HONG KONG -- By some accounts, it was only when stock exchanges on both sides of the Pacific began sparring to win the mandate for the expected $100 billion flotation of Ant Financial, an arm of Alibaba Group Holding, that regulators in China realized just how big internet finance had become in the country.
Regulators were not alone in their surprise. Banks, too, have only recently woken up to the challenge. Ant Financial and its great rival, Tencent Holdings-invested WeBank, will be three years old in 2018. But in less than two years, they have become the largest providers of online consumer lending. Alipay, part of Ant Financial, alone has 100 million daily active users.
"Internet consumer lending is now a standby service readily available in people's most frequently opened apps," noted Jason Bedford, an analyst with UBS in Hong Kong. "Online infrastructure lowers the barrier to entry and enables more lenders to set up operation with relative ease. In record time, some internet lenders have grown to a scale comparable to banks."
Industrial and Commercial Bank of China, China's largest bank by virtually any measure, and China's largest so-called joint stock bank, China Merchants Bank, have about 350 billion yuan ($55.2 billion) and 250 billion yuan, respectively, in their consumer loan books. That is not far from those of their online rivals, Bedford said. Indeed, most of the top internet players, including Baidu and JD.com, are already in the lending business directly or indirectly, and others will soon join them.
Fan Yifei, deputy governor of the People's Bank of China, is on special assignment to look after internet finance. He now has the challenging task of deciding whether the risks of fintech outweigh its benefits.
If China is to shift from an export- and manufacturing-driven model to one based on consumption and services, its young people must have access to credit. It is here that internet lenders potentially make the greatest contribution. Qudian, for example, offers loans as small as 100 yuan ($15.70) to young workers and students for inexpensive items, like concert tickets, while the average size of its loans is a mere 1,000 yuan. (It is also part of the Ali ecosystem, which helps it source resources and clients.) But do the internet lenders have the skills to monitor the risks of providing loans to those who have virtually no credit history?
There have already been numerous fraud cases and Ponzi schemes among both these new lenders and their clients. Internet lenders often raise funds from retail investors, giving rise to the ugly prospect of social disorder if they lose money. In other cases, the lending is indirect, as one platform provides funding to others. For example, a bank may supply money to an online lender who bears the credit risk but has none of the credit skills to analyze that risk. And given the general lack of transparency, it can be difficult to grasp the dimensions of a potential problem.
There is also no single credit reference market and nothing comparable to the one-stop FICO credit-scoring system in the U.S., which would enable lenders to figure out how many other platforms their own borrowers are using. Alibaba and Tencent use their platforms to track behavioral data as well as the credit metrics on income and delinquencies, but it is unclear how well their models actually work.
It is too early to say how this emerging industry will evolve and whether these platforms will inspire the banks, compete with them or merge with them. But if done right, they could help transform China into a more balanced economy.