Chinese companies that are engaged in financial technology, or fintech, are increasingly collaborating with banks, some of them even helping banks acquire retail customers, as the financial institutions build out their digital banking services and technology.
That is a fundamental shift from several years ago, when fintech companies enter the market with the aim of using digital technology to disrupt and disintermediate traditional banks from the financial business.
Tighter regulations such as the 2018 asset management rule governing banks’ wealth businesses have squeezed banks’ income source, pushing them to tap the retail banking business for revenue. Early movers, such as China Merchant Bank, Ping An Bank, both reported that retail loans contributed to over half of their entire loan book in 2018.
Such transformation towards retail banking has benefited fintech groups, with companies like Lexin Fintech, 360 Finance, positioning themselves as banks’ technology partners, rather than disrupters that compete against them.
“Chinese banks are still at the Banking 1.0 stage, as most of them serve clients offline,” said DBS Group Research’s analyst Cindy Wang. “Fintech companies could help banks serve clients through their online platforms, using mobile app to expand customer base and shorten new account approval time through artificial intelligence (AI) and big data analysis.”
It’s taken less than a decade for early fintech movers such as the Alipay service by Ant Financial Services Group and Tencent Holdings’ WeChat Pay to dominate China’s mobile payment market, together accounting for 94 per cent of their US$12.8 trillion market for online transactions. Ant is a unit of South China Morning Post’s owner Alibaba Group Holding.
Other fintech companies late to the payment space have been keen to ride the retail banking wave, selling banks their risk management technologies and refer borrowers to banks and earn a service fee.
Nasdaq-listed Lexin announced last month a partnership with 19 banks and consumer finance companies including Industrial and Commercial Bank of China (ICBC), China Minsheng Bank and Bank of Tianjin to help match borrowers with creditors in real time.
“What the banks value most is the 37 million customers on Fenqile who have good credit profile, and their borrowing demand on ‘Fenqile’ become favourable loan assets for these financial institutions,” said a Lexin spokesperson, referring to the company’s e-commerce platform for loan instalments.
The ratio of Lexin loans overdue for more than 90 days were at 1.41 per cent in the fourth quarter of 2018, according to the company’s Nasdaq filings, lower than the non-performing loans level of 1.83 per cent among Chinese banks.
Nasdaq-listed 360 Finance has also partnered with banks to provide its digital revolving credit line to over 12.5 million users between 18 and 35 years old.
Such partnerships will proliferate, as more banks transform their business towards consumer banking, analysts said. The collaboration is particularly instrumental for banks to evaluate credit scores, and in detecting fraudulent borrowers, Wang said.
“Only 500 million of China’s population of 1.4 billion people have their credit history maintained at the People’s Bank of China credit reference centre. Even for the leading four biggest banks, accessing consumer’s credit history and credit score is still a major pain point,” said Wang, adding that fintech firms’ use of AI and machine learning technology in credit risk management is useful to Chinese banks.
In Hong Kong, where 95 per cent of the city’s population has at least one bank account each, regulators have put in a “sandbox” approach to encourage banks and their fintech partners to test new technologies in isolation from the constraints of real-life regulations.
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