“PeopleFund’s Kim: “We disrupted Korea’s lending market from within”

• Strict regulations in Korea presented a serious challenge in establishing PeopleFund
• PeopleFund’s tech-driven platform is the first in Korea to fully integrate with a commercial bank to process consumer loans securely
• The tier-two market, or people capable of paying back loans, but was not approved by banks, became the primary market of PeopleFund.

PeopleFund, a marketplace lending platform founded in 2015 in Seoul, South Korea, is the first and currently the only peer-to-peer lender in the country that is fully integrated with a commercial bank. It is also the first to offer investment products directly on Kakao's messaging app, after their partnership with KakaoPay in 2018.

In an interview with Emmanuel Daniel, chairman of The Asian Banker, PeopleFund founder and CEO Joey Kim, describes his company’s beginnings and how their operating model came to be.

Joey Kim: We work with JB Financial Group. Their assets under management (AUM) is about $50 billion. We have a bank that’s actually working as a landing vehicle for us. So when the customer comes to us, we review their loan, their application, and we give them a rate. If the customer likes it, he applies for it. Then what we do is we take that information, and with our rate, we give it to the bank and they do the final verification. They take that loan and then they give the loan to the person, but they give the money to give to the borrower. What they do is they ask us to raise the money for that loan. So we raise the money from investors, from lenders. Then the bank takes that money and gives it to the borrower.

Emmanuel Daniel: That’s expensive. So the bank gets a cut. You get a cut.

Kim: So the bank doesn’t really get a cut. They get to very thin margins just for the operations. What the bank gets is the customer. So the bank can register the customer as their borrower and also, multiple lenders on that loan have to register to the bank’s system. So the bank can get access to all these customers that are fintech savvy and that are mostly in metropolitan areas, whereas JB, their business is back in the southern part. They can actually have access to these users in Korea, in Seoul area, which is something they’ve been wanting to do for a long time. They actually get customers. We can affect the license. That can work as a very big upside in terms of competition dispute because what license you use to lend money is very important, in terms of your credit for borrowers. That’s the main upside that we have.

In Korea, the banks are well known for being very conservative. They only target the super prime customers, which means the near prime customers and below have to go to a savings bank or other type of lenders to get their money. Basically, if you can get a loan from a bank, it has a very positive impact on your credit, which we are leveraging. We are getting to arbitrage on the license because the bank is actually working with us to book these loans. As soon as they get a loan from us, which means they’re getting the loan from a bank, it has a very positive impact on your credit, which we are leveraging.

ED: I mentioned monitoring all the different peer-to-peer (P2P) models around the world. It’s very interesting that you have this model in Korea and with your people in PeopleFund, you operate this way because of legislation, right?

Kim: We operate this way because of many reasons. The easiest way is just to get a private lender license, money lender license. That is what all these other companies are doing. We have about 200 peer-to-peer companies in Korea. We’re the only one that’s working with a bank. All the other companies are working with a private lender license. Basically, we wanted to give the actual benefit of having a positive credit. If it’s a moneylender, they will say, “This is going to have a very bad impact on my credit. So they just turn away,” which results to high acquisition costs. We don’t have that. We thought this would be the magic that we have to have, to compete in this market.

Creating PeopleFund

Kim: When we started the business back in 2015 February, we found a partner in August 2015 and then we found JB. We worked on this model because we wanted to make it perfectly legal. We took it to the government and said, “We want to do this. ” They said no. It’s not on the legislation. It’s not in the banking law. You have to do it legally, which we don’t know. We started making backups to legally make this work. We worked with a pretty big law firm in Korea that is very well-known in the financial sector, Shin & Kim, for about four or five months. We made it legal. We worked for about a year to make it work. We were about to open the service end of November 2015 but were called into the Financial Services Commission. They said, “This doesn’t look legal”. So we gave them all the legal documents and they said this might be dangerous, that might be dangerous. You have to fix that, fix this.

We made numerous changes to the system. At the end of the day, we were registered. For banks in Korea, usually, the core activities are lending, deposit, money transfer, these types of things. They have adjacent activities, which is selling insurance or selling other stuff, things you can do and other activities. Other activities have actually a list of things. We said this can be the core business because this is lending. They said, “No, this is not lending. It’s different”.

They asked us to register as “other activities” and registering, as another activity, is very difficult. You have to get board approval at the bank. It’s a huge bank. It’s $50 billion AUM. They have to have a board meeting just for this issue, which is going to make tiny money for them. We thought we couldn’t do it, but the bank was actually very eager to do this. JB Bank actually called the board and made the decision and we had to make a business plan to register at the FSC and we did all that. That took multiple months. And then at the very end, they approved it.

So for us, it took about a year and a half just to get the approval process. The other P2P companies in Korea like Lendit or 8Percent, these companies, they opened a long time ago and they were being operated. We were just a year and a half late in the market. We thought it was meaningful because we really wanted to use a bank license to actually disrupt this market because with a money lending license, you can’t do that. It’s just not going to work.

We are seeing the results today, that our default is about half or one-third of the competitors’. Our acquisition cost is really cheap. It’s a lot lower than the competitors. We don’t know the exact number but we know it from the market resources. Also, the amount of loans that we are generating is about twice the size of our competitors. So we are the biggest in Korea on a monthly basis. We are getting pretty good results from this model.

A snapshot of South Korea’s lending ecosystem

Kim: The Korean lending market, just to give you a brief overview, the balance of a personal unsecured loan is about $400 million. So, the size would be about one-fifth or one-sixth of the US. It’s quite big. Mortgage is a lot bigger. It’s about $700 million. The household debt has been increasing, as you probably all know. The banks, among that $400 billion, about two-thirds would be to banks. The other $100 billion divided by three, three years, would be the average maturity of an unsecured loan. So $100 billion, which is a balance divided by three would be annual new origination. So new origination is not a bank loan. It’s about $30 billion to $40 billion.

Monthly origination, new origination of a bank loan would be about twice the size of that, so, about $100 billion every year. It’s generated by the bank. The other $40 billion to $30 billion is by the savings bank, capital companies and also credit card loans. It’s a little bit different from cash advantage. These are actual loans.

ED: Korea used to have this horrible problem with the cash advance side in 2004. That was when the International Monetary Fund said go to credit cards. So the banks learned their lesson. The funny thing about Korea is that the consumer lending is huge. The normal salary man is one of the biggest market for salary loans and money lending and all that. So if you don’t watch it, you go to the wrong segment. You’ve got high risk.

Kim: Among the $140 billion to $150 billion of new loans on an annual basis, two-thirds is bank, one-third is savings bank and capital companies. That one-third, within that $40 billion, is about $10 billion US. So one-quarter of that would be private lenders. It’s these Japanese Sanwa and this company, APRO, which are pretty big, prevalent in Korea based in Japanese money. That is one quarter of that loan. The other $30 billion, the leftover, would be the second-tier loan. Savings banks have been making so much money out of these loans because they’re the companies, they’re the people that got rejected by the bank. They don’t have any other options but go there. These people, even if their credit rate is not that bad, but because they cannot get a loan from a bank, they have to own a savings bank and their yield would start at 15%, even if they’re like right at the borderline. You would start from 15%. And if you go to a bank, you can get it at 4%-5%.

It’s triple the cost. The reason why it’s so expensive is because these savings bank, they know that they can make a lot of money from these people. They are so aggressive on marketing. They spend a lot of money on TV commercials. They spend so much money on direct calls, direct messages (DMs). These marketing costs are all from the interests. I would say one-third to about half would be SG&A (selling, general and administrative expense) costs. The structure itself doesn’t make sense, right? That’s all customers’ money. They are paying for their own loans. They’re paying for the marketing of their own loans, which is crazy. This has been a social problem. Everybody knows about this problem.

Disrupting Korea’s lending market

Kim: In Korea, if you make a new cellphone, you would get these messages from loan sharks every day and you get random phone calls asking if you want to borrow money. All these operations are actually by the savings banks. It’s really a social problem.

The government won’t solve it, but nobody can solve it because somebody has to give them a low rate but it means they’re losing money. So no one would do that. So some disruptive player has to go into that space, but nobody did. What we did was target their customers and take the cream of the crop and target them at about 9%, maybe 10% even. And we finance these loans because the default rate of these tier two companies is lower than 7%. Our default rate is 2.5% historically.

At the moment, the breakdown would be about 60% of our loans are invested by institutions and corporations. The other 40% would be retail and lenders, high net worth and also very small amount mom and pop, average Koreans, anybody would invest. We did focus on high net worth before when we started, but now, our Series B funding was led by KakaoPay. They’ve been working to make different businesses on their platforms. Their second biggest shareholder is Alipay, Ant Financial. Ant Financial is actually putting in what they learned in China into Korea. They started with money transfer, but now, they’re selling investment products. They’re selling deposits for different financial institutions. As for investment products, they’re selling our P2P loans on the platform for the lenders to invest in. You can invest as small as $10 on this platform. But it’s not matched against a loan, it’s a pool.

Kim: It is matched against some loans and also, it’s a pool too. So they do both. We do both with KakaoPay. When it’s 100% secure loan, for example, we do house-backed loan as well. Anybody who has a house that’s $200,000, $300,000, they can get 60% to 70% loan-to-value (LTV) loan from us and that’s 100% secured. Because it’s a very safe loan, we don’t do pooled lending.

ED: So, if you went to a bank, what would they lend?

Kim: They can get 40% LTV. But if they want extra LTV, 20-30% more, they have to come to us. So the bank would be the first lien and we would take the second lien. Usually, the bank rate is about 2.5% to 3%, which is very low. We do the second lien at about 7% to 9%. It’s a pretty good yield. At the same time, the customers, the borrowers get extra LTV on their house. We just go for them as well. We sell these loans on KakaoPay and they sell like crazy.

ED: Yes, it’s like an investment product. They’re buying and selling. What’s the usual tenure of the loan fund? What about insurance?

Kim: We do one year and then roll over. If the customer wants to pay back, they pay back. We look at their LTV again. We do the asset value again. Then we give them a same limit or maybe a little bit lower or maybe a little bit more. It’s on an annual basis rollover. And all this is now automated. There’s one part that’s not automated, which is the registration part. We do have internet asset registration, where the lender can register that I have this right on the second lien. But that’s not 100% done accurately online. So, we have to do a little bit of offline work as well.

We do have insurance on the lender for mortgages for these house-backed loans. The interest rate would be about 1% to a little bit lower of the whole tenure. So, it’s ensuring the lender to get 95% of their money back. It’s a pretty secure product.

ED: But the interesting thing is that you are mirroring traditional banking. You have a nuance because you’re going to a trajectory because of customers who would otherwise go to money lenders. And then you’re still in the disrupting phase at the moment so you’re not an institutional player yet. The funny thing is, on the one hand, you are disrupting a slice of the market at the moment for the sake of being secure, but because the credit score is still a traditional credit score, it’s almost like you’re flying on a plane. Everyone is like first class, business class, economy. But at the carousel, everyone is the same. The bags arrive at the same time. What about small businesses? You have not mentioned them very much.

Kim: Small business is another goldmine. In Korea, there are so many small mom and pop stores that are not professional and not profitable. The average lifetime of a mom and pop business would be less than three years. Basically, if you start a business in Korea, it will close down.

It’s very, very difficult to target these customers because they have been (under a) Korean conglomerate system for a long time. They don’t know anything to do but to use their laptop and that’s it. They start with their retirement plan. They start a chicken place. It’s crazy. There are so many cases like that and they go bankrupt. It’s a social problem too.

ED: Do you think that as a technology company that you would acquire some of the players in the lower levels, the P2P, playing the high-risk level to building a market share? Now you’re well-funded?

Kim: It’s a difficult question. But what we observed from the market is that even if you are a very similar model or a similar P2P company, the customers you acquire are very, very different. What we want to do at the end of the day is to look at that chunk of the market that nobody looks at and we want to be able to pick the right ones within that market.

To do that, we need historical data of the customers who actually come to us and the people that we are declining. We want to actually give them money going forward. We want to focus on that. Volume, I think, is the second thing that we can look at. I don’t think gaining volume is the key thing in this market. I think the key company advantage actually comes from number one, the business model, which we did. Second would be the credit rating. We want to actually focus on that. If we find the magic number, we would actually expand more into the licensing business rather than making volume.

 If we find that answer, we would be able to serve or co-work with banks, even. The ultimate problem that we have to solve is let good banks serve more customers in Korea. We want to take a big chunk of that profit or revenue or customers to share that. We don’t think fighting against a bank is the key in this market because banks are the main players here. We respect that. As a fintech player, I think we want to serve the customers that banks cannot serve. At the end of the day, help, serve them better, which we are doing at the moment already.

ED: The second question I have for you, a strategy question: Isn’t all these adding cost to the business of lending instead of releasing cost? You are actually becoming like a bank. You are cost driven now. Your cost of business is so high. The whole idea of technology is to make it cheaper and faster, right? So you’re part of the system now. You’re actually just making one little sliver more perfect.

Kim: I really actually think about that all the time. I think in terms of cost, there are different chunks. The biggest chunk in Korea at the moment is sales and marketing costs for these loans. I’m talking about the tier two chunk. So if they pay 20% interest, as I said, half or one-third is actually given out to these loan referrals or advertisements and sales cost.

ED: That you can originate the customer without the sales and marketing?

Kim: A lot cheaper. I wouldn’t say without, but a lot cheaper. We’re actually giving that back to the investor and the borrower. What we are doing at the moment, I think for at least two or three years, we have to focus on that, that chunk of cost to make it more economical for the society. That’s one thing. Second would be, as you said, because we are a lender, what we are doing is we’re actually creating cost as well, which is the cost of capital, which is also the human resource cost and the money that we have to spend to do this business. What we want going forward is that we want to build a brand where people can think in their mind – they pay no extra costs .

In Korea, banks are everywhere. The banks have multiple accounts and the customers have multiple accounts at many banks. There is no acquisition costs, but if they get declined, if they’re rejected, the second place they should go to is PeopleFund.

Right now, our approval rate is quite low. We want to bring that up to a point where we can actually see a person and say this person will be good or bad. That’s something that we have to focus on after solving the number one and number two problem. Not after but at the same time because this is going to take a lot of time to do that.

ED: This is the thing that I measure innovation with, disruption, which is you have to disrupt cost and you hand it back to the customer. If you start looking like the bank that you’re competing with, then you’re not going to hand over the customer. The whole credit business becomes even more expensive. It will be very interesting. How are you funded now?

Kim: Equity-wise, we funded about $22 million US equity after our Series B funding. We secured about $30 million debt financing on top of that. So that financing is mostly invested in our loans.

ED: The world is going through a phase where all the innovation that was promised in finance didn’t take place. So the disruption factor should be there.

Kim: We do use a lot of different methodologies. For example, we’ve started off in a regressional model, but now, we’re doing machine learning to see dynamic changes of these variables. These are things that we are testing out. It’s very progressive from a CSS expert’s point of view already. So, we think that’s something that we have to focus on.

Some of the data that we want together and we are working on is facial recognition. We are testing out different tech models to look at the customer’s face when they apply for loans and get their points of the facial change. That has been very effective, hypothetically speaking. That has been very effective in looking at the emotion of the person. We think we need at least a year or two to validate these models, but it’s something that we’re investing a lot of money in.