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For decades (centuries, really) lending in Japan has relied on personal guarantors and introductions rather than objective credit scoring. This startup is changing that.
Before starting Credit Engine, which provides credit scoring, automated approvals, and other services to mega-banks and other financial institutions, Sei Uchiyama founded an online lending startup to ensure he understand this market from the bottom up.
Credit Engine currently automates everything from loan approvals to the collection of delinquent and non-performing loans, and its already starting to change finance in Japan.
Sei and I talk about the future of finance in Japan and the surprising way competition between FinTech startups and the banks is likely to play out.
It's a great conversation, and I think you'll enjoy it.
Show Notes
How much of the loan process can a startup be involved in
How the mega-banks are experimenting with this technology
The post-tsunami rescue micro-finance fund
Why pivot from direct lending to financial services
Why lending fintechs startups have trouble raising funds in Japan
How real-time credit scoring will change consumer behavior in Japan
Is Japan really "over-banked" and what that means for innovation
Japanese mega-banks' reactions to financial innovation
How automated debt collection improved results by more than 1000%
Are the biggest FinTech opportunities in developing or developed markets?
Mega-banks' secret weapon in competing with startups
How easing labor protections would help Japanese employees
Links from the Founders
Everything you wanted to know about Credit Engine
About LENDY the loan company they operate
Connect with Sei on LinkedIn
Transcript
Welcome to Disrupting Japan. Straight Talk from Japan's most successful entrepreneurs.
I'm Tim Romero and thanks for joining me.
Japan has always had a, well, let's call it a “conservative” attitude, towards consumer borrowing. Credit card balances are generally paid in full at the end of the month. Most household purchases are saved for rather than financed and outside of a mortgage, debt is generally seen as a bad thing. In fact, rather than using consumer credit scores, most Japanese lending still relies on introductions and personal guarantees.
But Sei Uchiyama, the founder of Credit Engine, is changing that. Over the past few years, Sei, has both started a new lending company and partnered with some of Japan's largest banks to streamline and automate loan approvals and issuance. And he and the team have even developed an automated system for collecting non-performing loans that outperforms traditional methods.
Now Sei and I talk about how faster and simpler access to credit in Japan might change things for both good and for bad, what it's going to take to truly disrupt financial markets and whether that will turn out to be a good thing and the differences between Fintech's startup strategy in developed and developing markets.
But, you know, Sei tells that story much better than I can. So, let's get right to the interview.
Interview
Tim: So, we are sitting here with Sei Uchiyama, the founder and CEO of Credit Engine who's providing turnkey lending solutions to financial institutions. So, thanks for sitting down with us.
Sei: Thank you very much for the opportunity talking here.
Tim: So, I explained really briefly what Credit Engine does, but I'm sure you can explain it much better than I can. So, what is Credit Engine?
Sei: So, Credit Engine is the online lending platform providing the loan origination system and also the collection system for financial institutions, including banks and non-banking financial institutions.
Tim: I understand it's a full service system. You provide scoring automated approvals all the way through processing and collections, right? So, that's quite a lot. So, tell me about what types of loans are you originating?
Sei: So, with a loan origination product, which is called C-Loan, it can cover from like the business loan to the commercial loan. For example, Mizuho Bank is providing mortgage with our system and Mitsubishi UFJ Bank providing small online lending. And also other banks are using our system to streamline or digitalize the operation of the traditional loan process that is not on online lending. It's more like they also have the loan officer and meet the borrower face-to-face. So, basically we can cover any types of loan.
Tim: Later, I really want to get into kind of the unique nature of lending in Japan. I think technology is really going to change how lending works here, but before that, tell me a bit more about your customers. Who are you working with?
Sei: So, our customers are from Megabanks to the independent lending company like Mitsubishi UFJ Bank, Mizuho Bank, and for other local banks are like Fukuoka Bank, Shizouka Bank. And also we are working with Line Credit and also FamiPay, which is the lending company of the Family Mart group. So, any types of financial institutions.
Tim: And is the primary advantage they see in Credit Engine that it streamlines existing processes or does it allow them to -- is it like expanding the market for them so they can make loans in smaller amounts since they can get the approvals quicker?
Sei: Actually, there are two ways that financial institutions use our system. One is for the operational system for their new services, such as like online lending service for small businesses, Japanese financial banks used to have that kind of service like 10 or 20 years ago. But after the [inaudible 00:04:50] shock and other financial crisis, they have stopped those kind of services. But after the technology develops, they are seeking now new opportunities in that area. So, since like five years ago, some banks are getting to online daily market for small businesses. So, when they're thinking about entering a new market, they needed a kind of new technology.
Tim: Why did it take the banks so long to move online? Because if you look at the rest of the financial industry, I mean, insurance went online in the early 2000s. So, why did it take banks so long to move lending online?
Sei: They're already active online that they have kind of interface for the end users to apply, type in their names and then address or some basic information and apply. But the after that they are using Excel and other traditional ways to operate inside a company. But now going on is more like a visualization of the entire process of the lending. Not only the application, but also end to end from application to the contract and also repayment. And that's what is happening and that's where we are providing our system.
Tim: Now I want to get back to that and dig in detail because I think that is going to have huge effects on the Japanese economy as a whole. But before we do that, I want to talk a little bit about you.
Sei: Me. Okay.
Tim: You've been involved in innovative finance for quite some time now. You were involved in a NPO that ran a rescue microfinance fund at one point, right?
Sei: Yeah. So, maybe I better start talking about my career. So, I studied my career at Shinsei Bank and after that I spent one year in Sendai after the earthquake and I was helping small businesses to raise fund to rebuild their businesses where their business was going by tsunami.
Tim: How did that work? Was that a government fund? Was that a private NGO?
Sei: I was working for NPO, but basically helping the small businesses to applying for the government or subsidiary or the loan for local banks. It was nothing like technology, but it was very good experience for me to run about how the borrowers are feeling about the application process because the one who can get money is the one who can rate the rate very good. It's not how passionate they're doing the business. It's more like a how elaborate your business and how good are you presenting? So, I see kind of that kind of pain they have. Yeah.
Tim: Were these like small loans? Was it a few million yen at a time? What were the sizes?
Sei: So, it depends on the banks, but it's starting from like 1 million yen and as big as could be like a hundred million.
Tim: Okay. So, anywhere from $8,000 to $800,000.
Sei: Kind of, yeah.
Tim: After the microfinance, you were at Money Forward?
Sei: Yeah, actually after the microfinance, I went to my MBA at UCLA, there I switched my career from finance to more like a tech side. And then I decided to join Money Forward, which was in like 2014 when they have just studied their online accounting service. I was in the sales division and also the business development.
Tim: And you started Lendy in 2016?
Sei: Yes.
Tim: Lendy was issuing small business loans.
Sei: So yeah, so I feel I know the pain, how a borrower, the thinking through my experience of the microfinance. And also I knew the pain of the bankers. And then I spent two years in the states online business and I see some like kind of online lending type of service or like Cabbage or OnDeck. And I was thinking like that kind of business could happen in Japan.
Tim: So, when you started Lendy that was really targeted at SMBs? It was small loan amounts, short-term loans?
Sei: Yes. It's targeting basically small businesses sales, less than 1 trillion Japanese yen, which is like $80 million and providing a small loan after like 5 million yen. And we are using the online data, including online accounting system or e-commerce cart system like yourself of the Amazon or Rakuten and also the credit card transaction so that we can get the direct data from the system which cannot be manipulated. Usually like a small businesses tend to manipulate the balance sheet or financial statement, but using those original data with us more credibility or security of our credit model.
Tim: Looking back to 2016, a lot of small businesses were still very cash based.
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