PERSPECTIVE: Despite China's Regulatory Crackdown, Its Fintech Industry Stands Strong
New rules, aimed at reducing risks in the peer-to-peer lending and financial sector overall, have winnowed the number of Fintech firms with extra funds to use for sponsoring large events.
At the Lendit Conference in Shanghai, the atmosphere was decidedly less bustling than last year because of the regulatory crackdown on the financial sector. New rules, aimed at reducing risks in the peer-to-peer (P2P) lending and financial sector overall, have winnowed the number of firms with extra funds to use for sponsoring large events. However, many Fintech firms remain in this growing sector, and are optimistic that their prospects will continue to grow.
China's regulators have striven to reduce risks and deleverage the financial sector. Regulations have forced P2P lending companies to implement a new record-filing system to reduce fraud throughout the industry. This round of P2P lending regulations has been the most extensive, requiring firms to register with local authorities after meeting a list of 108 rules. Inability to comply with the new regulations has resulted in the closure of hundreds of P2P firms in recent months and an overall decline in profitability.
Despite this, China's Fintech industry has reached a new level of maturity, possessing a large customer base and experiencing rapid improvements in technology. The use of digital payment applications, such as Alipay and WeChat Pay, is widespread, reaching $12.8 trillion in the first 10 months of 2017. More and more consumers apply for loans online. The industry itself is changing, catering to increasingly sophisticated users and firms that favor efficiency and lower costs. These days, Chinese Fintech firms are likely to incorporate artificial intelligence, big data, and cloud computing in order to properly assess for risks and meet growing demand for financial services.
The Example of Mintech
To find out more about how modern Chinese Fintech firms are keeping up with consumer demand and innovations, I spoke with the CEO of Mintech, Mickey Li, who was educated in the U.S. and is a former Senior Vice President of Global Risk Management at Citigroup Global Risk Management. His company, Mintech, is an online credit services firm that facilitates loans between banks and borrowers. The firm is decidedly not a P2P lending company, focusing on the asset rather than the deposit side of business. This has worked in the company's favor, as many P2P lending companies have struggled to repay deposits in a timely manner. For its part, Mintech acts as a bridge between banks and end consumers, providing risk assessment and underwriting loans to ensure that customers are good credit risks.
In the incredibly competitive industry that is Chinese Fintech, Mintech attempts to find customers who will repay their loans despite having little or no credit history. This is a challenging task, which is made somewhat easier by the fact that China has less stringent data laws than countries like the U.S., and consumers are able to allow Fintech firms to access their data. As a result, firms like Mintech can make use of customer data to understand customer social and financial habits. Use of big data, coupled with sophisticated modeling techniques, allows Mintech to predict whether customers will repay their loans.
As I have found, companies that welcome new financial regulations, rather than reject them, tend to be survivors in the Chinese financial industry. Mintech is one of the former. Li views new regulations as harbingers of important new trends. The first is an upsurge in protection for consumer data. While Mintech is already stringent in the handling of customer data, new regulations are sure to improve consumer privacy. The second is the discouragement of non-lenders in taking on risks. Loan facilitators are encouraged to find an insurance company to guarantee loans. Both of these will help to modernize and legitimize the Chinese Fintech industry.
Also driving the importance of the industry is the increased emphasis on consumption. Li sees this as a major opportunity.
"We have just changed from an investment-driven economy to a consumption-driven economy," he said. "That means consumer finance can be growing like crazy."
Certainly, with the potential upside for Chinese consumption, finance is a key complement. Fintech firms that will survive the current regulatory turbulence might face significant gains. For this reason, the firms that persist despite the crackdown are likely to come out far healthier than before.