The Problems of Credit and Financial Literacy: Building products for China’s underserved

James Safford
5min read

China has long been on the radar of those with ambitions of marrying technological innovation with a payments-savvy population of big spenders. Traditionally, though, China’s economy had been centrally-planned, driven by investment and built around large state-owned enterprises (SOE).

Banks had focused mainly on providing services for these SOEs, under-serving SME and retail consumers. So, naturally, with Alibaba and Tencent so successfully serving other areas – e-commerce and social media respectively – it should come as no surprise that they’ve found themselves filling this vacuum.

What’s the current climate in China?

So where are things now in terms of value and uptake? Well, Alipay and WeChat (Alibaba and Tencent’s respective wallet services) boast 520 million and 1 billion monthly active users (for context, PayPal had 227 million users globally as of December 2017). Chinese companies secured five of the top 10 slots in the KPMG/H2 ranking of the top fintech firms globally in 2017. Further, the largest Chinese fintech company, Ant Financial, has been valued at more than $100 billion (soon to be $150 billion!), far surpassing top-tier financial institutions like Goldman Sachs ($94 billion market cap) – though these are imperfect comparisons, as the two brands offer different services, the figures are noteworthy. China’s two main payments players – Alibaba and Tencent – have started to shed their early skins. Now they not only offer a full suite of social media, e-commerce and payment solutions for their users; they’ve started to focus their attentions on more refined payment interests. Tencent’s WeChat Wallet, which currently commands a 40% share of the market, is poised to spearhead the payments race as focus moves away from the cities and into rural areas. This could be attributed to the ubiquity of WeChat amongst large swathes of Chinese society, and the fact that Alibaba’s e-commerce business is less penetrative outside of China’s cities. Alibaba are instead directing their efforts towards boosting transaction volume via partnerships with restaurants and retail chains; these bigger-ticket purchases are expected to make up for shortfalls in user numbers eaten away by their rival.

What types of financial products are Chinese customers using?

When we think of China’s payments system now, we tend to think about their digital wallets. Payment solutions were developed to provide a bridge between an antiquated banking system and China’s increasingly emboldened e-commerce sector. This started in February 2004 with Alipay, and serious competition arrived the following year from WeChat. Wallet-based escrow services offered the solution – tying this all up in a nice, attractive app-based package – but we need to also consider the traditional financial infrastructure which underpins these services, and how these behaviours reflect the economy.

Domestic financial behaviour

China’s credit card penetration (0.3 credit cards per person) is notoriously low, but the country houses possibly the highest debit card penetration in the world (3.6 credit cards per person). Since each digital payment account is linked to a bank account in order to work (Think: Venmo, Bunq in the Netherlands, MobilePay in Scandinavia, etc.), what could be described as “debit card-based infrastructure” enabled rapid fintech uptake, as users could easily link their accounts to digital wallets. Credit is a different matter, though, with custom dictating that most would prefer to borrow from friends and family, rather than from a financial body. For SMEs, borrowing cash is an integral aspect of the scaling process, but is also a key health indicator for the economy. This has been understood, and recent policy tweaks – which included a reserve–requirement ratio cut – encourages banks to lend more. The market has responded, in part, by borrowing surpassing targets for the second quarter of 2018. If this is to be an effective policy, though, attitudes amongst China’s citizens needs to change.

What needs to change?

We’ve seen from Alibaba and Tencent’s moves into the payments space that China’s appetite for digital solutions to financial obstacles is substantial. And here is where a new player in the lending space could really make inroads. Take P2P lender Lufax as an example of a company that could fill this vacuum. The platform makes its money by matching borrowers with investors and collecting a four percent fee on each loan. Since the start of the business, the company has arranged more than 200,000 peer-to-peer loans, which represents a total of $2.5 billion. The products are very similar in design to WeChat Wallet and Alipay, with bold graphics, detailed pages for products, and a strong uptake of QR codes. I wouldn’t be surprised to see Alibaba and Tencent dominate this market, once the appetite is sufficient – such is their dominance in all other aspects of the financial space. Lack of credit does have the potential to stagnate growth, which would be disastrous for the Chinese economy; however, it’s not the only threat. The main barrier to financial inclusion could be lack of financial literacy available to China’s ageing population, especially considering an ageing demographic. Financial consumer protection risks are particularly important to address, what with the elevated risks that digital finance poses related to data privacy and fraud. Especially with a Shadow Banking sector that is so pervasive. Does this represent a serious threat? Growth is an incredibly important facet of China’s enormous economy. The Chinese proverb “hŭ tóu shé wĕi” (tiger head, snake tail) tells of a nation lurching forward with purpose, only to be held back by a snake tail – financial literacy could be what currently holds China back.

Cultural touchstones

From a product perspective, one way to approach both the credit and generation problem could be to simplify the product further, ensuring that there are substantial cultural, recognisable touchstones in place for users to feel as though their traditions remain intact. The “Red Envelope” feature, available to Alipay and WeChat users (the gifting of money in China traditionally comes in the form of red envelopes) is a perfect example of this idea in motion, and its success is undeniable:
  • WeChat reported a total of 14.2 billion digital red envelopes sent and received through the platform on the eve of lunar new year 2017,
  • During Spring Festival in 2017, 78.5% of China’s smartphone users participated in red envelope promotions.
If you look at what’s currently available, it’s not impossible to envision a future in which AI could be leveraged to personalise the lending system, enabling the environment in which Chinese SMEs and individuals feel comfortable enough to accept credit from mainstream lenders. The same can be said for ageing demographics, who could find a usage for simple digital financial products to provide a more rounded understanding of their financial position, potentially through powerful chatbots. The “Plan for Promoting the Development of Financial Inclusion (2016–2020)”, a government-issued paper on the topic of increasing financial inclusion, has put pressure on market-based, commercially sustainable approaches to this problem. This is the perfect response for tech companies like Lufax, Tencent and Alibaba, who have the opportunity to build out their offering further, and enjoy even more party support. This topic is clearly 'on the brain' of Chinese payments companies and legislators alike, and they will be hoping that changes could help release the snake’s tail from around the tiger’s head. James Safford is a Market Research Analyst at 11:FS You can discover James’ content on 11:FS Pulse and keep an eye out for research reports coming from him very soon.