Peer-to-peer (P2P) lending in China is not for the faint of heart — and that’s putting it lightly. Banks offer credit limits to borrowers that would seem punitively low in much of the Western world, so there is a pent-up demand for online alternatives. However, a wave of P2P failures — more than 200 since June, according to estimates — have sparked investor protests and government crackdowns, along with increased investor anxiety.
Swimming against that tide is China-based P2P lending provider X Financial. Its initial public offering (IPO) on the New York Stock Exchange (NYSE) this week raised some $100 million, according to reports and a PYMNTS interview with X Financial CEO Shaoyong (Simon) Cheng. He spoke with Karen Webster about the P2P landscape in China and why having an IPO in the United States is about much more than just capital (hint: it’s about reputation and pride).
As recent events have shown (China began a nationwide crackdown on P2P lending last year, following a series of multi-billion dollar scams in the space), consumer finance is challenging in the massive country. The opportunity is also gigantic, Cheng told Webster, given that the country has some 800 million working adults, with less than half of them in possession of a credit card.
X Financial specializes in helping underserved prime borrowers and mass affluent investors in China by matching those borrowers with investors willing to loan them money. Cheng said 20 percent of those investors are traditional financial services institutions, and the rest are third-party investors. The company typically serves customers who have already — or would have — qualified for credit from established financial institutions (FIs), but cannot get enough money via that avenue. “They want more credit,” he said.
That means the big opportunity for X Financial comes from the 400 million or so Chinese consumers who have credit cards, but are hampered by limits that are too low. Those limits remain low because China is relatively undeveloped when it comes to credit bureaus and assessing credit risk, which makes lenders cautious and consumers frustrated. Young consumers freshly graduated from college also make attractive customers, he noted, since they have the earnings capacity and cards that have already passed a bank’s credit screen.
X Financial offerings include a balance-transfer credit card product and an unsecured, high-credit-limit loan product. The company has also built a proprietary risk-control system that uses behavioral, social and other data to determine the appeal of prospective lenders.
Technology serves as an advantage for X Financial, even beyond its underwriting engine. That’s because Chinese consumers have embraced mobile commerce and payments more than nearly everyone else in the world, which provides a wealth of consumer information. “We get much more data than the banks,” Cheng said, a situation that gives the company a deeper view of consumers’ risk potential. He also said X Financial’s risk engine — that proprietary technology — could certainly find use with other organizations and lines of business, but he stopped short of detailing any plans to, say, license that technology.
Cheng told Webster that X Financial, with its new IPO, has the cachet of going public in New York, which he said brings “branding” benefits and a bigger platform for burnishing its reputation as a top-tier online lender. The fresh capital and prestige could, indeed, enable expansion to other parts of Asia and other countries. However, that’s not the focus, at least for now. “China is so huge and offers so much potential,” he said.
In fact, the trends are positive so far in X Financial’s home country: 50 percent of borrowers end up borrowing again, and about 70 percent of the company’s individual investors continue to participate as part of the P2P marketplace. For the first half of 2018, X Financial’s revenue hit $279 million, with net income of $66.9 million. The company has facilitated 1.7 million loans, and has 1.3 million active borrowers and 199,000 individual investors.
P2P lending in China is a young, fluid and challenging industry, but Cheng said that X Financial is very much in sync with Chinese regulators — something that makes the company attractive to investors. With 1.3 million borrowers out of a pool of at least 400 million prospects, X Financial has plenty of runway to grow.