The president of Shanghai-based wealth manager Noah Holdings has warned that Chinese peer-to-peer lenders expanding into asset and wealth management could end up having a negative impact on the industry.
Kenny Lam was referring to moves by P2P groups to expand their offerings by adding international strategies. They have been reaching out to asset managers, such as Standard Life Investments, as potential product providers.
However, Lam told AsianInvestor: ““P2P platforms are something we worry a lot about. Many of them are tech-heavy but not finance-heavy. I can’t understand how they assess risk.
“Fintech is hot in China," he added. "We have entered a period where we see a lot of players who are just focused on building the distribution platform, but do not have an understanding of the investment skills involved in selecting the products.
"You have a lot of players who are great in tech but not finance, and they forget that in fintech you have to have both." Lam warned that any fallout from P2P groups’ venture into wealth management would eventually affect the industry.
“The problem is the P2P groups are mass-focused. So you basically sell a product to a client that may have Rmb30,000 [$4,644] in net worth," he said. "If these investors get burned, it affects their entire wealth. That’s dangerous. Eventually it would affect the market."
P2P firms, whose core business entails matching capital providers with small borrowers via onine platforms, have a fast-growing client base in Asia and a wide reach. As of last year, for instance, Beijing-based CreditEase's service network covered some 100 cities and 20 rural locations in China, with a workforce of 35,000, including a salesforce of 6,000.
But Lam argues that the market attaches strong importance to asset management skills and that it will take some years before P2P groups become adept in this area.
“Asset management is not easily bought; it is something you have to learn over time,” he noted, adding that it took Noah 12 years since inception to reach its current market position, with $10.4 billion in AUM.
“We have success and failures, and you learn a lot about counterparty risk through many of these cases you have invested in," he said. "Wealth management is a different game. Day-in and day-out you need to understand who your counterparties are.
“We invest heavily in people. We have 250 people at the group level who look at product due diligence," noted Lam. "That’s extremely important."
Moreover, he argued that international firms would not quickly jump into distribution partnerships with P2P groups. Lam cited as an experience of how it took one company two years to conduct due diligence on Noah and assess how it conducts its know-your-customer processes.
A senior private banker in Hong Kong last year also said P2P firms may struggle to compete with well established distribution channels in China, particularly the banks.
However, some would argue that by hiring the right people P2P firms can build strong asset and wealth management capabilities relatively quickly. For instance, CreditEase has brought in individuals with significant industry experience, while Credit China has partnered Swiss private bank Bordier to to tap the latter's wealth management expertise.
P2P players appear to have the potential to disrupt the industry; time will tell how they fare.