The company has been using an automated system to assess and price credit risk of borrowers since 2014. Apart from traditional data points from the credit reporting platforms including China’s central bank, credit bureaus and data vendors, the company also sources unstructured historical behavioral and transactional data of borrowers from online services including social networks, online travel agencies, e-commerce platforms and payment service providers. It also acquires borrowers from those online platforms.
Before the launch of the online platform in 2010, the company had helped Chinese financial institutions, including Bank of China and China Construction Bank, create credit solutions since 2001, according to the company.
The target borrower base of the company are EMMAs, or emerging middle-class mobile active users, many of who have quality employment records but no credit history or bank-issued credit cards. The company’s products are thus available through its mobile app.
Its current offerings are consumption loans and lifestyle loans, with the latter offering larger amounts of longer-term financing. Principal amounts are in the range of RMB 500 (US$ 72) to RMB 100,000 (US$ 14,400). The maturity of loans facilitated by the platform range from one day to 36 months. The principal uses of the loans range from shopping, entertainment, daily supplies and phone bills to business expansion and home improvement, according to China Rapid Finance.
The automated system has also largely lowered the average borrower acquisition cost for the company to US$ 20 and US$ 17 in 2015 and 2016, respectively, from US$ 770-800 per borrower through a direct sales force and US$ 80-100 with an open application model through other online channels. The company concludes that the cost per click on these online channels is high and the response rate is low, and fraud rate is higher. Currently, the borrower acquisition costs primarily consist of cash incentives offered to investors who commit a certain amount of fund to the consumption loan program.
The investors on the platform currently are mainly high net worth and family office investors. The company plans to add more institutional investors in the future.
The company claims it had facilitated more than 10.7 million loans to more than 1.4 million borrowers as of the end of 2016. New borrowers acquired in 2015 and 2016 were approximately 600,000 and 718,000, respectively. As of December 2016, 67% of the total borrowers were repeat customers.
The platform charges borrowers transaction fees and investors service fees. Revenues for transaction and service fees (net of cash incentives) were US $60.3 million, US $62.5 million and the US $55.9 million in 2014, 2015 and 2016, respectively. In 2016, though the total volume of consumption loans had surpassed that of lifestyle loans, more than 85% of the total fees was generated from the latter, the larger and longer-term loans.
89% of all loan volume originated in 2016 consisted of prime and near-prime borrowers, whose creditworthiness the company believes is roughly comparable to FICO scores of between 660 and 720. The annualized average default rate has historically been 7 to 8% for lifestyle loans and 2% for consumption loans. The platform provides their Safeguard Program, a risk reserve fund service, which compensates investors in the event of a default, and charges a fee for the management of the service.
The company also makes minor revenues from micro-credit loans extended through its subsidiary, Haidong.
It incurred US$30 million and US$ 33 million in net loss in 2015 and 2016, respectively.
Yirendai, listed on NYSE in late 2015, is so far the only Chinese P2P lending company to go public. A handful of other Chinese players in this field are also eyeing IPOs in the U.S. or Hong Kong in this year, that include Lufax, backed by Chinese insurance giant Ping An, PPdai, and Dianrong, according to local media reports. Fenqile, which provides installment payment plans to consumers through its online retail site, is also reportedly planning an IPO.
China’s online P2P lending market is rampant with fraud, due to the general lack of risk management in the growth-seeking and under-regulated sector. Yirendai reported a major organized fraud incident in 2016. Chinese financial authorities have issued a series of new regulations since August 2016 and launched a year-long investigation and inspection in April 2016. A total of 2598 sites have collapsed for different reasons over the past years and 2236 lending sites were still operating as of March, according to online peer-to-peer market research site P2P001. It is expected there will be further consolidation in the sector this year.
Update Apr 05, 2017: An earlier version of this story confused the gross billings on transaction and service fees net of customer acquisition incentives and revenues for transaction and service fees net of customer acquisition incentives.