Wednesday, February 13, 2008

Chinese Stealth Startup Qifang Wants to Bring P2P Lending to the Mainland

lending is coming to China. This morning I interviewed a
Chinese-American entrepreneur living in Shanghai named Calvin Chin
working on a stealth P2P lending site for Chinese student loans called Qifang.
(The name, which translates to “bloom,” comes from the Chairman Mao
quote, “Bai Hua Qi Fang”—”Let a hundred flowers bloom.”) Consumer
lending is just getting off the ground in China. Most college education
is financed by group borrowing associations rather than bank loans.
Chin wants to bring that group lending dynamic online with Qifang. In
fact, P2P lending might have a greater impact in China and other
developing countries than the U.S. because of the absence of other
consumer banking alternatives.

Chin was born in Michigan, went to Yale, and worked in banking and a
few tech startups before moving to China. He founded Qifang in August,
2007. He is aiming to a launch the site in China in the spring. So far
it is a real bootstrap operation. He has raised $200,000 in angel money
from investors in Hong Kong and other parts of Asia, and is in the
process of raising a series A financing. Qifang was inspired by
existing P2P lending startups like Prosper and Zopa, but Chin is
developing it with a Chinese twist. He says:

We feel strongly about China’s Internet being pretty
embarrassingly all about copies. And while we were inspired by other
models, we feel like we need to challenge ourselves to be different and
better and fit the market. We think of it as innovation leveraging—take
a good idea and make it work for China by making it different.

porting over Prosper’s business model won’t work, given the lack of
credit history, the lack of a large student loan market, the
still-young Internet culture, and the severe regulatory environment. As
with Prosper, individuals with money to invest can come on the site and
register as lenders. They can browse through the profiles of the
different borrowers to decide who to loan their money out to. Unlike
Prosper, Qifang is starting out only with student loans.

And it is not the fist P2P lending site in China. A broader one called PPDai offers P2P loans across many categories (see this write-up
in English). But Chin thinks that starting with student loans is the
better strategy in China because of the need to stay in the good graces
of the government. Anything that helps promote education is popular
with government bureaucrats.

It is also a big market. Chin estimates there are 25 million
students in China, who pay an average tuition of $700 a year. That is
$17.5 billion in potential loans.

expects the interest rate on most loans on Qifang to be between 8 to 12
percent, a decent return. The interest rate will be based on how many
lenders bid on each loan. The site will recommend that lenders invest
in a portfolio of loans to reduce their risk, but if they choose, each
one can put all their money in a single loan. Since there is very
little credit history on individuals in China, the site will use other
proxies to calculate risk. Each borrower must scan in their national ID
cards to verify who they are, and list their school, major, grades,
hometown, parents ID cards and income. Chin is creating partnerships
with the schools directly, so that the information students supply can
be verified and so that loan payments can be made directly to
educational institutions. “We don’t want students running off to
Macao,” he jokes.

There will also be an interesting social calculus that takes place
on the site. Since each borrower’s parents will be named on the loan,
failure to pay it back would result in a shameful losing of face for
the parents. “Social pressure is very powerful here,” notes Chin.
Default and delinquency rates will also be visible by hometowns,
school, and even major. Banks don’t benefit from that sort of social
pressure. Whether it will have any effect on default rates will be
worth watching.

As growing economies like China develop their banking
infrastructure, P2P lending has a shot of growing up with it rather
than fighting against an already-entrenched way of doing things. In
that sense, P2P lending might have a better shot in China than it does