Along with the exponential growth of e-commerce in the last decade or so and increasing digitization of business processes, Chinese e-commerce companies and many other tech developers have built a big data-based, highly automated online lending infrastructure where tens of millions of small businesses have easy access to credit based considerably on their operational data generated through digital channels.
"Less than 7% of the new loans issued by domestic banks in the second quarter of 2018 were granted to MSEs."
As of the end of 2017, there were about 90 million micro and small enterprises (MSEs) in China, accounting for over 90% of the total business entities, and China’s economy has increasingly relied on these privately-owned businesses. However, they have long had difficulty getting loans from banks or other established financial institutions, despite the Chinese government issuing many policies and mandates to boost small business loans over the last decade.
Banks, mostly state-owned, tend to serve larger state-owned enterprises and most small businesses can't meet their collateral requirements. Less than 7% of the new loans issued by domestic banks in the second quarter of 2018 were granted to MSEs. Private lending channels have been important to Chinese smaller businesses, accounting for 40% of their total financing, but private lenders charge much higher interest rates than banks.
This gap in the market gave rise to the now popular internet-based business lending services that offer much easier access to credit and interest rates lower than those charged by private lending channels. Businesses can apply for loans on mobile apps and receive loan proceeds in a matter of minutes.
Their automated credit decisioning systems factor in sales data and other relevant data generated from businesses’ online stores or digital business tools they use and increasingly more external data. Real-time data are employed for loan monitoring and targeted marketing. As the Chinese government has become highly concerned with small business financing problems and is supportive of these technology-driven lending solutions, increasingly more data from the public sector, such as business tax records, are becoming available.
More recently, some online business lenders adopted artificial intelligence, particularly machine learning, to improve risk management and approval rates.
Beginning with online sellers, major Chinese e-commerce companies and independent business lending platforms have expanded their borrower base to all other businesses of the e-commerce ecosystem, such as suppliers and marketers, and conventional businesses that now generate meaningful operational data through business management tools or other digital channels.
Alibaba, the leading e-commerce company, started in 2007 to help sellers on its online marketplaces to get unsecured loans based on the merchant rating system the company had built or borrow against purchase orders generated on Alibaba's marketplaces.
Unsatisfied with the approval rates at banks and realizing the low scalability and efficiency of their manual-based processes, Alibaba decided to build a fully online lending platform, extending unsecured loans to merchants on Alibaba's e-commerce platforms with lending decisions made based on the sales and other operational data generated from online stores and the aforementioned the merchant rating system. The platform was launched in 2011 and implemented risk-based pricing and other customized pricing strategies in 2013.
Alibaba even managed to get the very first loan license with no region restrictions, giving the company full autonomy to extend credit to online sellers physically located throughout China.
Alibaba’s digital bank, MYbank targets small- and micro-sized enterprises, entrepreneurs and consumers by issuing affordable loans.
Alibaba’s small business lending platform is now under MYbank, or Zhejiang E-Commerce Bank, an internet-only private bank affiliated with Alibaba’s finance arm. Incorporated in mid-2015, MYbank claims that they were the first bank in China with the core banking system running on the cloud, which enables high scalability and flexibility, without any account managers or field marketers.
MYbank now offers unsecured loans to businesses of Alibaba e-commerce ecosystem, offline businesses that accept Alipay (the leading online payment service operated by Alibaba’s finance arm), customers of Alibaba's digital retail solutions for mom-and-pop stores, and merchants on a number of other online platforms. It also provides supply chain finance programs to suppliers and other partner businesses of Alibaba ecosystem.
Other major e-commerce players, including JD, the second-largest e-commerce company in China, and Suning, a leading retail chain that has built a strong online presence, have been providing similar credit products to sellers on their retail platforms and supply chain partners.
Smaller online and mobile marketplaces, such as Meituan, a mobile platform for local services, and Didi, a ride-hailing app, and providers of business management services have also begun extending loans to small or individual businesses on their platforms by partnering with big lending platforms or technology providers.
Apart from online and mobile commerce companies, a variety of companies from other sectors have developed their own online business lending systems with different data sources and business strategies. CreditEase, a major fintech company, utilizes data imported from major domestic and foreign e-commerce platforms and retail SaaS platforms. XWBank, one of the three internet-only banks in China, is powering the business lending business of mobile commerce platforms like Meituan and Didi. Ping An Bank, the commercial bank of major insurer Ping An, partners with big corporations and platforms, extending credit to their suppliers and other related companies. Some online lending platforms previously focused on consumer lending, such as WeBank, affiliated with social networking giant Tencent, and peer-to-peer lending platforms are expanding their technology platforms to small business lending.
State-owned banks and other established financial institutions have started to embrace the new business lending technology. The top two banks in China, also the world’s two biggest banks, have already developed similar lending platforms targeted to MSEs. In June 2018 Alibaba’s MYbank announced to open their business lending technology platform to traditional financial institutions, aiming to introduce some 1000 financial institutions onto the platform in the next three years.
MYbank announced in November 2018 that they had extended credit to more than 12 million MSEs since its incorporation in mid-2015. The total loan origination volume amounted to over 2 trillion yuan (230 billion USD), with the average amount of the loans being less than 100,000 yuan (15,000 USD). Businesses took out an average of nine loans annually.
Apart from great increase in lending and operational efficiency and high scalability, major Chinese online business lending platforms have also reported significant cost savings in loan origination and servicing and so far low delinquency rates.
MYbank claims to have reduced the loan origination cost to 2.3 yuan (0.3 USD), with 2 yuan being technology expenses, while the average cost for business loan originations through the traditional approach is estimated to be about 2000 yuan (300 USD). The delinquency rates at MYbank were only around 1% as of November 2018.
“Major Chinese online business lending platforms have also reported significant cost savings in loan origination and servicing and so far low delinquency rates. ”
It is estimated that China’s online small business lending market will see a big boost in the coming years as the Chinese government and regulators have begun promoting the technology-driven lending models as part of the efforts to stimulate China’s slowing economy, and the established internet companies have long seen online finance as complementary to their core services and moving forward, a potential high profitability.
Tracey Xiang is a tech writer, specializing in ChinaTech, Digital Economy, FinTech and AI.