think all will go through a similar process in China.
It took 10 years for marketplace lending to grow from an idea to an industry in China. Recently, there has been tightening in the market, but I believe a tighter market will help the industry become more stable and healthy.
There will be fewer P2P players in the next 3 to 5 years, but volume will continue to grow. I think for marketplace lenders in China, it would be good for them to become public companies for purposes of transparency and disclosure. However, there is a public-private market valuation gap, which is quite challenging for companies considering the jump. Future IPOs may experience this; reflecting the hype of a few years ago.
On credit scoring in China
Regulators have adopted a strong view that credit scoring is key for China to develop its credit bureau system. It will be a very strict process. I think the market has learned from the past several years that big data is not necessarily credit data. A credit bureau is a public utility — more or less — and consumer data should be handled with greater caution. Some historical practices are not necessarily up to credit bureau standards and/ or infrastructure. Companies mistakenly view better risk management as a function of more data, which is not true.
Currently, we use eCommerce data, telecommunications data, bank and credit card data, insurance data, and social security data. Big data is very helpful, but alternative data needs to cooperate with traditional finance and credit data to make the risk evaluation model really work.
I think China will develop a multi-layer system. The core will be the credit bureau — consisting of core credit data — and around it will be different applications for different industries utilizing some industry-specific data. Around that will be additional ancillary data services utilizing big data for anti-fraud, marketing, and so forth.
Still, the core layer will look quite similar to what the US credit system looks like; consumers will have means and processes to dispute claims, discrimination will be illegal, and there will be strong consumer data protection. I don’t think there will be wide open data utilization without consumer consent. I do believe China will adopt a nationwide credit rating system in the next one to three years.
On insurance tech in China
The biggest pain point for the insurance industry in China is that it’s never sold in the right way. If you go to an insurance company’s website, there’s a ton of products with a ton of features — it’s all very confusing. All the products have similar names and similar features. So, it’s very confusing and almost impossible for any consumer or small business owner to get really excited and familiar with the products and features. We try to do things differently, by utilizing data mining to match supply and demand. Our insurance engine can understand the customer’s needs and match those with the right insurance companies and/ or products.
CreditEase Insurance Agency is new. We talked about the different stages of fintech in China. In payments, you talk about TenPay and Alipay. In marketplace lending, you talk about companies like Yirendai and Lu.com. In crowdfunding, robo-advisors, and insurance tech in China, there are really no proven models yet. It’s still early.
We don’t need more insurance products, we need more education and intelligent matching. If you talk to consumers and small businesses in China, they don’t understand how important insurance is. And, they may have been hurt in the past by poor service or by buying the wrong products.
On wealth management in China
It’s OK to be a manufacturer of online wealth management products in China. But there needs to be a consumer interface that consumers and small business owners can trust as a trusted advisor; consumers may need multiple products working intelligently to meet their needs. If you look at the past, you have a lot of product companies, but what’s missing is a consumer layer like an advisor or wealth manager or insurance engine working for the consumer.
Talking about wealth management, China’s upper- and middle-class are used to buying individual single products, but that’s not good for them. It’s the portfolio or asset allocation that matters most. Any single-product company will not help the consumer with asset allocation work — it requires a different type of institution to perform that job.
The way we look at wealth management in China is by class: there’s the upper-class, to which we provide human financial advisors — similar to UBS or Merrill Lynch. For the mass-affluent segment, it’s not economically feasible to serve them with human advisors, so we use technology and robo-advisors, specifically. Small investors don’t have enough money for asset allocation, so they basically buy simple products like Yu’e Bao, or some P2P product or a stand-alone insurance product. They are young, don’t have much savings, and are not in a position for wealth management. So, there are different layers of customers and needs.
Robo-advisory is new in China. I think it has tremendous potential, but also faces tremendous challenges. The main challenge is investor education — making sure Chinese investors better understand the need for asset allocation. People don’t have that understanding. I think the most important role CreditEase Wealth Management and other pioneering institutions play is to educate investors.
China is still moving from single product to solutions, from fixed income to capital markets. These changes are very significant in China right now.
If you think about the earlier years for marketplace lending, it was quiet — very quiet. From 2006 to 2011, there wasn’t much noise or publicity. So I think the robo-advisor sector is currently at a similar place.
Where CreditEase is investing
Chinese investors are in the process of building globally diversified portfolios. From our point of view, we help clients who already have foreign currency outside of China to invest in the US and other parts of the world. On the other hand, we also have direct investment funds. We have a Fintech Investment Fund, which is an equity investment fund with a US dollar arm investing outside of China. We have a private credit fund that buys credit assets from US alternative lenders. We also have a few funds of funds outside of China in real estate, VC/PE and hedge funds.
We are still quite interested in opportunities in lending. For example, we invested in (former Lending Club CEO) Renaud Laplanche’s new venture, Upgrade. I believe there are still a lot of opportunities left over from marketplace lending 1.0. We are similarly interested in crowdfunding, insurance tech, and — not only robo-advisors — but also B2B fintech models helping the wealth management and asset management industry.
We are in a very strategic position. We have an equity investment fund that can provide capital, a debt fund that can offer debt financing, a listed subsidiary that can help with listing considerations, and we’re operating businesses in China in many different areas. And, of course, for companies with ambitions in China we can be a great partner, but it’s not a prerequisite for partnering.
One example is Tradeshift. We are on Tradeshift’s platform and provide financing to Chinese companies on Tradeshift’s platform doing cross-border supply chain work. The Tradeshift team has been very interested in the China market and we operate a joint venture together.
So far, we haven’t done anything in India. We are still looking into it.
The biggest challenge for the future prospects of China fintech
Using marketplace lending as an example, the last 10 years have seen tremendous growth, especially in terms of regulations and a working regulatory framework. But people need to be very careful about managing credit quality. Risk management will be very important. With the regulatory landscape tightening, companies may be in compliance, but if they don’t have a sustainable business model, many won’t last. Risk management will be the key challenge for those who are still left in the industry as the regulatory framework continues to tighten.
Photo credit: CreditEase
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