China’s Fintech Innovators

Ventures like MYbank and WeBank are betting that AI and cloud technology will further reduce the costs and inefficiencies of borrowing faced by SMEs.

China is leading global investment in the innovative fintech industry—and Alibaba is emerging as China’s leader in fintech. According to CB Insights, a market intelligence firm, fintechs worldwide that were backed by venture capital raised $39.57 billion last year, bringing the industry’s total capitalization to an all-time high.

Ant Financial, Alibaba’s financial services group and the IT giant’s super tool for internet financing, raised $14 billion, or 35% of the total, during that period. CB Insights puts Ant Financial’s total market capitalization now at $150 billion.

Today, all that small-sized, offline business owners need is one quick response (QR) or matrix barcode, and they can manage their business accounts—from receiving payments to managing loans and insurance—via mobile. MYbank, Ant Financial’s online commercial bank, uses big data and artificial intelligence (AI) to process vast amounts of data it has gathered in this way from millions of these so-called code merchants, to assess their business risks. AI has thus enabled MYbank to offer no-deposit, no-collateral, purely credit-based loans to more than 2.5 million code merchants.

This represents an improvement over the traditional process of moving money along the supply chain, says Rui Meng, professor of finance and accounting at the China Europe International Business School. “The main reason [for the inefficiencies in that process] was lack of trust between companies,” he says. “It came from lack of transparent information.”

Cheaper And More Transparent

Financial institutions formerly did not focus on the service sector, but rather on manufacturers and other large companies, says Zeng Gang, deputy director of China’s National Institution for Finance and Development; and the business model was based on large deposits. “This business culture did not serve SMEs [small and midsize enterprises], simply because the cost of financing was way too high for them,” he says. With the development of AI and cloud technology, and broader availability of tools like QR code, however, information has become increasingly cheaper. “The end result is lower cost for business operations,” he adds.

According to Huang Hao, president of MYbank, the human-resource costs of issuing a loan to an SME used to run to RMB2,000 ($298); the bank’s new AI technology brought the cost down to just RMB2.3, he explained in a 2018 interview with Reuters. MYbank has served over 10 million SMEs, working as a lender. Its goal is to raise that to 30 million within the next three years, by serving as a platform to enable other financial institutions to lend to SMEs as well.

Another Chinese digital-payment system, WeBank, is affiliated with Tencent, the entertainment, IT and investment giant. WeBank is similar to MYbank: Both provide digital lending software to facilitate loan underwriting for banks. WeBank is leveraging blockchain technology to create new sources of value. It can monitor marketing campaigns, transactions, applications, cybersecurity threats and other operational areas, in real time.

Given these advances, along with the government’s plan to boost domestic consumption and nationwide credit sustainability, China’s large financial institutions, including state-owned banks, are now backing the development of more fintech innovations to further streamline the lending process.

Separating Good From Bad

“As a platform, the more information you have, the more willing financial institutions are to work with you,” says Rui. “Essentially, your mission is to separate good assets from bad assets. Financial institutions then use your rating to decide which clients they lend money to.”

With access to high-volume transaction data, fintech firms utilize locations, transactions and historic trends to build an instant risk-control model for each client. Those data points—as opposed to the more traditional metrics of deposits, collateral and credit scores, which are mandatory at traditional financial institutions—have enabled fintechs like MYbank and WeBank, whose parent-company connections yield vast troves of data, to reduce costs tremendously and also lower the risk of bad loans.

MYbank benefits from risk-control technology utilizing over 100,000 criteria, over 100 prediction models and more than 3,000 risk-control strategies, says Jing Xiandong, CEO of Ant Financial, helping MYbank to keep its overall bad-loan rate to around 1%.

“We can compare the data of one company with the rest of the industry and therefore conclude the quality of this company,” Huang says, “whether it has 99% chance of success or 99% chance of failure.”

MYbank’s most active users are in China’s second- and third-tier cities, where loan shortages for the retail and service industries are the most serious. Interest rates are entirely decided by machines and algorithms.

Ant Financial is also leveraging its tech capability to partner with more-traditional banks, however, such as through a recent deal with China Everbright Bank. Under the agreement, Ant Financial will help the bank develop cloud computing, internet finance, mobile payments, AI-driven applications and smart risk-management systems, as well as biometric verification.

The big picture, then, is for fintech firms to become technology providers to banks, enabling the latter to cost-effectively improve their offering to customers both online and offline. “As a fintech firm, Ant Financial has made it clear that our future focus is on tech to support fin,” Jing quips. “We will hand out our mature fintech solutions one by one, among which AI technology will play the most important role.”