Private financing built on patience
While CreditEase is gaining attention from would-be investors, its chief says peer-to-peer concept will take time to set in on the mainland
CreditEase, a private financing company set up by Chinese who returned home, is prepared to wait a long time for success. The patience of the founders reflects the fact that the mainland has had a peer-to-peer credit system for only seven years.
Outstanding loans arranged by CreditEase have grown to more than 10 billion yuan (HK$12.5 billion), while financial products it sources from financial institutions for sale to affluent clients came to an even larger number, said Tang Ning, CreditEase's founder and chief executive.
The company is one of the mainland's first peer-to-peer (P2P) lending firms. Tang, who studied economics in the United States, founded CreditEase in Beijing in 2006 as an analogue of the London-based Zopa, which bypasses banks to facilitate loans between individuals. It drew attention from global investors this month when the San Francisco-based P2P firm Lending Club, after six years of operation, said it had turned a profit and was considering a stock market listing next year. However, its Chinese peer CreditEase shuns any concrete timetable for profit or an initial public offering.
"It is still our initial stage to tap into the huge market, which is worth more than one trillion yuan," Tang said. "It will take relatively a long time for us to succeed in the market and even longer to verify our success in a place where private creditability grows from nowhere."
In western countries, a testimony of trust is lending and a proof of trustworthiness is paying back, based on a credit appraisal given by a third-party professional agency, he said. However, on the mainland, where the market economy has a short history and there is little track record on personal credit, survival is challenging for the country's thousands of private financing companies, Tang said.
"I didn't expect it would be so hard to introduce the concept of creditability to the mainland," he said. "P2P lending is basically lending to strangers, based on risk assessment. There are early adopters, but there are also stubborn resisters."
In P2P lending, a typical borrower might be a company employee who moonlights as an online store operator and needs money for procurement. She goes to CreditEase with documents supporting her source of income, education, residency, property ownership and other credit criteria and files a loan application. CreditEase staff check her eligibility. A critical difference between a bank and CreditEase is that Tang's firm does not take deposits or directly make loans. Instead, it finds individuals, as well as institutions, to lend directly to the borrowers whom the company has pre-screened. The borrower then signs an agreement with a lender or lenders.
To set up a credit system for individuals, CreditEase does more than just introduce concepts. To help small business owners get access to loans, the company must, in some cases, work out the three basic financial reports, balance sheet, statement of profit and statement of cash flow, for applicants, based on their description of operations. It also suggests farmers form teams to borrow, using the community relationship as collateral to back up their borrowing.
In wealth management, it helps clients make asset allocations before selling insurance, mutual fund, fixed income and alternative investment products to them, for which it receives commissions. Its target wealth management clients are those with investible assets of between US$100,000 and US$1 million.
Tang said many rich mainlanders had no idea about asset allocation and were wary of insurance products, after aggressive marketing tactics in the past. "Both the P2P and wealth management markets have great potential to grow in the coming years, as the demand is far from satisfied," Tang said.
Tang would not reveal any revenue or profit targets, nor did the company have any listing plans in the foreseeable future, he said, adding that he felt no pressure from its private equity investors, including KPCB, IDG Capital Partners and Morgan Stanley.
"There are still many things to do to set up a credit system from grassroots across the nation," he said. "It may take decades for our first batch of wealth management clients to grow old and receive enough pensions to verify that wealth management is the right thing to do."