An online financial service exhibition in Beijing . Financial services via the Internet, including peer-to-peer (P2P) lending, are booming in China. Provided to China Daily

Matching borrowers and lenders proves to be lucrative for high-flying friends

A famous Chinese saying states a man should be steadfast at the age of 30. When Zhang Shishi, Yang Yifu and Li Xinhe turned 30 this year, they were definitely steadfast regarding their business of peer-to-peer lending, known as P2P.

In 2009, inspired by the story of Lending Club - a US online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially - the three young men who had graduated from China's top universities established their own business, RenRenYouXin Group Co Ltd. The group has two major subsidiaries as Beijing Renrendai Co Ltd and Shanghai You Credit Co Ltd.

Four years later, the group raised $130 million from a group of investors led by TBP Capital, marking the largest single investment within the P2P lending industry. That number was higher than Google Inc and Foundation Capital's $125 million investment in Lending Club last May.

The number of staff of RenRenYouXin also grew from four at its launch to more than 3,000 by the end of 2013.

P2P lending is the practice of lending money to unrelated individuals and small businesses without going through a bank. This lending takes place online on P2P websites. It has an average yearly interest rate of 15 to 20 percent, more than twice China's official benchmark.

P2P operations were popular in China's Internet finance sector in 2013, with the number of new companies surging and transaction values skyrocketing.

Zhang Yifu, Li Xinhe and Zhang Shishi , (from left to right) are co-founders of RenRenYouXin Group Co Ltd.

According to the website www.wangdaizhijia.com (wangdaizhijia means "home of online lending" in Chinese), a Chinese P2P lending portal, the number of P2P lenders in China reached 800 with a yearly turnover of 105 billion yuan ($17.23 billion) by the end of 2013. That compared with 200 P2P companies with a transaction value totaling 5.6 billion yuan in 2012.

The reason P2P flourishes is because individuals and small companies have difficulty getting credit from banks. P2P lending has simplified credit checks, thereby offering an easier option. It also offers a good investment channel for the middle classes because they can normally get three or four times the return bank deposits provide.

The investment in Beijing-based renrendai.com, the leading P2P platform in terms of the total number of outstanding loans, follows similar capital injections into several other major P2P lenders. It is a clear indication of the growing interest by venture capital and private equity firms in the burgeoning P2P lending industry.

For Li Shujun, a partner of TBP Capital, the robust growth of Internet finance is a major trend as household incomes rise and more options in investment channels are developed.

When talking about this round of fundraising, Yang said it looked like "love at first sight" with TBP Capital. "It took us only one week to decide to sign a letter of intent with TBP. The whole process, from undertaking due diligence to finally putting the money in place, lasted less than three months, which is incredible for such a large-scale investment," said Yang.

Shared philosophy

A shared philosophy and confidence in RenRenYouXin's management team is the major reason for such an efficient investment, according to Yang. TBP's Li said the air was electric after Zhang Shishi, one of the co-founders, finished his speech at a news conference and gave the floor to Li. "It wasn't so much the big deal but perhaps the more trivial things that indicated Zhang is a man of specifics, accuracy and strict methods - exactly what the financial industry needs," he said.

Unlike companies that will usually raise the rate of business expansion after fundraising, RenRenYouXin is going to slow down the growth this year. "A solid and balanced growth is critical for financial enterprises, which is particularly true in the fast-growing P2P sector," Yang stressed.

Although China's P2P sector witnessed robust growth last year, quite a number of lenders encountered operational problems because of increasingly fierce competition. According to www.wangdaizhijia.com, 74 P2P lenders went bankrupt or encountered capital chain problems in 2013, with 1.5 billion yuan from investors overdue for repayment.

RenRenYouXin's fund will be used to cultivate talent and optimize products, to boost risk management and to make strategic mergers and acquisitions at an appropriate time, Zhang said.

"Once we consolidate our base, we are confident of seeing an annual transaction value exceeding 10 billion yuan within five years," said Yang.

In 2013, renrendai.com saw transactions totaling 1.57 billion yuan, up 342 percent over 2012. The average bidding interest rate stood at 13.07 percent. "We plan to double our transaction value this year," said Yang, adding the "conservative" target would allow for better development in the future. He said that to survive is much more important than trying to zoom ahead.

Because the central bank's payment clearing department is very likely to be in charge of regulating the fast-growing P2P industry, the policy risks have been largely reduced. Therefore, more venture capital is expected to enter the sector, further strengthening competition. According to Yang, Lufax.com, part of Ping An Insurance (Group) Co of China Ltd, is the biggest rival of renrendai.com. Other major players include paipaidai.com, yooli.com and ito uzi.com.

The ambition of RenRenYouXin, however, is not confined to being a mere online platform matching lenders with borrowers. In 2012, the three young men set up Shanghai You Credit Co Ltd, which is an offline company aimed at finding qualified borrowers and double checking their financial status. "It involves gathering credit information about small borrowers. Producing data based on that will provide huge business opportunities in the future," said Yang.

Financial dream

Zhang graduated from the School of Economics and Management at Tsinghua University, Beijing, while Yang and Li were classmates in the department of financial mathematics at Peking University.

Before 2009, Zhang worked for his family business. Yang was pursuing postgraduate studies in the Netherlands and Li worked for Bohai Fund Management Co Ltd.

The shared ambition to do something interesting and influential on their own brought the three young men together. "We discussed a number of business ideas, ranging from pawnshops to guarantee companies. We even discussed going into the gold ore business because of Shishi's strong family connections in that area," said Yang.

"The gold ore business is pretty lucrative but we finally gave up on the idea because it is not environmentally friendly," Yang added. "We are really excited about the P2P business, given its huge development potential."

Li made a big bet on the P2P business. "We may fail within one to two years, but all of us are sure that this kind of adventure is a worthwhile experiment."

However, starting a business is never easy. The most frustrating time, according to Yang, was at the very beginning when they conducted a survey on the street.

"I remember clearly that we received 190 pieces of feedback from people, among whom only three of them answered 'yes' to a question asking whether they would lend money to strangers online," Yang said.

The essence of P2P lending is borrowing or lending money through the Internet. "We were definitely a bit discouraged at the result. But later we interpreted it as a business opportunity that people hadn't recognized yet," said Yang.

He says young entrepreneu rs should not be too critical about their ideas at the initial stage. "The biggest advantage of a startup business is that small ships turn quickly and their captains have the ability to change plans in no time."

When the online website was launched in 2010, the first batch of lending all came from the three partners' friends and relatives.

Finding the right partner, Yang added, is critical in starting up business. "The right partner who shares the same philosophy can help you through the most difficult of times."