Time: August 20 2016 Author: Ping An of China [Sizelargemedium small]

YongSuk CHO is Chairman and Chief Executive Officer of Ping An Puhui, who is from South Korea, being tall, thin and smart. He studied history for his bachelor's degree and later went to the University of California at Berkeley to study for his MBA degree. After graduation, he worked at Citigroup and HSBC, engaging in personal consumer credit for 18 years. In 2007, Cho resigned as Vice President of Consumer Credit Marketing Department from HSBC Korea (South) and joined Ping An. At that time, Ping An was not able to conduct consumer finance business directly, but needed to partner with banks: banks offered loans to customers and Ping An issued insurance policies to provide guarantees. The Company, named Ping An Credit Guarantee Insurance then, started from a small business unit in Shenzhen, spending 7 years on establishing a personal consumer credit structure. In 2015, against the backdrop of the government's promotion of consumer finance development, and under the instruction of Ma Mingzhe, Cho headed up the integration of Ping An Credit Guarantee Insurance Business Unit, Ping An Direct's Loan Business Unit and Lufax's P2P Micro Loan into Ping An Puhui.

Choose trust:

Everyone is worth being treated with trust

Qin Shuo: How do you understand finance and good finance? Lately, some Chinese wealth management companies and P2P companies 'vanished' and went bankrupt, raising many social issues.

YongSuk CHO: What's finance? I have been working in the financial sector for nearly 20 years. Finance is essentially an intermediary service. The most important thing is to deal with risk.

What Ping An Puhui engages in is consumer finance, i.e. credit finance for consumption. Credit is always accompanied by risk. Risk management is not solely for protecting the company and ensuring profitability of the company; at the same time, we have a strong sense of responsibility, i.e. causing no great issue to the society. We have 42,000 employees and have served 3,500,000 customers. We should be vigilant about risk at all times, and conform to the basic rules of finance.

A man engaging in finance must be very sensitive, who should have a long-term risk management concept instead of seeking short-term benefits only. There are about 15,000 P2P and micro-loan companies in China, with an average loan balance of less than RMB100 million, and in a weak position to address risks. I don't think a bankrupt company is caused by poor product sales, but by poor risk management. At the stage of explosive growth, most of us tend to only focus on market share, growth, profit and revenue. However, when the whole economy slows down, problems will arise because of lack of control and warning of such indicators as NPL and credit loss. Therefore, dealing with finance is always about striking a balance between growth, profit, NPL rate and loss.

What is good finance? I think good finance is fair finance. For example, when I was in South Korea or the USA, it was easy to find a company to get a loan. It is easy for me to compare loan amount, price, turnaround time (TAT), customer experience and brand among different financial companies before choosing the most suitable product. The market system is fair to me. The current challenge in China is I need a loan but I don't know where to get it. From banks, P2P companies, or micro loan companies? There are too many choices. I think the market lacks transparency and is difficult to distinguish between them. For many brands, I have not heard of them. For example, a company offers me a loan of RMB20,000 at an interest rate of 25%, which can be issued within 1 week. However, I don't know whether it is convincible. It's easy for me to be deceived. I am in a weak position, unable to negotiate with a financial institution. In this circumstance, it is not clear whether the market can give me fair treatment.

反过来,站在金融公司的角度,什么是公平?就是要有一个方法,公平地评估客户的诚信、信用。不管有没有竞争对手提供类似服务,我都要根据客户的情况给他一个公平的产品和价格。而不是别的公司什么价,我就另外一个价,这对客户不公平。On the contrary, what is fairness in the eye of a financial company? The answer is there should be a way to fairly assess the integrity and credit of customers. Regardless of whether there are rivals providing similar services, I will give the customer a fair product and price according to his situation instead of giving him a different price from other companies, which is unfair to him.

Regarding inclusive finance, my understanding is expanding access to affordable financial services to all individuals and businesses, and providing consumers with convenient, smart and fast services. All of this is independent from the development of internet technology.

Qin Shuo: I have interviewed some micro loan companies. What they conveyed to me is there's a big market, many people are short of money, getting a loan is difficult and expensive, but they have advanced technology to provide services. What they talked about is business, but you emphasiz that inclusive finance is about social responsibility and trust and its first pillar is risk management.

YongSuk CHO: This has something to do with our vision. We have just achieved a loan balance of more than RMB100 billion and served a total of 3,500,000 customers, and we aspire to become the most renowned consumer finance company in China and even in the world. Of course, cost, income and profit are important, and they serve as a foundation for the survival of an enterprise. However, if you want to be an outstanding one earning great respect in the market, what you need is to have a sense of mission rather than making money only. Is Ping An Puhui only aimed at making money? No. The meaning of our existence is trust, and 'trust is power' has become our new slogan, which means we hate customers being disturbed by onerous procedures; instead, when you need financial services, regardless of the loan amount you need, regardless whether you have any credit card or credit record, as long as you come to us, we can fairly assess your integrity and credit with advanced review technologies and provide you with the fairest fee rates and conditions.

My colleague showed me a P2P advertisement a few days ago, which says 'we will not vanish' and we are not a runaway P2P company. I think this is nothing to be proud of, but a foundation and a root. If we don't have a strong sense of mission, only focus on making money, always say the market is large and there are many opportunities, we cannot survive for long.

Qin Shuo: then how to realize 'trust, responsibility, convenience and fairness' as you speak of finance?

YongSuk CHO: firstly, we choose to trust customers, adn believe he is a 'good man'. Everyone is worth being treated with trust. We make a risk assessment of him in order to provide services for him. Currently, unsecured loans account for more than 90% of all of our businesses. When working out a line of credit for a customer, we make every effort to reduce manual intervention, using a model combining the customer's credit behavior and big data.

Reviews in the traditional lending model originate from 'distrust', so customers need to provide the relevant documentation and do face-to-face interviews in order to prove that you can be trusted. Our model is to simplify the process of providing documentation, with a view to establishing credit records for customers, even for those having no credit history through remote services. The amount of the first loan might be limited, but customers will get more quotas with the time passing by, and the review TAT will be reduced, which is underpinned by our 10 years of experience in risk management and having more than 3 million customers. Inclusive finance is absolutely a right direction, and internet technology is its cornerstone.

Real internet finance will increasingly blur the competition frontier between banks and non-bank institutions

Qin Shuo: What do you think of the outlook of consumer finance in China?

YongSuk CHO: We will have a look at household debt ratio first. The proportion of household debt to household income in China is almost half of that in the USA; the share (38%) of household consumption in GDP in China is also half of that (68%) in the USA. In China, household debt is low, while local government debt and corporate debt are high, which is unbalanced. How to achieve a balance? I think inclusive finance should be introduced to promote consumer spending. If customers spend more, enterprises will sell more products and their debt ratio will decrease. Thus, a balance can be maintained.

As of 2015, total consumer loan balance was RMB28 trillion in China, which is really not much. China has a population of 1.3 billion; and many of its people have credit standing, are willing to repay, need short-term financial services, and they will also have a stable income. However, unfortunately, it is difficult for them to obtain financial services since they have just got employment, without a credit record. The NPL ratio is rising in banks, but in fact there are many good individual consumers, who might also want to apply for a loan to improve their life. However, banks could not issue loans to these customers. With inclusive finance, we can provide financial services for those who haven't got financial services so far but are well qualified.

I once worked in Thailand and South Korea and studied in the USA. Everyone believes China will be the biggest market in the world in the future, which is only a matter of time. I came to China in 2007 and started consumer finance business. At that time, many of my former colleagues in South Korea didn't think it would work. In their eye, Chinese don't like loans, think borrowing money loses face, and brings a sense of guilt. In fact in Asia, many Asians don't like taking out a loan. However, when we have a look at the consumer finance market, we can see countries with high household debt ratios are all developed countries, such as the USA, Germany, Canada and Japan. They have a stable income and know their future cash flows will be stable, thus they can leverage financial services to live a better life. Of course, from the regulatory perspective, a ceiling should be set and the consumer credit should not be too high.

In fact, consumer behavior has changed a lot in China, especially among the younger generation. They have started to borrow money, believe they will have a bright future, and want to enjoy a better life; therefore, they go travelling and studying. I think this is a global trend, and this is a case in every country. Therefore, I believe the market penetration ratio of consumer finance business is bound to surge. In case any credit issue arises, personally I think it might be relating to corporate loans first rather than consumer loans.

Qin Shuo: Ping An has been trying to find out the ways of consumer finance for long. What do you think is the most valuable experience? What lessons have you drawn from the past?

YongSuk CHO: We started from scratch in Shenzhen, then in Shanghai, Jiangsu and Guangzhou, and now cover nearly 200 cities across all provinces. Everyone thinks the internet is something stunning, which attracts me as well. However, in the past decade, in each place of China, we have served most of the 3.50 million customers offline. Risks are different in different regions. For example, risky industries are different in Jiangsu ad Guangdong. I'm a foreigner, and I think this is a good lesson to me.

If running the business 100% online, without any experience and lessons learned from offline services, I will really doubt the enterprise's ability to identify different risks from different people in different regions. Therefore, we are lucky. From the very beginning, we operated the business offline and collected all necessary information and data, and didn't turn to the internet until now, which is totally different from those emerging internet companies.

Secondly, when formulating a new strategy for Ping An Puhui in 2014, I made an analysis of customers. For customers coming to us to apply for loans, we ask them to provide paper-based documents, such as income and employment certificates, and proof of address. Customers will provide a pile of them to us, but these materials are not all true, as it is easy to produce counterfeit documents, 50% of which might be genuine, and 50% of which might be counterfeits. Thus our team begins to worry more. When they think a customer is not reliable, they will impose another requirement, say, providing a marriage certificate. If thinking still not enough, they will impose more requirements. As a result, customers spend more time on preparing more materials; however, we still distrust them. Even if we decide to issue a loan, the ratio of overdue payment is very high, and we find that some materials are counterfeit.

What does it indicate? We drive out good customers by keeping asking for certificates. A good customer cannot stand such demands. He thinks he is a good customer, and doesn't understand why we demand more of him since having provided a lot of information to us. However, for a bad customer, he thinks it's not a big deal and he can accept it. Hence adverse selection occurs. Therefore, demanding more of customers cannot necessarily reduce risks but drive out good customers instead.

From 2014 on, Ping An Puhui introduced significant reforms. We seldom use this paper-based approach. When making a lending decision about the loan amount and price, we don't need to see customers, don't need to have a face-to-face interviews with them, and don't need to ask them questions. So far, we've accomplished a lot, but we still have a long way to go. Thanks to the experience in the past decade, we have found what information is really helpful for our lending decision-making. On the contrary, where you work and how much you earn is really inconvincible information, and is also troublesome.

Qin Shuo: Then what's the basis and scenario for issuing a loan?

YongSuk CHO: For example, your phone bill and how often you call your family members can serve as a basis. If you agree to share your phone bill with us, we will not need any of your paper documents. We will get the relevant data from operators and make a decision within one second. It benefits customers because it is fast; and it also benefits us because it improves our review model, more efficient, more cost-effective, and requiring not many offline workers and outlets. Thus, a win-win situation is achieved.

If you apply for a loan via our app. Firstly, we thank for your application, and we will use such high-tech means as face recognition and micro-expression to identify your identity, as well as some anti-fraud means to identify if you are a real applicant. Secondly, thanks for following the first step and please tell me how much you want to borrow. If only RMB10,000, that's OK; if RMB100,000, we will ask what else you can provide to us, i.e. the information that can be automatically obtained, being genuine, and difficult to counterfeit. For example, do you have any life insurance policy, auto insurance policy, social security insurance, tax payment, or records of shopping on e-commerce platforms? After customers grant us authorization, we can look up the information within one second. Customers also favor this approach, who use their own means to affirm themselves.

If all of the above scenarios are realized, there's no need for us to expand the current size of 800 outlets across the country to1,000 to 2,000 outlets. The number of outlets can remain unchanged, but the loan balance will increase. If the business is 100% operated online, the application process can be automatic, without any manual intervention, and customers can complete it by themselves. The main task offline is collection. It is very helpful for our risk management, as all data is genuine, without the possibility of counterfeiting or manipulation; in addition, our cost is lowered. Thus we have the potential to cut the price and become more competitive. Those who are qualified for credit loans but unable to get services from banks will come to us.

My dream is to achieve a loan balance of RMB1 trillion

Qin Shuo: For individuals and small/micro-sized enterprises, are banks and inclusive finance the only two channels to achieve indirect financing? That's to say, you go to either banks or inclusive finance institutions.

YongSuk CHO: Absolutely right. In other countries, people borrowing money from consumer finance companies are not necessarily low-income earners. For example, senior executives in South Korea receive a high income, but they still borrow money from consumer finance companies, as its process is easy and fast, while the process in banks is tedious and troublesome. For example, I need 50,000 yuan for 3 months. I don't care if the price is high since it is a short-term financing need. Customer experiences with inclusive finance and banks are different. The balance of consumer loans is RMB28 trillion in China, 96% of which is provided banks and only 4% of which is provided by micro-loan companies whose average loan balance is RMB100 million. However, among the balance of consumer loans in the USA, 50% is provided by banks and 50% non-bank financial institutions. In other Asian countries, 68% is provided by banks and 32% non-bank financial institutions. What does it mean? It means the proportion of consumer loans provided by non-bank financial institutions is too low in China, just in its infancy.

At a conservative estimate, China's consumer-credit market will swell from RMB28 trillion to 52 trillion by 2020, with the participation of non-bank financial institutions rising to nearly 20% from 4% now. Among this 20%, we hope to achieve 10% of this market by that time, which is 6% now. Though the percentage doesn't seem to increase substantially, the whole market is growing. My dream is to achieve a loan balance of RMB1 trillion.

Qin Shuo: It sounds quite exciting.

YongSuk CHO: Chairman Peter Ma has always talked about what happens in the coming 5 years and 10 years instead of now, today and this month. So far, financial services are strikingly different in banks and consumer finance companies. The former is characterized by a cumbersome and strict process; and the latter is characterized by low amounts and rapidness yet with high risks. In addition, the cost of funds is only 2% in banks, while the minimum cost of funds reaches 8% in consumer finance companies, indicating a difference of 6%. Due to this difference, banks tend to serve high-income, high-amount and low-risk customers, as those customers requesting a large loan are willing to wait for a longer time. They spend in a planned manner, without an urgent need for money. However, for consumer finance companies, as their cost of funds is higher, they don't have competitive edges as banks in this regard. They usually serve low-income, low-amount and high-risk customers, and their strength lies in convenience.

I think a real reform is being pushed through. If the customer acquisition cost and the operation cost of consumer finance companies get close to zero under extreme circumstances. However, everything in banks is 'high-end', for example, the rent of offices and outlets is very high and the salary of bank clerks is high; therefore, the expense base is high in banks. If things go on like this, we are absolutely able to rival banks. Of course, if banks continue to expand their customer bases, it's hard for us to compete against them. However, we are sure to have opportunities in the coming five years on condition that we can realize internet finance in a real sense and our customer acquisition cost can get close to zero. Then the competition frontier between banks and non-bank financial institutions will become increasingly blurred, which has never happened in the history. I think this is very interesting, which everyone can see.

In fact, inclusive finance is faced with a barrier

Qin Shuo: I have a question. For risk management, the presumption is that human nature is evil; therefore, many parameters are set to protect ourselves. However, in your model, you believe customers are good. Is there any contradiction between the two?

YongSuk CHO: Trust is a two-way street. We need to trust customers and customers also need to trust us. If we ask customers to provide the information that is easy to be forged, we are wrong in the very beginning. Customers spend lots of time on preparing various documents, and we only find many of them are fake. Customers are at fault, but we should be held accountable for it since our process is ineffective in having us trust the information provided by customers. Therefore, I would like to fully trust customers and I will not leave them any room for counterfeiting, which has nothing to do with whether customers are good or bad. I only aim at building better mutual trust. If a customer can provide his auto insurance, social security insurance and life insurance record, which is genuine information, cannot be manipulated by the customer and we obtain through systems, I would trust him. If I use the genuine data for making a lending decision in a cost-effective and fast manner, the customer will also trust us because I provide him with the best amount, price, product and brand. Therefore from my perspective, I trust a customer, which means that I will not offer a customer any possibility of providing false information. My value lies in my knowledge of how to assess creditworthiness of customers. Only when institutions lack professionalism, will they demand more information of customers; however, the information is useless.

We have served 3.50 million customers and I believe we will have 10 million users soon. This really needs trust, otherwise our business cannot be sustained. Therefore, I have always emphasize if there's no trust, it is not Ping An, and it is not Ping An Puhui, either.

Qin Shuo: Will this market become a winner-takes-all market? With a small size, one cannot offer competitive services. If you have more market shares, you can offer more competitive prices and gradually you can change from a consumer finance leader to a leader capable of competing against banks for a bigger market share.

YongSuk CHO: It is a sure thing. Once our loan balance reaches a certain size, we can diversify risks, as by then we are capable of knowing where the risk is and what we can do, and managing our loan portfolio well. Only when the business size increases and products and channels are spread everywhere, can you serve customers across the country. Only when a size is reached, can your operating cost be lowered. It is different from buying a pair of sports shoes, where costs of each pair of shoes are almost the same. Once inclusive finance reaches a size, risk management will be definitely better and expenses less; in addition, we have a brand and our outlets are spread across the country, thus we can set market standards. Nobody can provide a lower price than ours.

I believe in the coming five years, only three largest companies can survive; while the others will come and go. If we strive to become one of the largest three, we must have a sense of mission and responsibility more than making money, and only in this way, can a company see sustainable growth. In the beginning, many people might say we are a usurer due to a small size, high pricing and high risks. However, with the popularity of the internet, we can cover mass customers at a low cost almost the same as banks', which is inclusive finance in a real sense and will have an impact on banks. Banks can run the business in a traditional way no more, and must make a change. These changes will also do a lot of good to Chinese customers.

Qin Shuo: Do you worry internet companies' engaging in inclusive finance?

YongSuk CHO: I'm also learning from internet companies. However, I think we have the advantage over them. Firstly, we are real. Of course, I don't mean they are unreal. What I mean is that we have a real past of ten years, we have a loan balance of RMB100 billion and 3.50 million customers, and we have credit data in the entire customer lifecycle. Secondly, our offline outlets are spread across the country. Our offline teams can deal with the issues in risk management, especially post-loan management which cannot be fully processed online. However, internet companies can only seek outsourcing. They operate in a closed-end loop; while we are an internet financial company in an open-end loop.

In fact, inclusive finance has a barrier. We have a diversified model. Both online and offline customers are spread across the country. We have had more than 3.50 million customers who have received loans successfully from us, which demonstrated our stronger capability for risk management and receivables collection; however, internet companies can only make phone calls. As the proportion of existing customers continues to rise, the loan renewal expense continues to decrease, which allows us to cut operating costs. Regarding innovations, e.g. in anti-fraud, our network awareness includes information from multiple sources, including government organs, social networking platforms, online retailers and operators, which allows us to have a cross-check of customers from multiple sources. Regarding credit risks, we have an 'identity radar' system.

In addition, our core review technology is in the system. No one knows the rules, possibly only one man knows how loans are reviewed and approved, and even I don't know the rules. Therefore, a technological threshold is established. There's an employee turnover in the Company, but it cannot affect this process. In addition, so far, a truly capable person has never left Ping An Puhui because he knows Puhui has a bright future.

Aim to achieve something greater on a great foundation

Qin Shuo: Is there any benchmark for the model you are exploring, similar to Apple or Tesla in China?

YongSuk CHO: I joined Ping An in 2007. I worked in HSBC at that time and in Citigroup before that. In 2007, Ping An ranked No. 440 on the Fortune Global 500 list, lagging way behind Citigroup an HSBC; now the gap between them narrowed sharply. Ping An is already very great, and I would like to create something greater on a great foundation; therefore, we need to become a benchmark company. If we use a company as our benchmark, we will lose the sense of mission when overtaking the company someday. Our practice is totally different from that of Citigroup and HSBC. Even though the economic growth slows down, the market penetration rate of consumer finance remains very small. Therefore, we are still able to do the business and the market potential is great.

I think China has its own strength. Chinese are not afraid of changes but tend to embrace them. Both the young and the old in China are willing to try out new things. Of course, sometimes China seems to be in its haste during this process, especially in lending and credit cards. When competition became fierce, many companies simply chose to cut prices. If we sell financial products as if they are consumer goods, risks will be neglected.

Qin Shuo: You act as a leader of the company, what's your management style?

YongSuk CHO: I mainly engage in internal management and I seldom deal with external issues. In addition, I ask many questions. I welcome innovations, embrace mistakes, and am very tolerant. Our team members have never swore at each; however, we always put forward many questions. I often ask them such questions as 'what do you think of it' and 'how are you going to solve it'. I don't mean to impose pressure on them, but to share ideas and facilitate mutual learning.

Qin Shuo: What kind of corporate culture would you like Ping An Puhui's employees to create together?

YongSuk CHO: Our DNA is perseverance. The style I like is tenacity. As long as the whistle doesn't stop, we will not stop. I value tolerance and implementation as well. Whenever we are confronted with a problem, we will have a discussion together, which is very open. However, once a decision is made, we must 100% carry out the plan, without any compromise. For the implementation, we are very strict with ourselves. However, many other companies tend to have a brainstorm at each meeting but don't carry it out at all, or carry out many plans yet without a full and frank exchange of views.

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Ping An Insurance (Group) Co. of China Ltd. published this content on 15 October 2018 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 15 October 2018 06:32:03 UTC