VCREDIT, Chinese leading independent online consumer finance service provider, has pursued internet-based intelligent product operations commenced in 2006. Contributed from its smart lending and risk control technologies, the firm has seen its business size and customer base grow rapidly over the past decade. As of the end of last year, VCREDIT had over 48 million registered users, and its main product KK Credit retained 16.4 percent of China's credit card balance transfer market.
"Engagement in Transactions"
VCREDIT started to develop smart internet-based services, with KK Credit as its entry point, after gaining a critical mass of capital and momentum in 2015.
"At the very beginning, customer acquisition was a huge challenge because the scene was nascent," VCREDIT's Chief Executive Stephen Liu said. "Our advantages lied in a risk control system we built in the early stage, the capability to price the risks in an effective way, and the precise description of our target groups. We found out that prime and near-prime borrowers are underserved by traditional financial institutions, so we chose them as our target groups. You can see our KK Credit is one of the first tailored consumer finance products providing credit card balance transfer services in China."
"Back then, many of our rivals were unable to price risks. It remained very difficult for some companies without scenarios and risk pricing ability to control the rate below the red line of 36 percent," Stephen Liu added, sharing his insights.
After KK Credit, VCREDIT has rapidly upped its ante to offer a host of services and rolled out Dou Dou, Xing Xing, among others. "We have the expertise to develop advanced risk control models and realize the complete automation of online and offline businesses. Naturally, many partners come to seek for collaboration with their consumption scenarios due to this business advantage. For example, we have joined hands with China Telecom to roll out mobile phone installment service in 20 cities so that the original in-person interviews and on-the-spot contract signing can be automatically operated in the programme of VCREDIT."
VCREDIT's prospectus shows that in 2015, 2016 and 2017, the company realized the loan of CNY3.53 billion, CNY7.87 billion and CNY24.54 billion, respectively, indicating a compound annual growth rate of 163.7 percent. During this time, the firm achieved the total income of CNY1.06 billion, CNY1.43 billion and CNY2.71 billion with the CAGR of 59.6 percent. Last year, the company recorded the operating profit of CNY347 million with the adjusted net profit of CNY293 million. This shows the company made a great progress in 2017.
Mr. Liu has his own clear and unique understanding of risks. In his opinion, most consumer finance service providers should focus on each transaction instead of setting up an account system like traditional banks carrying out revolving credit. “Due to the unstable credit of near-prime borrowers, the largest value of these population comes from trading. We do not carry out revolving credit business or operate two loans at the same time with these customers. They must repay the loan before borrowing the next. Moreover, we cannot assure the approval of a loan to our customers even if they have borrowed from us. As we need to screen each application, the high cost becomes the biggest problem of trading. However, with the assistance of smart risk control and automated trading, we can reduce the cost and provide a realistic solution to make it into a functional business model,” Mr. Liu said.
First Share of Smart Finance
Smart risk control and smart credit mentioned by Mr. Liu are the basis of VCredit's 'Smart Finance' strategy. In April 2015, the firm took the lead in publishing its Smart Finance strategy.
The company developed a smart lending mode named 'Robot Lending' based on Hummingbird Cloud risk control system. It focuses on realizing the automated and intelligent consumer finance service on mobile internet through its proprietary robot.
Lending Robot is operated by the company's eight proprietary risk control engines, including functions such as data collection, analysis, rating, regulation, interception, decision-making, anti-fraud, and machine learning. Hummingbird system performs four major tasks, such as identity verification, fraud detection and prevention, debt-to-income ratio assessment, and risk quantification.
Scorecard engine is the core of risk quantification. Their credit plus-alternative data approach performs a foundational function in their risk management system. As of now, the company has already developed over 50 scorecards.
"We classify our customers into different types with three to five scorecards for each," Mr. Liu said.
Assisted by continuously optimizing risk management, the rate of VCREDIT's customer loan quality maintains a relatively high level while the amount of overdue loans is annually decreasing.
Sticking to Compliance Operations
As Chinese consumer finance market evolves, compliance risk is one of the inevitable topics.
The Office of the Leading Group for the Special Campaign against Internet Financial Risks and the Office of the Leading Group for the Special Campaign against Peer-to-peer (P2P) Lending Risk jointly issued the Notice on the Regulation and Rectification of the "Cash Loan" Business ('No. 141 Letter') on Dec. 1, 2017.
In this letter, authorities reiterate the regulation of a 36-percent red line on capital costs to borrowing while prohibiting an individual from lending from over two financial institutions and financial institutions from accepting these loans.
No. 141 Letter also formulates requirements on capital sources of cash loans and forbids all kinds of exchange organizations and P2P online loan platforms to "inject capital" into cash loans.
Mr. Liu highly agrees to strengthen the regulation of consumer finance sector and believes that it will promote a standardized development for the whole industry.
So far, the supervision has a very clear framework by first establishing a qualified investor system, and then protecting consumers, followed by the establishment of a credit system. The No. 141 letter clearly requires lending institutions to follow the principle of 'know your clients' and protect the rights and interests of these financial consumers. It requests institutions not to tempt clients to contract a loan so as to avoid these borrowers from falling into debt traps. The letter also makes precise provisions on the details of the overall capital cost, the maximum amount of loans, the term of loans, and the use of loans.
Besides the credit investigation capacity of the PBOC, Baihang Credit Investigation, sponsored by National Internet Finance Association of China, Sesame Credit, and Tencent Credit, has gained the first license for individual credit investigation this May.
"The No. 141 letter has little impact on us since VCREDIT provides banks, trust companies, consumer finance companies and other licensed financial institutions with services including customer acquisition, technology support, and credit risk quantification. Our products aim at prime and near-prime groups of customers, with the rate of a loan between 18 and 36 percent, and it by no means involves the P2P funds since the beginning,"said Mr. Liu.
The emphasis on compliance makes the VCREDIT more confident in its risk control capabilities than its peers. Mr. Liu attributed it to the "Hong Kong Gene" in his body, when interviewed by Hong Kong newspaper Ta Kung Pao in 2014. From his point of view, the business culture in Hong Kong environment is to do what one can do and make the money that one can earn. He frankly said that he pays more attention to risk management instead of the business scale.
Mr. Liu is quite optimistic about the development of China's consumer finance market in the future. "The outlook is absolutely excellent; China has begun changing the growth model from investment-driven to consumption-driven and consumer finance is a very significant aspect to stimulate domestic demand. With the enhanced regulation, gradually standardized market, and the continuously advanced financial technology, we can make a useful contribution besides licensed institutions and other main forces in the consumer finance sector," He said.
The compound annual rate of growth of per capita consumer spending from 2017 to 2022 is expected to be 8.1 percent, which will continue to be higher than CARG of nominal gross domestic product per capita of 7.8 percent in the same period. The outstanding principal balance of loans in the consumer finance market is expected to reach CNY30.74 trillion in 2022, with the CARG from 2017 to 2022 at 24.0 percent. The growth rate of consumer loans will be higher than other personal credits, and online consumer loans will grow faster than the offline ones, according to a report from US consulting firm Frost & Sullivan.
Grounded in the achievements of VCREDIT in the smart finance industry and the tremendous prospects of China's consumer finance market, the company has attracted four rounds of funding before and after it went public. Especially the third round of financing reached a large scale of USD50 million, which was received from private equity fund TPG last October. “This PE institution has only invested two companies in China's Internet financing industry until now, one is us, and the other one is Baidu Finance,” Mr. Liu said.
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