An Interview with Tomoyuki Sugiyama from Crowdcredit by Longine FinTech Team
We asked Tomoyuki Sugiyama, Founder and CEO of Crowdcredit, Inc., about their business, competitive advantages, and future prospects for business development.
3 Key Messages to Readers
Crowdcredit offers Japanese investors, with excess funds, investment opportunities such as personal loans or small- and medium-sized business loans in countries where funds are limited.
Crowdcredit is expanding their line of investment products for investors, which reflect Japanese personal investors’ preference that loans are secured by collaterals or the durations are short.
Going forward, Crowdcredit strives to become a platform to analyze credit products in various global regions.
Connecting Capital Surplus Countries with Capital Importing Countries through Crowdfunding
Longine FinTech Interviewer (hereinafter “Longine”): First, please tell us your thoughts in launching an investment-type crowdfunding company.
Crowdcredit Inc. CEO, Tomoyuki Sugiyama (hereinafter “Sugiyama”): When I established this company, I intended to look for opportunities for cross-border arbitration by monitoring the flow of funds at a macro-level. Based on my experience in working for a British bank, I felt investment opportunities would increase by connecting such countries as the United Kingdom, where there is a structural fund shortage, and countries like Japan, where there are excess funds. The cash flow in South Korea and Australia are similar to that of the United Kingdom. Given that this is macro-level arbitrage, the opportunities are not lost instantly; the convergence of opportunities actually takes time. I thought providing such investment opportunities to investors could grow our business. I also felt there is social meaning in doing so.
Longine: You had the vision first.
Sugiyama: I initially thought about establishing a bank. However, as it’s quite difficult, I decided to create a business with a system, called “investment-type crowdfunding.”
Meeting Individual Investors’ Needs by Shortening the Term and Collateralizing the Loan
Longine: How did the business evolve after the launch?
Sugiyama: We now offer products for small, diversified investments in personal loans in Finland and non-performing loans in Peru. In Finland, for example, we aim to produce a 12 to 13% return after considering default, as the interest rate on personal loans there is high. However, individual investors prefer collateralized over uncollateralized products, even if they are diversified. This is the same as with banks requiring collateral. People say, “Banks won’t lend without collateral,” or “The interest rates of microfinance institutions in developing countries are too high,” but they can probably understand what financial institutions think once they become the ones to actually bear the risk.
Longine: So, how are you handling it?
Sugiyama: We are setting up collateralized products with a shorter investment term. For example, while the majority of personal loans in the European market have a term of two to five years, with most of them being three years, I think it’s slightly too long for individual investors in Japan today. Products with a term of six months to two years are the most popular among individual investors in Japan. Therefore, we introduced two-year products, when main products traditionally had a term of three years. We are now planning to create a product mix primarily consisting of products with a term of seven months to two years.
Longine: How about collateralization?
Sugiyama: We plan to begin aggressively introducing collateralized projects after February. Those we have been setting up since the end of last year include auto loans in Latvia and Lithuania, countries that are in between developed and developing countries, for example. As the difference in interest rates between the yen and euro has recently disappeared, you can obtain a yield of approximately 8% with collateral from a 2-year loan invested in yen.
Other than automotive collateral, there is also invoice trading. As receivables are collected over a period of 1 to 3 months in invoice trading, we are establishing them so that money is reinvested within the funds several times to ultimately generate an approximate 6% return over a term of 7 to 8 months.
We also recently began handling trade financing projects in Cameroon, in the form of chattel mortgage made to tire and glassware importers, over a period of approximately 7 months, by using inventory itself as collateral. Although Cameroon has a “B” credit rating and a country-level risk exists, the default rate of trade financing transactions did not really increase at the time of the Lehman Brothers collapse. Even though there is still little track record with the partners, it has generated a good return thus far; it’s even collateralized. To try to diversify the risk in asset management, I think it is important to invest in products that have almost no correlation with stocks and such, the performance of which tends to be influenced by world economic trends. Therefore, we plan to offer them to customers by explaining where the risk lies.
The Reality in Identifying Projects
Longine: What is the competitive situation in acquiring projects?
Sugiyama: It varies by country; for example, we understand that while many individual German investors are investing in Lithuania, we are the first corporate investor there. There is still a wide range of regions to which we can expand.
In countries with a shortage of funds, neither banks nor social lending develop, the latter of which relies on funds from domestic investors. In such countries, I believe we can work as a middleman and create a situation that makes them think, “Isn’t being able to continuously receive funds too good to be true?” while making the Japanese investors think, “Isn’t being able to get such a high interest rate too good to be true?”
However, some countries are difficult to enter. The United States is one of them. Eighty percent of peer-to-peer (P2P) transactions are pensions and hedge funds, usually requiring at least one billion yen per one-shot investment, which is difficult for us at this time. Situations are similar in the top five European countries, where there is an array of hedge funds. As such countries as Germany and the Netherlands have abundant funds, we’ve been told several times that they don’t really feel the need for funds from overseas.
Longine: Other than European countries, which countries and regions are you considering?
Sugiyama: The west coast of South America, Chile, Peru, Colombia, and Mexico are interesting. The macro-economy has been stable for the past 15 years, and the governments have not been wasting money. For example, while Peru faced double deficits in the current account and government budget last year, this was actually only the second time in the past 13 years when there was a deficit in the government budget. They have savings from the remaining 11 years, and also have foreign exchange reserves. Peru’s central bank has raised the interest rate under the current world economic situation; however, the government is simultaneously undertaking a fiscal stimulus. This is evidence for the robustness of their macro-economy. I was also able to personally get a feel in Peru that momentum still exists in their economy.
Longine: You discover something new when you go there.
Sugiyama: Exactly. I used to handle financial engineering-related work to measure the value of complex financial products when I was at the bank. Therefore, I tend to automatically look at financial products’ market value and liquidity. However, I began thinking that investments could actually work with almost no liquidity. When there is half-hearted market liquidity, the market could collapse in a self-fulfillment manner in the face of such situations as the collapse of Lehman Brothers because everyone tries to reduce risk in the same direction. Products with no liquid market, on the other hand, must be held through maturity.
In short, we ask only those to invest who don’t mind that there is no other initial option but to hold through maturity. You might feel nervous, as a variety of economic events occur through maturity, but I think it is a viable option to invest by focusing on intrinsic credit risk rather than price fluctuations due to other investors’ behaviors.
Default is a Precondition
Longine: Is there a considerable number of defaults?
Sugiyama: The maximum interest rate is 70% in Estonia and 50% in Finland, for example, so we offer 60% or 40% interest rates to those who are borrowing at 70% or 50%, and ask them to refinance. Given that approximately 40% of loans with a 60% interest rate would default, the idea is to take the remaining 20%.
Another important thing involves the collection procedure at the time of default. Violent collection practices are becoming an issue in all countries. The servicers we partner with are not violent; they tend to collect money while providing basic education to the debtors with low financial literacy. They collect money by teaching them on the phone, saying things like, “Can you borrow from your family or relatives?” or “There is a method called ‘withholding from your salary’.”
Vital Points in Investor Development
Longine: How do you acquire investors?
Sugiyama: Due to the products’ nature, people often recognize us through the existing financial media that cover us. Advertisements on the Internet didn’t work out easily. It’s difficult to sell by abruptly saying, “Delinquent debts in Peru.”
Our current customers are not senior citizens. Our primary customers are those in their 30s and 40s who are more familiar with the Internet. Many of them have experience in trading by using an online brokerage.
Expanding Products from High-Risk, High-Return Products to Middle-Risk, Middle-Return Products
Longine: What kind of product mix can we expect in the future?
Sugiyama: To sum up the history to this point, we initially focused on investing in delinquent debts in Peru, and subsequently created funds with personal loans in three countries, including Estonia, Finland, and Spain. We recently worked on funds with personal loans, specifically in Finland.
Going forward, we plan to offer funds with small- and medium-sized business loans in Cameroon, which I mentioned earlier, and funds with personal loans in Eastern Europe and Mexico. We would like to establish three pillars of personal loans ? small- and medium-sized business loans, and delinquent debts ? and, if possible, would like to add overseas real estate mortgages to the mix. We would also like to add medium-risk, medium-return products that are less risky than our current products.
The Shift to Four Polarities of Crowdfunding in the Future
Longine: What is your view on the future of crowdfunding?
Sugiyama: Social lending is merely a loan fund. It’s gaining attention in recent years because it is expected to play a role in supplying risk money to a relatively high-risk sector, which the banks can no longer service, as the Basel Accords tightened after the collapse of Lehman Brothers.
The Bank of England, Ministry of Finance, and Financial Services Authority are working together in the United Kingdom to support social lending. It seems they intend to circulate money in society using two pillars, namely, the banks which pool deposits with guaranteed principal and make safe loans, and social lending, which lends to relatively risky borrowers.
It has been forecast that the market size of social lending will grow to 100 trillion yen in balance. We hope to ride this wave well.
With that being said, it is necessary to understand the circumstantial difference between the West and Japan. The United Kingdom has a limit to which banks can lend because they are short on funds. Meanwhile, since the United States is a country of immigrants, a large number of low-income people have no access to a bank. Compared to these, we could say that banks in Japan are, in a sense, lending throughout society. As a result, if you observe other social lending companies, almost all of them are primarily offering real estate mortgage loan products. They are basically lending to real estate businesses rather than lending to small- and medium-sized businesses and individuals. I think we should develop business in Japan according to the characteristics of Japan.
Longine: The social lending market is still young.
Sugiyama: As an industry, social lending has not experienced a financial crisis, such as the collapse of Lehman Brothers. Once it experiences a crash to visualize the level of loss, rather than displaying it in theory, and demonstrates to investors that hitting the bottom is not as bad, I think market growth will further accelerate. In fact, it seems to me that all providers are experiencing trial and error in an attempt to create products in preparation for a monetary shock.
Longine: How will the relationship between big data and social lending evolve?
Sugiyama: It is becoming increasingly involved. The role of players in the social lending ecosystem is polarizing in four directions. In addition to traditional originators, who attract customers, screen them, and collect payments, players who develop a screening model that uses big data and provides it to originators are emerging as a third pole. I also believe that online brokerages and small- and medium-sized brokerages will enter the market as it grows. I think the added value of start-ups will shift to analytical functions as the fourth pole, to assess the work performance of originators or screening models that use big data.
Longine: What will happen to the direction of Crowdcredit?
Sugiyama: I think it would be one direction for us that we will become an analytical platform which could tell which originators in which country are operating well or what type of credit scoring model would work in a given country.
We would also like to develop a system to pool capital from small- and medium-sized businesses in Japan and affluent segments overseas.
Longine: Thank you very much.
Sugiyama: My pleasure. Thank you very much.