Yirendai is an online consumer finance marketplace in China connecting investors and individual borrowers, conducting essentially P2P (peer-to-peer) lending business. It was started by the founder of CreditEase, a large financial services company focusing on providing inclusive finance and wealth management products and services in China. Leveraging CreditEase’s large platform, Yirendai was able to facilitated almost US$2 billion in loans from inception in March 2012 through the end of 2015.
Why does the business exist?
While consumption levels is increasing rapidly, there’s limited financing options that could provide consumers easy access to credit. And for people with access cash, there’s not many investment choices for them to make a good rate of return (high single digit) with low level of risk while still get the flexibility of withdrawing their investment at any time. This is why thousands of P2P online lending companies have been established over the past 5 years in China. They provide an online platform to connect borrowers with lenders. The borrowing amount can range from RMB1 to RMB500,000; some have collateral such as cars and some don’t; the term is usually shorter than 2 years and can be as short as 3 month; and the interest rate is at least 10%+ which is much higher than borrowing from banks. This type of loans is not well liked by traditional banks in terms of cost of origination, risk and reward.
How does Yirendai’s business model work?
A typical transaction process works as the following:
- Yirendai will acquire borrowers through both online and offline channels and more importantly through referrals from parent company CreditEase.
- Borrowers will submit loan application online with supporting documents such as ID, salary proof, credit card statement, etc. (there’s no credit score system such as FICO score in China).
- Then through its proprietary risk management model, Yirendai will determine the risk level and whether to approve the loan and if so at what interest rate (usually between 20-40% APR including fees).
- After the borrower agreed to the interest and fees, Yirendai will list the loan information on its platform to solicit interest from online lenders and the interest rate offered to lenders is much lower usually around 10%. Amount invested by an individual lender can be as low as RMB100.
- The whole process takes only a few days to complete. From transactions like this, Yirendai doesn’t assume any credit risk and is able to earn an interest spread of 10-30%.
Yirendai also offers lenders an automated investment product that will help lenders to diversify their investment portfolio and avoid them the trouble in choosing among thousands of loans. And for this product, the lenders will be charged for a small amount of management fees.
What are the challenges to its operating model?
While thousands of P2P lending companies in China have gone bankrupt in the past few years, Yirendai is one of the industry leader and was successfully listed in NYSE in Dec 2015. The two key success factors are:
- Risk control system: the biggest risk for P2P lending companies is credit risk. To attract lenders, many companies guarantee return of principal and interests. Even though Yirendai doesn’t provide hard guarantee, a risk reserve fund was set up using part of the fees collected from borrowers to cover for potential default. And in China the return of principal and interests is generally expected by investors. Under this situation, the ability to control credit risk is very important for P2P platforms to remain attractive to lenders and make a profit themselves. Yirendai has a strong risk management team and is able to leverage parent company’s experience in the field.
- Borrower and lender acquisition cost: user acquisition cost is a big part of the cost structure for Chinese Internet companies. The offline referrals from parent company CreditEase provides Yirendai a huge advantage competing against similar platforms on cost.
What extra steps should Yirendai consider?
- Industry wide collaboration to establish a more comprehensive set of data for borrower profiles. One of the loopholes of current system is that borrowers can borrow from different platforms and aggregate to a significant amount that they may not be able to pay back. However platforms are not communicating with each other thus not able to find out this potential risk.
- Partnership with ecommerce platforms to explore more user cases. To continue growing borrower base, Yirendai should consider more channels to acquire users. Instead of waiting for users to realize their needs and come to the platform to borrow, Yirendai can offer financing services through ecommerce platforms when users make a purchase. User data obtained by ecommerce platform also provides extra information for risk assessment.