China’s Top P2P Lender Pivots Away From The Business

The world’s most valuable peer-to-peer lender is shifting away from the business.

China’s Lufax, short for Shanghai Lujiazui International Financial Asset Exchange Co., is valued at $18.5 billion, far more than peers like San Francisco-based LendingClub Corp. At the end of October, it had an estimated 13% share—the largest—of China’s $109 billion market for matching small borrowers with lenders, according to industry researcher Wangdaizhijia.

But the company is pivoting away, shifting into China’s booming retail-investing market with online accounts that let clients trade stocks, mutual funds and fixed-income products. Lufax says it is going where the growth is, and hasn’t been influenced by concerns about “P2P” lending, which suffers from growing skepticism abroad and soaring defaults at home. The shift comes ahead of a planned Hong Kong initial public offering by Lufax in the second half of 2017 that could raise $5 billion at a valuation of $25 billion, according to people familiar with the situation.

“The concept of wealth management which took off in the U.S. in the 1970s…we think China in the next 10 years is going to go through that in an accelerated way,” Lufax Chairman Greg Gibb, a former McKinsey & Co. consultant, said in an interview. He declined to comment on the IPO.

Lufax’s pivot reflects the fast changes in the financial-technology industry.

The company—an affiliate of Chinese financial giant Ping An Insurance (Group) Co.—was founded six years ago with a business model like that of LendingClub, offering a matchmaking platform that lets customers invest in loans to individuals and small businesses. Of Lufax’s $56.9 billion in client assets, such P2P loans still account for around a third—though the company expects a drop to 15%—and yield an average of 8.4%.

But investors globally are souring on P2P lending, which tends to be less regulated and potentially riskier than traditional bank lending. LendingClub shares have dropped about 75% since its December 2014 New York IPO. In China, hundreds of P2P lenders have collapsed, including high-profile Ezubo Ltd., whose executives were arrested and accused of defrauding thousands of small investors of $7.6 billion.

Now, Lufax and rivals are pushing sales of funds and other investment products. The value of such “wealth-management” products rose 12% to 26.3 trillion yuan ($3.8 trillion) in the first half of 2016, according to China Banking Wealth Management Registration System disclosures. As of the end of 2016, nearly 100 million people had bought such products online, up 10% from a year earlier, according to a survey by the China Internet Network Information Center.

Competition is fierce, with offerings from banks, insurers, startups like Lufax and the financial arms of tech giants like Alibaba Group Holding Ltd. that range from exchange-traded funds to insurance products, returning up to 6%, as well as apps for easy trading over mobile phones. Regulators have started raising concerns because it isn’t always clear what the products are invested in.

Lufax doesn’t yet turn a profit, but hopes to generate earnings next year as the money it spends to attract customers declines, Mr. Gibb said.

Cao Zhi, a 33-year-old working in Shanghai’s banking industry, first put money into a Lufax account a year ago, drawn by attractive rates, liquidity and the Ping An connection. At the end of the year he moved his money to a P2P lender backed by the Guangzhou city government.

“Both platforms are backed by parties with a strong reputation, so all things being equal, I went for the one with higher interest rates,” he said.

Lufax sells more than 3,500 fixed-income, money-market and mutual funds and insurance products sourced from domestic financial institutions; customers can buy via mobile phones and online accounts. It collects fees from financial institutions for listing their products and from customers when they buy mutual funds. The company also operates a secondary exchange where investors can trade existing funds.

Big banks and other traditional financial firms have dominated the wealth-management market, but Lufax says it offers higher returns and charges lower fees than many of them. At the end of September it had 25.5 million registered users, the company said, 6.55 million of whom hold Lufax products or have made a transaction in the past 12 months.

LUFAX BY THE NUMBERS 

• 25.5 million 
  Registered users, up 39%*
• 6.55 million 
  Active users, up 80%*
• $56.8 billion 
  Retail-customer assets under management, up 56%*
• $16.3 billion 
  New loans by consumer-finance platform Puhui Financial, up 2.8 times**
• $624.8 billion 
  Total transaction volume, up 3.6 times

**From same period in 2015. 

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