No score, no problem. The lenders opening up access to SME credit in China


Many of us in the West like to romanticise about our respective ‘underserved and overcharged’ SME markets as being ripe for fintech disruption. The reality is, when compared to their small business peers in China, they have a well-stocked buffet of banking options at their disposal.

Consider for a moment the following. Only 300 million entries exist in China’s centralised credit scoring database. That’s a mere 22 percent of the country’s 1.38 billion inhabitants who can potentially access credit. Now take the US, where some sources have the percentage of the population with some credit history at 86 percent. The difference tells us a lot about the propensity of the market for disruption.

In a market like the US, the motivation remains low for incumbents to innovate for the masses, who for the most part can be adequately assessed. This drives alternative credit scoring to the fringes of the financial system, to smaller fintech’s servicing niche parts of the market. Disruption therefore remains low.

However not so in China. A lack of good quality data on individuals and businesses is just one of the many dilemmas giving rise to a technology driven upheaval across the financial sector. And in today’s data rich environment, China is taking full advantage of the tools at their disposal to build a world first score that maps both financial and social behaviour – the Social Credit System (SCS). For those of you who have watched Black Mirror on Netflix, you might have an idea of what this could ultimately look like.

In the interim, companies like PINTEC spinoff Dumiao are taking scoring into their own hands. At Next Money in Hong Kong, CEO Jing Zhou highlighted the company’s ability to leverage 40 independent data sources to process an SME loan application in under 15 minutes, with finance available in half a day. The company receives over 1 million applications per month. This type of scale is only possible in China, or possibly India. With Zhou’s Chinese bank competitors struggling to turn around a like for like application in under 2 weeks, then it’s relatively clear who has the upper hand.

Alongside Dumiao, the so called ‘Lending Club of China’, Dianrong, is one to put on your radar. In 2014 it struck up a partnership with The Bank of Suzhou targeting small enterprises.

It’s not just speed where fintech startups like these are winning. Innovation and better experiences are translating into small business trusting tech providers over and above traditional institutions. A recent EY report, The Rise of Fintech in China, co-authored by James Lloyd, EY’s Asia Pacific Fintech Leader and Sachin Mittal from DBS pointed to the rapid explosion of users trusting non-banks to manage their finances, up from 35.1 percent of the population in 2007 to 54.5 percent in 2015. As a point of reference, another EY survey found that only 20% of customers globally plan to use non-bank providers in the future.

The market opportunity in China for SME lending and banking solutions is unquestionably huge. With SMEs receiving only 20-25 percent of bank disbursed loans, there will continue to be expansion in the non-banking sector for years to come. Whether non-Chinese originated companies will be able to penetrate this market and take advantage of this is the great unknown. Other non-Chinese tech companies seeking to establish footholds outside of the financial services space have not been great success stories. It seems far more likely that Chinese firms will come to displace incumbent services in the West. And that is when things will certainly get interesting.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.


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