Xiaomi’s co-founder Hong Feng outlined how the mainland Chinese company is leveraging data to become a fintech powerhouse, with Hong Kong now in its sights.
During a keynote speech at Hong Kong Fintech Week, Hong said, “We are actively working with partners [in Hong Kong] to bring smart solutions to the convenience lifestyle...we want to make the mobile phone become your banking card, your transportation pass, your entry card or your loyalty card.”
Hong Kong has already become Xiaomi’s hub for settling payments for its crossborder transactions (about a third of its revenues are international). The company already works with global financial institutions, and is on the lookout for additional relationships, Hong told the audience.
The Xiaomi trifecta
Xiaomi is best known overseas as a manufacturer of smartphones. In fact its business is a trifecta of hardware, internet services, and retailing, online and offline.
The company is only eight years old but in that short time it has transformed itself into a payments player in China, and is now becoming a major financial provider to small companies in its various supply chains.
Its data capabilities make it a dangerous threat to conventional banking – a threat that to date has been confined to mainland China, but will become relevant to Hong Kong as the company capitalizes on a growing presence among the city’s consumers and merchants.
We want to make the mobile phone your banking card
In July this year it listed on Hong Kong Exchanges and Clearing, raising $6.1 billion; it was the first to take advantage of HKEx’s new rules allowing dual-class shares.
Today Xiaomi boasts $10 billion in revenues and is the fourth largest smartphone manufacturer in the world. Rapid growth has been due in part to the company’s preference to incubate entrepreneurs, letting it grow its ecosystem by taking minority stakes in a multitude of startups (two of which have IPOed in America). Key to these are devices and sensors: the company has activated 1.15 million Internet of Things connected devices (not smartphones) across 20 million households.
From phones to fintech
That’s the headline size. But what’s that got to do with financial services? Hong says fintech stems from the company’s original strategy. It simultaneously competes in hardware, ecommerce, and retailing. All three spaces are ruinously competitive but the company succeeded in each by leveraging its presence in the others. This has enabled it to sell cheaper devices at high quality and attract more users, to whom it sells online services, which leads to the data that feeds the cycle.
From there the company launched into finance.
“With our deep understanding of retail users, sales channels, and hardware manufacturing partners, we can be their financial partner as well,” Hong told the crowd.
The company started its fintech path by offering consumer loans to its internet users. It has now issued more than Rmb100 billion’s ($14.3 billion) worth of loans, all priced and approved based on its internal data.
It also works with mainland banks and metro transport services to support payments.
Xiaomi can outcompete any bank when it comes to understanding the financial needs of companies it does business with. These are suppliers that typically struggle to get traditional banking services, often because banks – relying on balance-sheet information – don’t have visibility into the company’s situation.
Data deep dive
“Sometimes [banks] don’t have know the methodology to evaluate companies, or understand what’s the interesting data they need, or the data they have is outdated,” Hong said. “Information from the balance sheet is the after-result of many things that have already happened.”
Xiaomi, on the other hand, is getting hundreds of data points from these companies, in real time, that tell it how a company is doing. It can see if a company has good technology, if it’s financially stable, if it exercises good quality controls. These companies are already in a business relationship with Xiaomi, which means they are riddled with Xiaomi sensors and devices.
“We look at data end to end,” Hong said. This includes sourcing variables such as the team’s strength and reputation, as well as the activation rate of their devices and how long users stay engaged.
We look at the source of data, not the result of data
“We look at the source of data, not the result of data,” Hong said. “Financial balance sheets represent the end result of the data. But we can know beforehand what it will look like,” thanks to the increasing digitalization of the manufacturing process.
Xiaomi provides suppliers with industrial IoT sensors. This helps these companies, while giving Xiaomi a real-time window into factors such as production yields, power consumption, labor usage and inventory balances. There’s almost no way a financial institution can gauge the financial situation of a manufacturer or a retail outlet the way that Xiaomi can.
But can this model be replicated outside of mainland China?
Xiaomi is already a major exporter. In Hong Kong, it’s now sold more than 1 million smartphones. It counts nearly 10% of the population as a consumer; plus it has sold more than 1 million activated IoT devices (including wearables) to Hong Kong users.
From that starting point, Xiaomi intends to get into lending, transport payments, and other finance-related activities, both at the consumer and corporate level.