Dianrong CEO expects P2P lender-bank harmony

P2P lenders will transform the way traditional banks operate but they are not going to fully replace them, says Soul Htite, co-founder and chief executive officer of Dianrong.com.

The rise of peer-to-peer lending companies is not an existential threat to conventional banking but will instead complement the industry by serving people that traditional banks cannot reach.

That's the view of Soul Htite, co-founder and chief executive officer of Dianrong.com, one of the fastest growing P2P lenders in China.

“One of the common misconceptions of P2P lenders is that they go head-to-head with banks,” Htite said in an exclusive interview with FinanceAsia. “In fact, internet and technology allow P2P and other fintech companies to reach out to people that [do not have access] to bank loans.”

That includes small- and medium-sized enterprises, where the costs for traditional banks would be too high, said Howard Cong, managing director of L.R.Capital, a Hong Kong-based alternative asset management firm that has invested in Dianrong.com.

Htite, who previously worked for listed US P2P lender Lending Club, said China needs internet finance companies because banks alone cannot fuel the economic growth it needs as the country evolves from an export-dependent economy to a consumer-driven one.

“It is not a zero-sum game between fintech and traditional banking. Their existence supports each other,” he told FinanceAsia.

Rapid urbanisation -- the proportion of Chinese living in urban areas has more than doubled to 55% in the last 30 years -- has driven the growth of China's P2P lenders because many people moving from rural areas are unable to borrow because of a perceived lack of credit worthiness.  

“There is a huge market for us to do business here,” Htite said.

That is backed up by data from the China Europe International Business School, which shows that total outstanding loans from P2P companies almost quadrupled to Rmb126.6 billion ($19.8 billion) in the year to February but still accounted for only 0.35% of the country’s total.
 
Spurred by this potential Dianrong.com raised $207 million from a consortium of investors last month, including Standard Chartered, China Fintech Fund, Bohai Leasing, and Hong Kong-based Max Giant Capital. The Series C-round of funding came just months after the conclusion of Series B funding from New-York-based Tiger Global Management.
 
Dianrong.com currently allows borrowers to borrow between Rmb100,000 to Rmb1 million but would consider bigger loans on a case-by-case basis. It connects borrowers with lenders through its online platform and promises lenders annualised returns of 6% to 20%, depending on their risk appetite.
 
Htite said banks tended to be more discretionary than P2P lenders when assessing credit risks.
 
“If a person with bad creditability goes to a bank he may not be able to get a loan because he may be immediately rejected by the compliance officer,” he said. “In Dianrong.com we are using a tech-based risk assessment system to identify the best lender and rates for every borrower so that most of them will get what they need.”

Standard vetting procedures such as profiling customers, verifying documents, checking credit histories, and validating loan purposes are done by Dianrong.com employees. The system then screens the submitted data, assigns a credit, and identifies lenders that match the requirements. 

Regulation

Htite said he believes China’s banking regulator is doing the right thing to issue new guidelines to regulate fintech companies and standardise industry standards. And he is not worried that the new rules will marginalise their business scope. 

“The regulator has two main objectives – protecting the customers and ensuring the economy is growing. As long as P2P [lenders] stick to the rules, they will be fine with their operations,” he told FinanceAsia.

According to some local reports, P2P lenders will be required to have a minimum registered capital of Rmb50 million in order to become a member of the China Internet Finance Association, an entity set up by the People's Bank of China to regulate internet finance companies.

Htite said the new regulations make sense given that the current entry threshold is low. “We do not want to see cases where a small group of young people set up a P2P website, collect lenders’ money and suddenly disappear. The new rules will help prevent this.”

As an example of government support, Htite noted that Dianrong.com’s Shanghai headquarters is almost fully funded by the government as part of its “Internet Plus” initiative to support internet finance start-ups.

To the regulators, transparency is a key issue for fintech companies because they are not as highly regulated as banks. As part of its expansion plan, Dianrong.com is ready to become more transparent in terms of operational data and disclosure of information as required by the China Banking Regulatory Commission, Htite said. 

Future of banking

Fintech has disrupted the billion-dollar banking industry and prompted banks to change structurally to embrace more technology such as internet banking, mobile banking, and e-payments.

Notwithstanding the wave of disruption, Htite said he does not believe that P2P companies would fully replace banks but would instead help transform their business models and even work with them.

Bank of Suzhou, for example, entered into a strategic partnership with Dianrong.com in October last year and among the ebanks that have started using Dianrong’s P2P technology and platform.

“Banks have been running the existing model for years and they have the infrastructure and licence in place, so it is not easy for them to adopt new ideas,” Htite said.

Still, P2P companies will not be able to replace traditional banks’ risk management and pricing capabilities for large projects because they do not have the appropriate infrastructure. “A bank is able to acquire distressed assets, do risk management, price them, and sell them off or take them public. That is what they are doing and it should continue.”

L.R.Capital’s Cong said the banking industry may be more segmented in the future, with banks serving bigger customers that need more services, and P2P lenders covering small companies and individuals.

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