Creating Credit

By Anna Kitanaka

Freshly launched in October, is Japan’s first social lending site, providing an online auction platform for borrowers and lenders to create their own customized loans.

Q&A with CEO Tadatoshi Senoo

Tadatoshi SenooManeo Inc. CEO Tadatoshi Senoo hopes his new site will encourage customized lending.

J@PAN INC: Why did you choose to start this company?
Tadatoshi Senoo: I believe that Japan is moving further towards being a financially disparate society. I think this because I used to work in a bank, and observed how money flows. I saw that young people between ages 20 to 30 are faced with big life events, such as getting married, having children, moving house etc., and many banks wouldn’t offer loans to cover this. Also, I saw that a lot of older people were wealthy in contrast to the young people who have a steady cash flow, but can’t draw on huge lump sums when needed. So I started studying this industry—I knew that they already had it in other countries, but didn’t know if it would work for Japan.

JI: There is obviously a lot of risk in this service and one way you limit it is by giving Maneo score ratings?
TS: Yes, we do give scores but the details are confidential and we can’t give out too much information about it. But the basic factors are based on the borrowers income, outstanding debts, free cash flow, their job, whether they own property and so on. Although the scores help lenders to determine whether to loan them money, they should also look at other aspects, such as why the borrower wants to borrow money, age, family situation etc. as well as ask them questions.

JI: But even if you ask questions, surely there is always the risk of lies and deception?
TS: Well, it’s not possible to make it 100 percent fraud risk free. But they can use the Q&A service to try to gauge whether they are being truthful or not. Also, as an SNS, we have communities, ManeTomo and such. If, for example, borrower A is pregnant, she will most likely join a pregnancy community and post questions on there. The lender can trace the history of activity for borrower A and try to determine whether they are being truthful. There are various ways to try to see if you are being deceived or not.

JI: What other risks are there?
TS: Of course, there is the risk that a borrower may default, and lenders won’t get all their money back. But we make sure the borrower has a minimum income of 3 million yen. Also, before the payback date, Maneo will be active in sending reminders to the borrower in an effort to try to hedge the risk.

The other risk is that Maneo Inc. itself may default. For this, we have set up a subsidiary called Maneo Escrow where the lenders’ cash is held. Although it’s not 100 percent bankruptcy proof, it is separated from Maneo Inc. so if Maneo defaults, it does not infringe on investments in Escrow.

JI: If the borrowers default, are there legislations in place to protect lenders?
TS: Although Maneo will try to recover any remaining debt, the money that a lender loans is not covered 100 percent, as it might be in a bank.

How it works:

Much like a typical online auction site, borrowers place loan listings online, indicating how much they want to borrow and the maximum interest rates they are willing to pay. Lenders select borrowers by bidding on these loans. Both lender and borrower’s profiles will display Maneo scores, which are rated by Maneo Inc, based on their desirability ratings. The lender provides the lowest interest rates effectively “win” the loan.

Once registered as a member, borrowers and lenders can utilize Maneo’s social networking services. Registered members can communicate with each other through ‘ManeTomor’ (ManeFriends), ‘ManeBlog’ and ‘ManeoMessage.

JI: About your target market, will this not encourage people who are ineligible from borrowing at banks to apply to Maneo? How do you stop these people?
TS: Our target is to lend to people for life events. Of course, the risk of people who can’t borrow at other places attempting to borrow at Maneo is not zero, but we try to limit these. The big factors are how much they want to borrow and their salary. For this, we ask for paper-based evidence such as withholding tax slips and income breakdown copies to take to the Japan Investment Council (JIC). We also ask for bank account copies to check that they are eligible to open a bank account. We can also see whether they have other loans through the JIC.

We’re not trying to find people that can’t borrow at banks. There are two types that we want to target: One are the types of people that do not want to go to the counter at banks and borrow money faceto- face—they want to do it online instead.

The other types are people that are looking for better interest rates compared to banks. The rates etc. are all decided by the banks but with Maneo, the customers are more involved with deciding these things.

JI: Is your auditing stricter or less so compared to banks?
TS: I think our checks are the same as banks.

JI: What percentage of people do you expect not to pass the checks?
TS: Well we only just started so it’s hard to say, but we estimate about a 50 percent acceptance rate for borrowers. We believe that the majority of lenders will pass the checks.

JI: Are the lenders’ checks strict too?
TS: There are a lot of levels to go through. We test that they know the risks, check their capital, etc. They are not able to invest by borrowing from elsewhere to lend to Maneo—they must invest using their own assets. For example, lenders with only 1,000,000 yen income and 1,000,000 yen capital are not able to lend.

JI: Do you do police checks?
TS: No, we don’t do police checks.

JI: How do you stop criminal use such as money laundering and loan sharking?
TS: There are various regulations in place to check against profiting from crime. We use those regulations to do identification checks. And also, regarding money laundering and whether someone can actually do this…well for example, if someone wants to launder, say, 1 million yen through Maneo, lenders can only lend up to 200,000 yen per borrower… this means they’ll have to lend to 500 people! It would be such a hassle, plus, even if just one person out of 500 defaults…there is not much incentive for money laundering— it is just too much hassle. Same with loan sharking—the profits would be too low for them to make it worth their while.

JI: Are you able to find out peoples’ addresses?
TS: Regarding the actual possibilities, yes it is possible. You can become friends with someone through ManeTomo. But we do advise people against this, and we also patrol message exchanges between networks. Also, anyone can report ‘bad use’ to Maneo, and also block people from contacting you.

JI: What legal regulations does this service come under?
TS: Maneo mainly regulates the borrowers, and this comes under the money lending regulation.

Maneo Markets, a subsidiary regulates the lenders, which falls under the Financial Supervisory Agency’s Financial Instruments and Exchanges Law.

This type of social lending was only founded in 2005 and it may be hard to see the history of it, but have there been any problems that other companies have already faced that you’ve learned from?

In the US, there is a similar company called Prosper. At the beginning, their checks were not very strict and they used to have about 25 percent subprime loans. Their default rates rose to about 10 percent. Now, they are dropping their subprime rate, down to 6 percent currently, with a default rate of 1 percent. We saw how important it is to collect good quality borrowers—that was a strong lesson.

JI: How is the financial crisis affecting you?
TS: There are two things, both good and bad. The first is, in a bad light, the money that lenders have will decrease, and we are unsure whether they will get into social lending.

As for the good news (if you can call it that), is, if the financial institutions increasingly cut lending to individuals, more people will come to social lending as a last resort (for borrowers) and social lending will integrate closer into society. So I think there are two effects.

JI: Do you lend to companies?
TS: No, Maneo only lend to individuals, the reason being that company default risk auditing is an extremely complicated process which we are not confident enough to do yet.

JI: How do you plan to change the face of finance?
TS: Well, we think that we provide ordermade finance. The products you get in other places are largely ready-made, and we are unsure that they really fit the customer’s needs. If social lending succeeds as a business model, then maybe other places will find that order-made lending will become very important. Mind you, the administrative stresses caused by custom lending may not be realistic for big financial institutions, but it might become necessary to move towards that goal.

JI: Do you have any competitors?
TS: There are a few that are thinking of starting up in Japan. Zopa [from the UK] is thinking of starting Zopa Japan, as is Prosper [from the US]. As well as other venture companies looking to start too.

JI: How do you compare to them?
TS: We are the first and the others haven’t started yet so we are unsure. It might be that they look to us as a model.