Interviewed By The Asian Banker Live
Soul Hitte, founder of Dianrong.com, a marketplace lending platform in China, compares the development of peer-to-peer lending between US and China, and the expansion into becoming integrated supply chain platforms at the Future of Finance Summit 2017 in Singapore.
Here is the trascript:
Thank you. It’s a great pleasure to be here. I have to answer all the questions they asked. So, Ron did a great job to explain what it is that we do. So, I’m gonna focus my presentation on the “why.” And I would like to start by just showing you some numbers to give some weight to our industry. So, I spent exactly ten years in FinTech. Five years in the U.S., with the Lending Club, and five years in China.
So, in China we had about 32 billion RMB, and it’s all funded by 3.8 million of our lenders. These are people that invest 10,000 RMB, 15,000 RMB. So, it’s a pure peer to peer platform. But the most important number is our default rates. It’s 2.3 percent. In a country like China that a lot of people say doesn’t have infrastructure. So, if we compare the solution between what the bank offers and what we offer, we’re actually doing a good job. Not too many banks can claim to have a 2.3 percent default rate. I put the default rate here as an indication of how serious our industry is.
So, of course, there is something happening. And a lot of people like to refer to it as a revolution. There are some industries we should not have a revolution; we should have an evolution. I don’t want medical industry to have a revolution; I want it to be growing in a very stable way. So, what has been changing? To address your question about how do we work with bank, or how we compete with banks, I think the question you position the bank on one side, and you position FinTech companies on the other side.
Yes, of course, we are a young industry. And you have the H.F.D.S, or you have the Citibanks. And of course, it looks like we can never get – the balance should be banks on this side and the Internet on the other side. We are part of the Internet. So, if banks are gonna beat the Internet, that’s a different story. I don’t think they would be able to, because there is something that is called the Internet tsunami. So, what happens? It’s been happening for a while. 25 years ago, the customer had to give nothing and get information. And that was the industry of portals. And then we went to gates; became very popular. Early on in the Internet industry, we would give time. We would spend time. We’d get bombarded by ads. And then we get fund.
So, we moved again to e-commerce. And e-commerce is a big jump in the industry. All of these things are driven by the customer. So, we are getting good deals, so we have to trust a place called Amazon.com, Alibaba, and send them our money. And who thought 15 years ago that I’m gonna be sending $5 thousand to somebody I’ve never met, and he’s gonna send me a T.V.
Then we moved to social networks. And social networks is a huge jump, because before I was gambling with my money. Now I’m gambling with my private information. So, that’s very, very important. It created a huge trust. And what do we get back? We get back the fact that I can be part of a community. I can have my friends next to me I can communicate with. What’s happening now is that this customer that we’ve been educating for a period of 20 years wants to take back control. So, it happens with a taxi company. It happens with Airbnb. And it’s happening with finance. We’ve been telling the customer—just like a baby, it’s growing—we’ve been telling him, “This is how the bank works. They take your money. They give you 1 percent, and they invest it at 15 percent.” An arbitrage opportunity. And we’ve been educating and educating and educating. Now, this customer wants tools to take advantage of that same opportunity.
We cannot resist this tsunami. I apologize; I know we are in Singapore. We don’t like to talk about tsunamis. But this is one tsunami that you wanna be hit by. It is the Internet tsunami, and it’s not stopping. So, I’m gonna talk about three examples of how the Internet is really changing everything. And the first one is the marketplace versus the bank. So, banks worry about asset liability. They worry about, “How do I make more money from interest margin?” They worry about compliance, operation, and credit loss. But they forgot one very important thing.
I remember when I was a kid, my father would take me to the bank branch. The guy knew my name. He knew which school I was going to. There was a very close relationship between my father and the banker. But today we don’t go to the branch. We do everything online. So, that relationship between the bank and the customer became wider. And most of the time, that void is filled by FinTech companies. So, the bank has actually turned into an infrastructure company, just like the company that gives us energy or gives us management of the road. So, the company that’s giving us electricity today, they don’t know that we are running a show like this. The company that is powering water, they don’t know whether I use it for my restaurant or I use it for my spa. So, they cannot predict what to do in the future. They lost completely sense of what the customer wants.
And all that tsunami of data is not going to them. Banks today are celebrating saying, “Oh, I have a PayPal account with $19 billion. And it’s one account, and I’m happy about that.” It’s actually a very big problem for them going forward. Because their customers are not all gonna be like PayPal or Alibaba. They’re gonna be like people that want to use $500.00, $1000.00. So, in banking there are really two major operations: either payment and money transfer or lending. Lending requires risk management and a lot of things. So, the way people do lending—and here I might a little bit disagree with Ron about securitization—I personally happen not to like securitization. Securitization is what created the issues in 2007, 2008. I understand because if banks or central institutions, like Ron said, cannot consume this product that we’re offering from FinTech, unless it is in the form of securitization, yes, we have to give it to them.
I still would like to see our industry focus more and more on peer to peer, where both sides are equal. So, basically, securitization is, you need money. You have some money. So, I’m gonna put all of you together in one package. Rate it, give it to some people, lawyers. And then, we’re gonna send it to you in a format that has absolutely nothing to do with the people that became the original genesis of the product.
So, we told banks, “You waste too much time and you lose too much transparency by doing it this way. How about we give you a solution where you can connect directly with people that’re giving you money?” And we said, “How are we gonna do that?” and said, “Yes. There are a lot of people on the Internet that want to use it.” Said, “Oh, yeah, yeah, yeah. I’m talking about billions of dollars. You’re talking about hundreds of millions of dollars.” I said, “No. We have a lot of people on the Internet.” Today in China, 3.8 billion customers every month are issued more than $400 million, and I have $600 million of capital. So, $200 million, I have to tell them, “Sorry; we don’t have enough assets for you.”
So, it is really a proven model, and it works. It works all the time because I don’t have any asset liability problems. I don’t borrow money to lend it. I am very efficient in the sense, I take a borrower and write him. And instead of packaging him in securitization and distributing him, I tell the whole world, “Who wants to give him money?” And then, you have $1.00 here, $5.00 here, $10.00 here. And in five minutes, ten minutes, twenty minutes—it doesn’t matter the size of the loan—he gets funded. And it’s not my decision. It’s the lender that decides. So, we empower lenders with tools and everything. So, in a sense, every lender is behaving as a bank himself.
So, I spent 13 years of my life working for Oracle. And I was building software for banks, insurance companies, airlines. It is always the institution model technology that’s rebuilt. It is a big entity in the middle, and it treats everybody else as a customer. What happens is that we start building network technology models. And the conversation about a Tribe versus a network? I actually think a network is a big Tribe. So, as long as we don’t have institutions, I think efficiency is gonna increase. The reason why we have very strong regulations is because there is one institution in the middle. I cannot move money between blue and green unless I go through the institution.
Think about it this way. If I want to give him $5.00, I have to call my bank, deploy them, which sends $5.00 to his bank. He doesn’t trust me that I give him $5.00 directly. Because we don’t have a mechanism. So, for $5.00, we have to deploy two institutions. Other friend, who tried to send $100,000.00 two days ago from the U.S. to China. He failed; it returned back. But he told me, “It returned back, but there is $50.00 less.” When he called the bank, said, “Why?” He said, “Oh. We paid $25.00 to send it, and it failed. And then we have to return it back. $25.00 charged by the other bank.” That’s crazy. And that’s $100,000.00. If it was $200.00, that’s 25 percent of his money. So, we have a very serious infrastructure problem that exists in technology that we’ve been building for banks does not support. That’s example No. 1.
Example No. 2. Everybody likes to be part of the economy growth. Wanna benefit from the financial product that’s out there. But if you look at which management companies. They don’t wanna talk to you unless you have at least a certain minimum. The model of selling is that, “I’m gonna deploy a person who’s gonna private banking, whatever they are doing. And yes, the minimum to participate in a product is $250,000, $5 million; it depends on the product.”
So, what we did—which is a great innovation in China; we did get an award for that as well—we created this product that we call extreme diversification. What does this mean? If you have 500 RMB and I give you borrowers to lend to, no matter what you do, the guy that has 200,000 RMB will have a better performance than you, because he can give 1,000 to each one of them. But if I create a system that will take your 500 RMB and consider it one cent at a time—so, instead of giving him $1.00, you’re giving him one cent—then you are actually having 500 times 100, so 500,000 different borrowers.
The issue is not in splitting it the first day. The issue is when the payment comes. I have to start splitting it over hundreds of thousands of people. So, there’s a company, state-owned company, in China called Dongfeng, China orients. They have a large group of assets, 1.3 billion RMB. And they were negotiating with us, if we’d consider to our platform. This happened in 2014. So, before they finished drafting the contract, we put it in our platform, it was completely subscribed. In three days, they haven’t finished yet drafting the contract. We call this the laws of small numbers. If you wanna do distribution, you have to be able to chop it into small pieces. You cannot sell investments on the Internet for hundreds of millions of dollars, but you can easily sell it for $100.00, $25.00, $10.00. The more you push the number down, the technology challenges, they grow, because you’re gonna have an explosion of transactions.
So, I consider this product to be more on the financial inclusion side than to be on the investment side. How is it financial inclusion? The guy that has a job and he gets a salary of $10,000.00 every month. He wants to invest $1,000.00. He would never be able to get a product, a good quality product, from a wealth management company. But with this product, with this system, he can get it. So, we are including more people with small amounts, to participate in the big opportunity.
The third example, which is very close to my heart, is a real process of innovation. So, each one of you has one of these. All of you have a mobile phone. It’s interesting to see that it is made by a very large number of people. So, I want you to focus on that piece that you adjust the volume with. And I’m telling you this story as it happens to us about 18 months ago.
We received an application, a loan application, from this company called Food Chanda. So, this is a small company, medium-sized, small-medium, some depends. In China, it’s 2,000 employees. And they want to borrow 3 million RMB. They want to borrow 3 million RMB because they need to pay their employees. And they told us, “You should lend money to us, because I make this piece of the iPhone.” We couldn’t verify that they make this piece of the iPhone. They said, “No, no, seriously, here it is.” But there is no way we could have verified that they do. So, they got refused by the bank. They get refused by FinTech companies like us. And their only option is to go to shadow banking.
The truth is, we connected with Foxconn, and we verified that they are the makers of that. And we verified that yes, they do have an order. So, imagine this. The company that is working on your iPhone 8 cannot get funded. That’s crazy. There is seriously a problem with infrastructure. So, when we talk about FinTech. When Ron says we create products, it is a big part of infrastructure that we need to do. There’s a big part of innovation that we need to do to create the product before it gets to you. So, can the banks do this? No, they can’t. Because they look at finance as an arbitrage opportunity. They don’t care about whether you get funded or you don’t, as long as there enough people willing to give the money. They look for the ones that are gonna bring up their balance sheets.
So, we look at finance as a logistics problem, because we cannot make money from the interest rate. So, the more people we have. So, what we did is, we started understanding what’s going on. So, my understanding before, I always thought, “It’s simple. You have an order from Foxconn, you must have an account payable from Foxconn. You give it to any bank; he’s gonna give it to you.” But the reality is that these suppliers are like this, are in different levels. So, the guy that came to us was probably level four. With Foxconn, they told me that they’ve tried so many years, with their brand name and everything, and they can only fund 10 to 15 percent of the demand. So, which leaves all these people unfunded.
We use block chain technology, and we follow transaction from step to step. And today I’m very happy to say that we cover 100 percent of all Foxconn suppliers. So, if you are a Foxconn supplier, you can get funded within 30 minutes on our platform. And these assets are 100 percent guaranteed by Foxconn. So, we don’t compete with the bank. We create an even bigger market. So, the bank can lend to it. In fact, our JV with Foxconn has already four banks part of it. So, Dianrong is one lender. Bank of China is one lender. Standard Chartered Bank is one lender. And there are more coming.
Everybody benefits. Whatever I say in this example from Foxconn can be applicable to any of these industries. We created this solution that does not rely on the credibility of China, does not rely on any payments. So, if Ford decides to make cars in Mexico, we can use this. If Ford decides to make cars in China, we can still use it with them.
So, we are here because we wanna answer the question, “What is the future of finance?” Yes, customer decides. It’s not a DBS, or Pierce that is gonna decide. Customers are gonna decide. So, I have struggled a lot to understand, who is our customer? Is it the guy that wants VIP service, or our data people that’s at a line that are upset at the time they don’t get good service? Or are we talking about the millennials? It is a very interesting report by Goldman Sachs that says that the millenniums want to have a work-life balance. So, they want something very simple, very easy to understand. There is a lot of merit to that.
But what we always keep forgetting, that we are in a world like this. This is not representative. This is representative. We are 7 billion people. Perhaps in this room, you are part of the 1 percent top of the 7 billion. Singapore, all of Singapore, is part of the top 1 percent. So, these are the people that are gonna decide for finance. All of them want to have a student loan, want to have a car, want to invest. We’re only covering at most, 1 billion. And when the Internet getting bigger and bigger and bigger, and accessing more, you’re gonna have companies that are gonna become giants of finance. Forget e-commerce. Forget Alibaba. Forget Incent. Forget Google. Google is an information company. Wait until the biggest finance company of the world shows up, that has all the services, but it’s gonna look at finance as a logistics problem, not as an arbitrage opportunity.
So, in my opinion, the future of finance for customers is gonna be inclusive and affordable. It’s gonna be fair. Whatever you pay, I pay. It’s gonna be easy to understand. No derivative, no blah, blah, blah that I don’t understand. And it’s gonna be super easy to regulate. It’s gonna be extremely easy to regulate, because it’s gonna be very transparent. I know exactly when I take an Uber, at what time he took me, where he takes me, what path he takes. It’s very simple for me to understand. But for operators for a company like Prosper and our self, we will have to look at it as a logistics problem more and more. And we cannot do any arbitrage. But it will be a huge opportunity. Thank you.
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