Phang Yew Kiat, vice-chairman and chief executive officer of Credit China FinTech, talks about his company’s transformation from just a traditional peer-to-peer lending company into a business that offers multiple lending revenue streams.
Here is the transcript:
Emmanuel Daniel (ED): I’m very pleased to be able to speak this morning with Phang Yew Kiat, a native of Singapore, ex-banker with one of the leading international banks; you worked a lot in China and built your international experience in the banking industry and today is the vice chairman and the brains behind a transformation of a traditional, Hong Kong listed company into becoming one of the largest peer-to-peer lenders in China. It was from a $150 million listed company to a $3 billion listed company.
Now, both stories are just as interesting as the other. Tell us a little bit about your journey because I think that there are lots of people out there who want to see transformations on their own journey and what skills you acquire as you are working through the network of Standard Chartered Bank, where you worked at, and how that prepared you for what you’re building now with Credit China.
Phang Yew Kiat (PK): Thank you for inviting me to this interview. Those were very kind words in your introduction with a small correction; today, Credit China is the fintech group. The way I describe it, it is not just a peer-to-peer lending company because in the course of the next few minutes I will be able to share with you a bit more about the multiple revenue streams that we have built in the course of the last three years rather than just a single, mono-line fintech company.
Now, I was privileged. I am a Singaporean. After finishing my national service I went to the U.K. to study and after my study I joined Standard Charter Bank in London as a management trainee. The journey started from there. I was privileged in the sense that in the first seven years with Standard Charter Bank I had a chance to work across multiple different jobs, first in group operations and then subsequently I was transferred into group electronics banking. This was 20 years ago, 1996 to 1997, and then I had a chance to get into the business analytics of the performance of Standard Charter Banking Group across 16 countries.
This is the point where I acquired some management accounting experience and I was subsequently given an opportunity to head up as a CFO for Standard Charter Bank in Indonesia. That was in the years 1999 through 2000. Subsequent to that I was given an opportunity to join one of the largest banks in Southeast Asia. That was in 2001, with the DBS Group, working for one of the most charismatic chief executives, Phillip Paillart, at that time. I learned a great deal from this Frenchman and during that period when I was at DBS we had successfully acquired Dao Heng Bank, so with the M&A skills that were involved in the activities that so effective from the skills exposure around integration of post-acquisition pieces.
I was privileged in the front-line in that point in time in assisting the group chief executive in navigating through some of these challenges.
ED: Then you went off to China.
PK: Then, in 2005 I was given a chance to start with an opportunity to spearhead a new bank. It was a once-in-a-lifetime opportunity. Many bankers in Asia who work in the banks have done a bit of M&A and post-acquisition work, but to start a brand new bank in China was one of the are opportunities that was presented to me. I jumped onto this opportunity and I went into China again.
We spent the first year literally negotiating the terms and the conditions and subsequently we were only given 12 days to build a brand new bank. That was called China Bohai bank. After the initial building phase I remained in the bank as the Deputy CEO responsible for both the consumer and SME business. During those three years in China working for a Chinese bank with foreign partnerships was challenging, but I learned a great deal about the operations and the operating environment that is happening in China. That literally gave me good knowledge of how to navigate the risk environment of lending across China.
ED: Fast-forward to Credit China.
PK: Fast-forward to Credit China, in 2012 I had made a conscious decision to walk away from traditional banks. Initially, I was planning to start a hedge fund business and given an opportunity to do so, but I was later convinced to stay focused with the skills that I’ve acquired in the previous 17 years and put them to proper use and therefore to work around the fintech area.
ED: How did the Credit China opportunity come, given that the organization itself was not called Credit China at that time?
PK: At that time it was called Credit China without the fintech and then a Chinese group wanted to build – at that time we used the term internet finance – in 2013. I knew the largest shareholders of Credit China at that time and I knew him for about five years. He had then invited me to join the board and help the company to transform into the internet finance space because the traditional finance companies in Hong Kong at that time were literally constrained by the amount of capital the company has in terms of lending in China.
So, I needed to find a brand new business model where I’m able to scale up the operations without constraining the capital in the company. We looked at what at that time was interesting; a peer-to-peer lending model. Peer-to-peer lending was a model that was founded in the U.K. by a group of financial engineers in 2004. We were literally picking up that model after nine years, which we thought would make it a bit more mature, but we had then made some minor customizations to create an entire ecosystem with not only a peer-to-peer lending website, but we also took into consideration having a mobile payment license to take care of the fund movement between the investor and the borrowers.
And then, to enhance the entire credit model for the investors we had also taken into another consideration how to give a layer of credit guarantees on the borrower.
ED: The credit guarantees and the credit models, were they imposed on you or you were creating it as you went?
PK: That’s a good question. It is purely a model in which we thought at that point in time that it was necessary and relevant for us to create skills. It was not imposed on us to have a credit guarantee layer, but we thought it was necessary at that point in time and it still serves us well to have a guarantee layer in the peer-to-peer lending space today.
ED: Did you have institutional investors, like the Goldman Sachs and Morgan Stanley’s of the world at that time?
PK: No. Today we still do not have institutional investors, but we do have local companies who are putting their excess funds as a lender onto our peer-to-peer lending platform. Today, the institutional investors per se company funds that are flowing to the peer-to-peer matching website accounts for, at the end of 2016 approximately five percent. We intend to grow that in 2017.
ED: Okay. Was internet finance very website-centric then when you first started and it became mobile over time? What was the size of the loans that you disbursed since then? And I think you’ve built it into five others; in total your five business lines, if you could just run us through very quickly.
PK: Okay. So, at the beginning we started the journey in 2014, the transformation, creating the so-called entire ecosystem around peer-to-peer lending. There are basically five components. The first is the peer-to-peer lending website itself in the middle. Then, at the top we have the credit guarantor layers. On the left side there are bunch investors, the person who lends money, and on the right side are the borrowers. Then we also have the fifth component, the bottom layer and that is the payment layer. That facilitates everything from the funds to move from the investors to the borrower’s end and vice-versa when the loan matures.
So, this is what was created in 2014. The journey was not as smooth as what you probably see. We started off in the first quarter exactly three years ago at this time. On the 31st of March of that year we only had 8,000 registered users. Come June, three months later, from 8,000 we grew to 29,000 registered users. By the end of September, another three months, we had 200,000 registered users. We concluded our first year-end with one million registered users. That volume scaled up to five million in 2015.
ED: So, a registered user is an active user?
ED: What was the –?
PK: Approximately, our conversion ratio was about 45 percent of 45 percent of the registered users eventually have completed a transaction on the platform and we term them active users. That was the strategy. I called it Strategy 1.0. We worked religiously and we were much disciplined and we just grew that fundamental business model for the first two years.
Now, at the end of 2015 we were taking on some of the policies introduced by the Chinese government. At that time Premier Li Keqiang introduced a term that he called Internet Plus. The terms was used around where the government is actually encouraging many of the enterprises to start thinking about how to leverage the power of the internet to help companies to introduce new business models. Borrowing on those thoughts, I have gone to Credit China and I told them that actually if we start looking at our current ecosystem what is most valuable in internet ecosystem for peer-to-peer lending is actually the payment gateway.
ED: Yes. It completes the hoop, right?
PK: Correct. The payment gateway is an important and essential element. The way I presented it at that time to the board was that our activities that were happening across the internet can basically be divided into two categories. The first category is information exchange. We’re talking about website searchers, we are talking about email correspondence, we are talking about social messaging, et cetera. That is information exchange.
The second type of activities are value exchange, where you buy something over the internet, you order a product or service over the internet and –
ED: There you’re going into supply chain type environments –
PK: That’s right, but more importantly you are always having to make the last part to make a payment for it. That is where it comes down to the payment and therefore we have –
ED: What is the ecosystem that you created as a result?
PK: As a result I’ve told them that it’s important for us to look beyond the peer-to-peer lending circle and thinking about that we have missed a great portion of it and that is gaming payment opportunity, the social gaming payment opportunity. Now, China today has a gaming market estimated at approximately 150 billion Renminbi. For people who play computer games, that market size is 150 market size.
We have missed out on e-commerce. We don’t have resources to engage in that space and none of the e-commerce operators were keen to us at first because we started in 2014 as a very small base. We didn’t have users, but come to the end of 2015 we had 5 million registered users. This is where it became interesting, and some of the smaller e-commerce websites, one was a payment gateway so that we can direct some of our clients to complete the purchase of an e-commerce item over on their website.
Then we have also missed out on the element of making bill payments on a telephone app for utility bill payment et cetera and so on and so forth. So, across that space then what I’m convinced about is to allow us to upgrade our strategy from 1.0 to the next level, and that is to start to build out capabilities beyond peer-to-peer lending.
And so, in the year 2016 we have done five acquisition transactions. The first thing we did is we thought we wanted to deepen the space in payments. We bought a mobile post company that uses mobile post payment technology. That was the first company that we bought into.
The second company that we bought into, it is a fairly, relatively new start-up, but a successful social gaming company designing computer games. The third company we bought into is a consumer lending company and this consumer lending company, consumer finance company, has the capability of processing a new loan all in the span of within a minute.
We also concluded the fourth acquisition, and that is extending our offerings beyond China’s shorelines. We have acquired a payment processing company in Vietnam. The last acquisition that we have, the JV acquisition that we have come into is in block chain technologies.
ED: Right. That’s the sixth?
PK: That’s the fifth, but the original business that we have in traditional lending remains and that was altogether successful.
ED: Let’s just examine the whole idea of extending credit to the un-banked population in China. So, because of your structures and what you’ve been learning in terms of building a lending business is that you started off as an internet finance business. It became mobile. You had good relationships with key logistics type industries –
PK: Supply chains –
ED: Supply chains – one was a juice manufacturing company and another was a mobile –
PK: It was a mobile phone distributor.
ED: And to these two you actually plugged into a network of distributors and at the end you have got several hundred thousand small businesses that were your original borrowers of your micro finance or your internet lending model. How many small businesses are there connected in that way? Does this model provide the kind of certainty in the lending business that is similar to the credit score based approach that banks take?
PK: So, let’s start off by talking about how today Credit China FinTech, and CCF as a company we have two types of lending. That is, we lend to two groups of borrowers. One of them is the SME owners. Now, traditionally the bank would take the financial statements and then send a relationship out to assess the performance of the company, come back, write a report et cetera. Now, I’ve found that this approach is very limiting in the way of creating skills and therefore we have made a conscious decision that we only lend in an industry that we understand.
And so, we have decided – and as you have described – we have made partnerships with one of the largest fruit and juice producers in China, Huiyuan, and we signed them up to work through an arrangement where we created a joint venture company where they will be able to share the ERP information as it relates to their distributor, Huiyuan Fruit Juice. Now, Huiyuan Fruit Juice is the largest fruit juice producer in China. They have more than 8,000 distributors. Now, each of the distributors on a regular basis buy fruit juice from the manufacturers and then put them on the retail shelf and at the end of it may go back to the retailer in 30, 60, or 90 days’ time to collect the money.
Now, many of these distributors are relatively small and they don’t keep proper financial records for their company because they are a proprietorship. It is difficult for them to go to a bank to borrow money. Our decision on credit lending is taking a new approach. We do it apart from applicant scoring based on their background. We also do what we call a behavioural score card. Based on the distributors past years of purchasing records from Huiyuan we are able to analyze their buying behaviour. Then we will know actually this proprietor who’s a distributor how much effort are they putting into the business.
ED: So, what is the size of the loans that you are distributing this way? Do they come to a brunch or do you actually disperse the loans immediately and directly into a bank account?
PK: The model has evolved. In total in 2016 collectively together with Huiyuan we dispersed loans of up to RMB4 billion.
ED: That’s about $700 million?
PK: RMB4 billion; let’s put it to be approximately $600 million.
ED: $600 million?
ED: How many of them are in particular –?
PK: It varies depending on the volume that some of the distributors are buying. We typically do not fund the proprietor 100 percent of their business. That itself in our opinion is too risky. We typically fund up to between 60% and 70%.
ED: Of their turnover?
PK: Yes, of their turnover volume in a particular month, so then there is ownership from the entrepreneur and the proprietor to ensure that he’s focused on delivering.
ED: What are the sizes like?
PK: They’re particularly one million.
ED: One million Renminbi?
ED: That would be about –
PK: It would be less than S$200,000.
ED: U.S. dollars would be?
PK: It would be about $150,000.00.
ED: That is sizable. How is it dispersed?
PK: We typically raise the funds to appear to be a build matching platform and once the lenders have accumulated to the borrower’s requirement, the funds are then disbursed. Typically, we will give the credit back to Huiyuan Juice directly to manage their risk.
ED: Do you mean the fund is distributed to Huiyuan and not to –
PK: It’s distributed to Huiyuan and then by allowed the distributor to draw down on their stocks based on the purchase so that the funds do not flow into the wrong area. That is another layer.
ED: Okay. So, essentially you are Huiyuan’s supply chain credit facility in that way. How is that evolving? Over time you’re going to understand more about the small businesses and they would be coming directly to you for loans for other things that they might want to do.
PK: So far, we have remained to be fairly disciplined. There’s a lot more that we could do, but we have chosen not to go beyond this particular business model as of today.
ED: Okay. So, there are two industries that you understand well, the fruit juice people and the phone distributing people and that give you an ecosystem of how many small businesses?
PK: Probably today about 3,000 of them. We lend to 3,000 of these enterprises.
ED: Right, and the total assets that are being created?
PK: In that whole space there are approximately in total in 2016 about $1 billion.
ED: Right. There’s a payment component to that. What’s the size of the payment flows that you see?
PK: That is interesting. The payment flows are getting bigger because our payment gateway now offers a direct solution to people like Huiyuan et cetera because our payment gateway is directly plugged into the ERP system. In the past, just imagine for a moment that the distributor would place an order to the salesmen or the account managers working for Huiyuan and then the next thing is they will generate a purchase order. Those guys who needed to take a purchase order would go to the bank and remit the money to the bank.
We have shortened the entire process by creating an app allowing the distributor to actually make an order on their mobile phone in the comfort of their office or home or go wherever they are, place their order, and based on their tier level they get the necessary discount and then they make a payment directly using our payment apps to Huiyuan. Therefore, they will be saving a lot of financial resources in terms of account reconciliation.
ED: Now, when you create ecosystems like that what is the prospect of competition coming in? In other words, another peer-to-peer lender also being well-funded and so on and they’re going after the same ecosystem you have and then creating another risk in that these sectors become overly lent-to as a result? What are the dynamics in China for this?
PK: We need to remember one thing; China is a huge market. We are talking about the internet population that’s active on a daily basis estimated at 730 million people. There are thousands of supply chains that have still not been developed. What we have assessed is that there will be competition. What is important for us to keep ourselves relevant and keep our proposition attractive is automation. You need to help to address or resolve the pain points of your target customer. That is most critical. Let’s understand what the customer needs and let’s design a solution around the customer needs.
Very often in a traditional financial institution unfortunately traditional banks are not able to deliver that. I’ll give you just one simple example. Just try to remember; when was the last time you walked into a bank where you need to sign off for the same account application in multiple places for doing one transaction? Now, in the context of offering a FinTech solution, we are making the whole process simple. We have a punch-in password, one single password. We will not expect a user to punch in multiple passwords for the same transaction.
ED: You mean you don’t have dual-factor authentication and so on?
PK: We do if it hits a new threshold level, but even for dual-factor authorization it’s only two times and not beyond two times.
ED: The new regulations in China that are coming into place to finally create some discipline in this marketplace how have you fared against that new regulation? Actually, some of the regulations are designed to sieve out things like Ponzi schemes, governance issues, and so on. Now, how have you fared in the context of the new regulation and how do you think you need to configure your business to make sure that it conforms within regulations today?
PK: Yes. The first thing to remember is that I’m a publicly listed company in Hong Kong, so I have an obligation, number one, to make sure that everything that I do is relevant and in compliance with all the regulations in the different jurisdictions in which I operate. That’s point number one, and so with that in mind in the context of China fortunately one of our subsidiaries is a permanent standing member in the National Internet Finance Association founded by PBOC in March, 2016. As a permanent-standing member in that community we are helping to de-regulate this to design new policies for the industry.
We are actually sharing the industrial knowledge and experience in helping to craft our policies. Now, there were only four institutions or four companies in China chosen to be permanent-standing members in the National Internet Finance Association, so I think that gives you a good flavour as to who we are. The second dimension is as a FinTech group, I’ve told my team and I’ve told my board that it’s important to be prepared for regulatory changes because the FinTech industry is still relatively new.
Now, the governing policies around it are not fully developed so the regulations that occur around a bank, where there are very many, for the FinTech space we need to prepare for evolving regulatory changes. One of the competitive advantages of CCF today is we have the mindset to be continuously adapting to new regulatory environments.
ED: What are the next steps for Credit China? What is the next breakthrough that you are looking at in order to scale the business, or is it a time for consolidation because there are lots of questions on the credit quality that’s being generated in the marketplace right now. It is entering a phase where even the economy in China is softening a bit.
PK: I fully agree, therefore in preparing for that, over the last three years the board and myself have actually created a business that offers multiple revenue streams. Today I have six streams, first starting from the traditional lending business; the second revenue stream is from payments; the third revenue stream is online wealth management; the fourth revenue stream is online lending; the fifth revenue stream is coming from social gaming; and the last revenue stream is coming from block chain technologies.
Now, out of the six revenue streams five of them are more than 100 million Renminbi worth in 2016. It is my goal and the board has even mandated for the executive directors to build two more new revenue streams in the coming two years to expand, to broaden, and strengthen our revenue streams coming in.
ED: Right. Is it on the back of retained earnings or is it on the back of new capital?
PK: It’s on the back of retained earnings. So, that’s one part. Just imagine that we are one FinTech group with multiple revenue streams. At any one time if you run into policy changes in one particular area, at least as a group the revenue remains fairly consistent and growing. The second thing is that it is then my goal to build each of these revenue streams to turn them to become more than 100 million in terms of profit per revenue stream. That’s what I’m working towards with the team.
That is one aspect of the earnings. Now, coming back to the question of how we intend to grow our business and our goals in 2017, basically there are four top targets, simple targets: two more revenues, two more new markets in 2017, and I hope my organic business, things that are already within the group will be the core growth engine. That means that the core growth in 2017 must come from organic business growth. The last thing is I’m looking to deliver across all simple KPI’s to be at least 30 percent growth in 2017.
ED: Okay. So, you’ve figured out the 30 percent component in your growth for the foreseeable future?
PK: It’s for now because I’ll give you an example. The payment-party volume growth across the country in China alone has grown from 2015 to 12 trillion Renminbi volume to 2016 of 20 trillion volume.
ED: Mm-hmm, and that’s not even banks.
PK: This is just the third-party payment and it’s growing at 64 percent. Now, when we’re talking about Fintech there are very many different areas of FinTech, but I think we are privileged to be in the right place at the right time and doing the right thing. We are riding with the wave and therefore I hope the team can take advantage of this current environment to grow at least as quickly as the market trends grow.
ED: Phang Yew Kiat, that’s an amazing story with a lot of moving parts and we could have actually zeroed in on any one of them and that would have been another one-hour interview. So, we would like to continue tracking how you’re evolving and be able to tell your story in the next few years. It’s really been a pleasure speaking to you today.
PK: Thank you.