How going by the book helped Hong Kong start-up VCredit weather China’s breakneck consumer finance market
Company is seeking up to US$200 million from its Hong Kong market debut this month and founder Stephen Liu Sai-wang says having a clear business model and complying with laws have helped it prosper
When Stephen Liu Sai-wang set up online consumer finance firm VCredit a dozen years ago, he wondered whether his “follow the rules” Hong Kong approach to business would allow him to prosper in mainland China’s breakneck, anything-goes environment for start-ups.
Now, in the face of ever tighter regulations as Beijing moves to rein in what it sees as risky financial lending, and after the collapse of thousands of online finance ventures, he sees the merits of playing it by the book.
“I know it’s a wild market. China is like a paradise for adventurers, sometimes the more daring you are, the faster your business grows,” Liu said in a recent interview.
“But I think I have some Hong Kong genes – a clear business model and compliance with rules and laws. I do what I can, and make the money that I can make. I think this is also the commercial culture of Hong Kong.”
The company, backed by private equity firm TPG and Chinese investment firm Citic, is preparing for its trading debut on June 21 in Hong Kong after its initial public offering, seeking to raise US$200 million. It will be the first Hong Kong listing by a consumer fintech firm this year after China began the crackdown on online consumer lending as part of a broader drive to contain financial risks.
Liu, who grew up in Hong Kong and worked in investment banks during the 1997 financial crisis, said he started VCredit in 2006 in Shanghai, seeing potential in China for a consumer finance market, which did not exist then.
“Personal loans were thriving in the US, but there was a gap in China,” Liu said. “I travelled to the US after the 1997 financial crisis and noticed Capital One had evolved quickly into a leader in consumer finance by using information and big data to build better products and services, which at that time was a novel concept.
“I was thinking it [technology-based consumer finance] could also be the future in China and I could copy the US model there.”
Since those days, China’s internet finance market has exploded, particularly peer-to-peer (P2P) lending and financing platforms. Between 2012 and 2015, the number of P2P platforms surged 18 times, according to the State Information Centre.
But a series of big scandals, including platforms that took money from investors and either pocketed it instead of lending it on or lent it to other entities that failed, prompted the government to launch several waves of crackdowns from 2016. Thousands of P2P firms have since closed down.
In April, Beijing launched a new licensing framework for online lenders, known as the “record filing system”, which many believe will eliminate most players. The framework requires all P2P finance platforms to register with the government details of their business operations, including who they lend to and how they plan to manage risk.
“We are not involved in P2P or the revolving loan business, ” Liu said. “Our funding partners all have licences and records with the government.”
VCredit offers tailored finance products by originating transactions between borrowers and traditional financial institutions, but does not fund loans with its own capital or provide any guarantees.
Its adjusted net profit reached 293 million yuan (US$45.8 million) in 2017, after a loss of 280 million yuan in 2016. It ranks among the top 10 consumer finance service providers in China in terms of the balance of outstanding loans, according to research firm Frost & Sullivan.
Liu said the company uses consumer credit data from the People’s Bank of China, which operates a national commercial and consumer credit reporting system, as well as from other sources including internet search engine company Baidu.
It uses the data to verify identities, detect fraud, assess debt-to-income ratios and to quantify credit risks. It will use the IPO proceeds to strengthen its capital base and enhance research and technology capabilities, he said.
“I’ve been cautious since the beginning,” Liu said. “I experienced the 1987 and 1997 financial crises. As a financial professional, I think concern for risk is in my bones.”