How this fintech firm is serving the credit needs of China’s underserved
CHINESE Internet-based lenders have undergone rapid growth in recent years, with total loans booming past the US$130.7 billion mark earlier this year.
According to South China Morning Post, around 70 million startups and 270 million blue-collar workers in China are presently underserved by the country’s banking system, often finding their business loan and credit card applications rejected.
More recently, the country has made attempts to revamp the financial system through the promotion of the better use of Internet technologies to offer small loans to individuals and firms in need.
One Shenzhen-based company, Lexin Fintech Holdings, is strategically focused on serving the credit needs of educated young adults in China – a group identified as notably underserved by traditional financial institutions.
Lexin offers loan products to meet the credit needs of customers at different stages in life, including professional education, rental deposits, business investment, home purchase, as well as unexpected events impacting their finances.
Underserved target audience
According to the company, the group’s education levels and eagerness for a good credit rating translate into both high-income potential and consumption needs. Customers between the ages of 19 and 35 contributed approximately 70 percent of the total online consumer credit usage in China in 2014.
Lexin’s primary business, Fenqile, an online consumer finance platform, seeks to address the credit needs of this group through comprehensive and competitively-priced products. For example, Fenqile offers instalment shopping to customers, following in the footsteps of Chinese microcredit providers like Qudian, who raised US$900 million in their US IPO earlier this year.
Instead of directly providing loans to consumers, Lexin matches customers with other funding sources, including institutional funding partners, investors of asset-backed securities, and individual investors. The company uses a targeted and cost-effective customer acquisition strategy, which leverages its e-commerce channel, referrals, and cooperation with commercial banks.
“Paying in instalments has become a phenomenon among Internet users in China, allowing iPhones to become more affordable, particularly for young consumers who have a taste for trendy, high-quality products,” Lexin vice-president Darcy Fang Liu told SCMP.
Lexin’s online consumer finance platform saw much success during the recent Singles’ Day shopping festival. During the first hour of the 24-hour shopping spree, the number of value orders on the platform rose three and six times respectively compared with the same period last year.
Apple’s latest handset, the iPhone X, was top choice among consumers using the Fenqile platform, which was available for 36 monthly instalments of CNY360.5 , with no down payment required.
Technological advances in risk management
Lexin leverages a technology infrastructure that enables effective risk management. What makes the company stand out among traditional financial institutions is the way in which it utilizes the data insights and technology capabilities of its Hawkeye credit assessment engine.
Using sophisticated algorithms and a dynamic model, Lexin can predict the income potential and behaviour of each customer. As well as this, the company utilizes machine learning to improve its risk-management capabilities.
From this, it has developed over 1,000 decisioning rules utilizing 5,000 potential data variables, accumulating a vast amount of proprietary data from over 6.5 million customers and 22 million credit applications.
This automation adoption and data capabilities enable Lexin to perform a more comprehensive credit analysis of its customers than more traditional institutions have ever been able to accomplish.
China’s stricter regulations around online consumer lending
In recent months, China has tightened regulations concerning rules on online consumer lending. In June, Beijing implemented the ban of online lenders extending credit to university students following public outrage over young people falling victim to loan sharks.
— eChinacities.com (@eChinacities) November 7, 2016
These victims would often be demanded to pay staggering rates of interest, often threatened by the violent collection methods of loan sharks.
In response to these regulations, Lexin said recently;
“We have closely tracked the development and implementation of new rules and regulations that are likely to affect us. We believe these requirements have created entry barriers for many market players in China and further differentiated us from our competitors.
“We will continue to ensure timely compliance with existing and new laws and regulations applicable to our business”.
Earlier this week, the company filed for an IPO in the US on the NASDAQ global market.