Chinese fintech companies are finding new opportunities in small business lending

A logo and a smartphone for the digital payment app from Alipay will be on a desktop at the headquarters of Wirecard AG in Munich on Wednesday, September 5, 2018.

Matthias Döring | Bloomberg | Getty Images

China Boosting smaller business lending has created a business opportunity for large financial technology companies.

As Beijing struggles to balance crackdown on high debt with sustaining growth, President has Xi Jinping and Premier Li Keqiang have both publicly announced their support for privately owned companies. The central bank has also released cash for lending in recent months, easing rules to help small businesses get hold of money more easily.

Nonetheless, the business environment – particularly in the finance sector – continues to favor state-owned companies, although the private sector is contributing to the financing Much of the job creation and economic growth in the country.

But there is money for those willing to lend to smaller businesses, especially when some of the risks can be mitigated. According to Tencent-backed online lender WeBank, around 80 percent of the nearly 90 million small and small businesses in China do not have a bank loan.

Fintech can play a bigger role here.

Thanks to their close ties to Chinese technology giants Alibaba-Supported online lender MYbank and Tencent-backed WeBank can use hordes of payment information or social network data to determine a company’s ability to repay its loans. This is basic credit information that many private companies have not been able to provide, and some traditional banks prefer to borrow to large, state-owned companies instead.

Micro and small businesses do not receive the same level of financial support in proportion to their contribution to China’s economic growth

Source: PBOC, CBIRC, Capronasia

In the past, banks were reluctant to lend to small businesses due to a lack of collateral, limited profitability and greater business risk, said Felix Yang, an analyst at financial services advisory and research firm Kapronasia. The process of taking out a loan from banks is also slow and complicated, which gives companies more incentive to reach out to other lenders even if the interest rate is higher, Yang said.

Smaller loans, faster application

In contrast, in China, taking out a loan from an online service can only take a few minutes.

“Platforms like MYbank, Su’ning Finance and other internet finance providers could take a step closer to closing the funding gap for SMEs (micro and small businesses) in China,” Yang said in an email. He found that traditional banks rarely lend less than 1 million yuan ($ 148,385), while the average size of a loan on a fintech platform is often much lower.

According to minority shareholder Ant Financial, the average size of a loan to small, medium-sized businesses and sole proprietorships on MYbank is about 9,900 yuan ($ 1,469). By the end of September 2018, the latest available figures, nearly 9.78 million of these companies had accumulated loans of more than 1.19 trillion yuan through the online platform. The non-performing loan rate was around 1 percent, according to Ant.

Alibaba affiliate Ant Financial, which is reportedly valued at $ 150 billion, also operates one of the dominant Chinese mobile payment systems, Alipay. With the user’s approval, customer transaction information can also be used to determine what type of loan a company can apply for, either through MYbank or another Ant Financial service.

WeBank, backed by Tencent, has also expanded its business with small and micro businesses.

In late 2017, WeBank launched an online-based loan product for small businesses in Shenzhen, reaching more than 200,000 in less than a year, said Li Nanqing, WeBank president and party secretary, wrote in the People’s Daily on December 14, 2018. Almost half of these companies are in manufacturing and high-tech, he said.

“In order to provide better credit support to businesses, WeBank has thoroughly implemented the arrangements made by the Party’s Central Committee to Support the Development of Small and Micro-Enterprises and actively used data technology to optimize costs,” Li said in the article.

According to its website, the company is currently offering loans to small and micro business owners in Guangdong, Jiangsu and Henan provinces.

Partnerships with existing financial institutions

As is often the case at the intersection of finance and technology, fintech has not always had a smooth relationship with the Chinese government. Beijing has tended to let technology develop before trying to push back with stricter regulations. For large fintech companies like Ant, their latest strategy has focused on partnering with existing financial institutions.

“We are seeing a significant increase in demand for our technology products and services from banks, asset management companies, insurance companies and securities brokers who are looking for ways to better serve their customers at a lower cost,” a spokesman for Ant Financial said in a statement. “This includes banks trying to bring down the cost of borrowing for (small and medium-sized businesses) to help them survive and thrive.”

This collaboration places alongside the Consumer market that the banks have already tried to reach with the help of fintech companies.

Even if banks, with the support of fintech firms and government policy, are more willing to lend to smaller companies, it is unclear whether this will have a significant impact on economic growth. The extent to which fintech companies can address private sector funding challenges remains modest, and companies that have received support are not necessarily ready to invest, analysts said.

In the end, few financial technology companies could benefit from it, some analysts said.

“Fintech offers a new mechanism,” said David Yin, vice president and senior analyst at Moody’s Financial Institutions Group. “I think this offers a new trend, a new approach. But it seems that there are only a limited number of fintech companies … because of their parent company support, they can. “

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