China's Biggest Peer Lender Plans Push Into New Finance Services

  • Lufax aims to be `Charles Schwab With Chinese Charateristics'
  • Targets emerging middle-class investors for its platform

China’s Lufax has become the biggest online peer-to-peer lender in the world by certain measures. Now it is aiming to become much more.

Gregory Gibb, the former McKinsey & Co. consultant who runs Lufax, wants to create the Charles Schwab Corp. of China, offering a broad selection of financial services including discount brokerage to the country’s fast-growing middle class. He sees it as a natural extension of the Lufax lending platform, where individuals and small-businesses who want to borrow money are matched with investors seeking higher returns than what they can get from a bank.

Lufax, short for Shanghai Lujiazui International Financial Asset Exchange Co., has emerged as the leader in China’s booming peer lending market among thousands of competitors shaking up the traditionally state-controlled sector. The goal now is to bring innovation and lower prices to a broader swath of finance, a challenge for giants such as Citic Group Corp. and China Construction Bank Corp.

“Charles Schwab with Chinese characteristics” is the goal, said Gibb, a reference to the “socialism with Chinese characteristics” term used for economic reforms under Deng Xiaoping. “When we started P2P, every day we would finish selling everything in five minutes. We saw this totally unmet need in the marketplace.”

More Opportunity

Though peer lending started earlier in the U.S. with companies such as LendingClub Corp., China has quickly become the bigger market. The total amount of outstanding peer-to-peer loans hit 351 billion yuan ($55 billion) in October, according to iResearch Consulting Group. 

There is more opportunity ahead, said Paul Schulte, former head of Asia banks research at China Construction Bank International and author of “The Next Revolution in our Credit-Driven Economy: The Advent of Financial Technology.”

“The bottom line is that Lufax has a larger market share with a larger base in a market that is growing faster, with a larger potential population by an order of magnitude compared to LendingClub,” said Schulte.

Lufax was founded four years ago and its biggest shareholder is Ping An Insurance (Group) Co. It lent 14.7 billion yuan ($2.3 billion) last quarter, Gibb said. LendingClub said its total for the period was $2.236 billion.

Future IPO

The Chinese lender is planning an initial public offering, but timing and location haven’t been set yet. It could come as early as next year or as late as 2017, said Gibb, adding that Lufax isn’t yet profitable because of rapid growth and the cost of acquiring customers.

Lufax is seeking to raise about $1 billion from investors at a valuation for the company of between $15 billion and $20 billion, a personal familiar with the matter said this month. That would make Lufax the most valuable financial startup in the world, according to CB Insights. 

The proposed valuation would be an increase from Lufax’s $10 billion valuation when it raised funds in March. The company has grown since then, including a $2 billion deal in August in which Lufax bought a network of small lenders from Ping An to bring its total storefront for sourcing loans to about 500. Lufax now has 16 million registered users, up from 10 million in July, Gibb said. 

Transfer Limits

“The whole story of Internet finance is scale,” he said. “You have to have large numbers of investors because that gives you negotiating power, which gives you the ability to generate a large amount of revenue.”

Lufax, whose website is being rebranded as Lu.com, is also aiming at cross-border transactions, selling more offshore financial products to Chinese who are still limited to transferring $50,000 a year overseas. Lending accounts for just 10 percent of the 100 billion yuan a month in volume of investments made through their platform, Gibb said.

While potentially profitable, the lending business is highly volatile, and tends to move with equity markets, he said. The wealth management business has proven steadier. Only about 5 percent of what is sold through the platform is sourced from Ping An, he said. The rest comes from 80 mutual funds providers, 25 other insurance companies and 350
financial institutions, he said.

Industry Shakeout

The peer-to-peer business is going through a shakeout. Gibb estimates that in the past 18 months as many as 800 lenders have gone out of business, while another 1,000 have started. Most failed because of a mismatch between giving out long-term loans and taking in short-term investments, not because of defaulting borrowers, he said.

Even with computerization, the peer lender needs humans to check against fraud, the number one problem with loans, he said. Default rates have been declining in the last quarter, he said, without revealing specific rates.

Lufax may be able to partner with China’s big brokerages, such as Guotai Junan International Holdings Ltd. They are focused on managing money and rely on third party distributors to sell their products, said Zennon Kapron, managing director Kapronasia, a Shanghai-based consultancy.

“We want to reach the middle market investor in China, the emerging middle class,” Gibb said. “We want to reach 15 to 20 million active investors over a couple of years.”

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