Behind the international headlines about Beijing’s crackdown on the lending practices of Ant Group and other internet companies, there is a surge of consumer finance companies and smaller banks that are trying to fill in the gaps with their own digital offerings.
They helped finance an ongoing Chinese consumption boom. People revealed a post-COVID-19 desire to splurge during the recent Chinese New Year holiday in February.
According to the Ministry of Commerce, the first six days of the lunar new year saw retail and catering enterprises hit sales of Rmb821 billion. That is 28.7 percent more than the spending from Chinese New Year in 2020.
Dong Ximiao, chief researcher of Shenzhen-based Zhaolian Finance, says fintech is the core competitiveness of consumer finance. “In 2021, the consumer finance industry should deepen the application of fintech to improve operational efficiency, moderately reduce credit interest rates as well as customer costs, and strengthen the monitoring of loan flows,” he told the website China Economic Net.
(Zhaolian Finance also goes by the English name Merchants Union Consumer Finance.)
Meeting consumer needs
As a portion of China’s GDP, consumption has lost ground to manufacturing and exports – but spending is still rising in absolute terms. Some of this reflects pent-up demand from during the pandemic. Now with the domestic economy open again, authorities want to see consumption increase, as part of the Communist Party’s “dual circulation” agenda.
That in turn will rely more on consumer lending – which is increasingly about digital channels, digital payments, and digital credit.
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The outside world may miss this rising trend, given the recent attention on Beijing’s crackdown on how internet companies like Ant facilitate loans through their platforms, while passing the risk onto banks. While the government is trying to rein in the power of its Big Tech sector, at the local level of consumer lending, digitization continues to play a leading role in boosting activity.
Nor is innovation limited just to the big internet names.
For example, in June 2020, Zhongyuan Consumer Finance, based in Henan Province, moved its core operating system to Tencent’s cloud infrastructure. This enabled Zhongyuan to stop processing loans in batches, and shift to a round-the-clock mode of continuous service. Moving to cloud computing allows the finance company to also process orders much more quickly, and in greater volumes.
Nor is this simply a case of outsourcing computing storage and calculations. The move caps a three-year push by Zhongyuan to develop a range of its own technology solutions. The company has obtained 33 patents for its software for managing and warehousing data.
Another example is PSBC Consumer Finance. It responded to customers impacted by COVID-19 in August 2020 by launching its “U Post Cloud Customer Service”. This lets it handle customer complaints, return funds, mediate disputes and process loans through video chat.
Typically, commercial banks do not serve this segment of the market: the consumers are too high-risk, and therefore have been left to the non-bank consumer finance lenders.
However, the rise of lending platforms such as Ant’s Huabei and Jiebei opened a window to these consumers, giving banks a chance to access those customers by relying on internet companies’ data-based credit scores.
These avenues are being curtailed by regulators, who are insisting Ant and other internet companies increase their own “skin in the game” in the form of much higher capital requirements.
As a result, banks are turning to those consumer-finance companies that are at the forefront of digitization, as new windows to these lower-tier consumer segments.
In some cases banks are trying to roll out their own data-based scoring systems to reach consumers directly. The larger banks do not need to partner with consumer finance companies. Instead they are trying to use digital tech to develop their own means of servicing these customers. Bank of China, Postal Savings Bank of China, Shanghai Pudong Development Bank and Shanghai Rural Commercial Bank are among those introducing new consumer-finance products.
For smaller banks, though, they need to either innovate unique products, or team up with non-bank partners.
For example, Bank of Chengdu has introduced financing options such as a “discretionary” credit card installment loan, with quick approval and flexible terms. This product is aimed at white-collar workers, relying on their spending behavior rather than a mortgage guarantee to provide loans for renovating a flat, hosting a wedding, or going on a trip. Users can apply for a loan of up to Rmb300,000. Consumers can choose to pay it back anywhere within 24 hours out to five years.
Tech R&D can be expensive, so a number of consumer finance companies have looked to increase their capital by selling shares to banks – which in turn are eager to own a part of these businesses. For example, Bank of Beijing and Bank of Hangzhou have both recently increased their equity stakes in affiliated consumer companies.
Joey Tang Yijia contributed to this story.