COMMENTARY: China's Banking Being Transformed Through Big Data, AI

Alibaba’s MYbank, Ping An and other firms are almost instantly approving hundreds of billions of dollars in small business loans and settling claims through automation.

Mark Melnicoe
    Aug 03, 2019 5:10 AM  PT
COMMENTARY: China's Banking Being Transformed Through Big Data, AI
author: Mark Melnicoe   

China has taken a big lead over every other country in several consumer technologies, perhaps none more so than mobile payments. Explosive growth over the past five years brought total dollar volume in 2018 to an astonishing $41.5 trillion - more than double the entire annual GDP of the United States.

No other country comes nearly as close to adopting a cashless economy as China, with its 1.4 billion consumers. Two systems – Alipay, a product of Alibaba Group Holding Ltd. (NYSE: BABA), and WeChat Pay, from Tencent Holdings Ltd. (HKEX: 0700) – dominate, with 90 percent of the market.

Why, you might ask, does that matter? Because those hundreds of billions of transactions amount to a treasure trove of data. And with that, an ancient yet critical industry is being revolutionized – or usurped, depending on how you look at it.

Instead of applying for loans at traditional banks, millions of small businesses are turning to Alibaba's MYbank, which has doled out loans to 16 million small businesses since its inception four years ago.

But here's the kicker, as reported this week by Bloomberg: Using real-time payments data and a risk-management system that analyzes more than 3,000 variables, MYbank has lent 2 trillion yuan ($290 billion) to nearly 16 million small companies.

"Borrowers apply with a few taps on a smartphone and receive cash almost instantly if they're approved," Bloomberg wrote. "The whole process takes three minutes and involves zero human bankers. The default rate so far: about 1 percent."

Big Data combined with another burgeoning industry in China – artificial intelligence – is behind the ability of Alibaba founder Jack Ma's company to pull this off. Other Chinese companies – mainly banks and insurers – are starting to get in on the trend – scaling up their offerings by automating underwriting, lending and assessment of a customer's creditworthiness.

China has twice as many smartphone users as the U.S. has people – some 700 million. Add to that the mobile payment usage and the authoritarian country's social credit scores and lack of privacy protections that allows companies to collect reams of data from social media accounts.

That creates a massive trove of data, and entrepreneurs like Ma are taking advantage. MYbank isn't the first Chinese firm to utilize data to create or reorder industries: the bike- and scooter-lending craze began on the streets of Shanghai and Beijing, after all.

FinTech's Possible Boost to Economy

But when such earth-shattering change comes to banking – it carries the potential to rescue China's economy, which is growing at its slowest pace in 30 years.

Banks traditionally have been loath to lend to smaller companies, preferring the safety of big, state-owned firms. But small and medium-sized private companies employ four in every five Chinese workers and account for about 60 percent of economic growth.

They are the companies that have been hurt in the central government's two-year crackdown on shadow lenders, who were their main source of capital. That, in turn, has harmed the economy.

MYbank and its peers now are stepping into the breach, having figured out how to analyze real-time spending data to understand a customer's creditworthiness.

"The upshot of more information is a loan approval rate at MYbank that's four times higher than at traditional lenders, which typically reject 80 percent of small-business loan requests and take at least 30 days to process applications," Bloomberg said.

It quoted MYbank president Xiaolong Jin as saying the Hangzhou-based firm's operating cost per loan is about 3 yuan, versus 2,000 yuan at traditional banks.

Other financial-services companies are also using data and AI to revolutionize their industry. Ping An, China's largest insurance company, and also a major bank, is using AI to issue on-the-spot accident claim estimates, partly by using emotion recognition to determine whether loan applicants are lying, according to Fortune. As of January, the insurer had loaned over $72 billion and shrunk average approval times from five days to two hours using the technology, the magazine reported this month.

As more of China's companies get in on the use of Big Data and AI, it's becoming increasingly apparent that – rather than just "ripping off" American technology, as President Trump would say – they are breaking the mold of centuries-old industries with trailblazing innovations.

When it comes to consumer services, China is rapidly shifting the ground from its reputation as a copycat. And that may just save its economy.