by Lena Zhang
The popularity of smartphones and advancement of internet-based financing in China has brought about a surge in e-commerce credit usage. Nowadays, individuals, especially those among the younger generation, are turning to e-commerce credit apps, which allow them to take out loans via their smartphones. Thanks to an increase in online financial consumers, various e-commerce companies specializing in e-commerce credit — including Nasdaq-listed LexinFintech (Lexin) and other online financial companies — have experienced a surge in business in recent years.
By June 30, 2018, Lexin had over 8.9 million consumers with approved credit lines and over 29.2 million registered users with a combined total outstanding loan balance soaring to RMB 24.7 billion (USD 3.6 billion), according to the company.
The company believes in the power of technology, as its CEO Jay Wenjie Xiao openly spoke about how artificial intelligence (AI) has empowered the fintech industry at a World Economic Forum (WEF) panel discussion in Tianjin city on September 18.
“AI has largely contributed to a revolution in increasing efficiency in the financial industry by lowering the costs of lending, and therefore making lending more accessible to consumers who were previously underserved,” he said.
According to the company, Lexin has integrated AI into its value chain where the technology has helped with customer acquisition, risk management, fund matching and in order to better serve Chinese fintech consumers.
Young people as targeted consumers
There is enormous space for China’s fintech industry to grow. Even today, hundreds of millions of Chinese citizens still lack access to bank services. For those who do have access, banks provide financial services based on an individual’s financial past by looking at consumers’ credit history, whereas Lexin attempts to predict the future in assessing loan worthiness. This means the company assesses the future prospects of customers who usually don’t have a credit history. According to Lexin CFO Craig Zeng, LexinFintech serves the best customers for banks’ future by acquiring these customers at present.
Founded in 2013 in southern China’s city of Shenzhen, Lexin’s target consumers are young, educated Chinese ages 18 to 36 years old, who have high income potential, high educational backgrounds, high consumption needs, a strong desire to build their credit profile, and an appreciation for an efficient customer experience.
Thus, young people have great potential for taking on debt even though many of them lack of credit history. The first peak in demand for financial services among this demographic comes with college graduation when they often need to rent apartments, purchase furniture, and so on. Prior to getting married, these young adults often require a great amount of money for setting up their new family and household as well.
Cost-efficient customer acquisition
The evident fact that young people favor taking on loans via e-commerce platforms rather than from banks is explained by the efficiency that e-commerce credit platforms offer. When seeking bank loans, individuals must submit loads of paperwork to demonstrate creditworthiness before they can take on loans from banks. Potential Lexin customers, however, can complete a credit line application within just a few minutes by providing basic personal information and authorizing the company to collect information from various data sources.
In fact, the platform’s high efficiency is backed bolstered by robust technology. Lexin is able to meet its financial needs with the use of big data, artificial intelligence, and cloud computing, all of which enable the company to assess the creditworthiness of young people. For instance, about 98% of loan applications on Lexin’s e-commerce platform Fenqile (which translates to “happy installment”) are handled automatically by its risk assessment engine, which utilizes more than 1,000 decisioning rules and 7,500 data variables, according to Lexin. Thus, Lexin can better communicate with partnering banking institutions to achieve more effective fund matching.
The force of technology not only serves the need of consumers but also helps to reduce the cost for e-commerce companies. The cost for a bank’s manual processing might be ten times the interest rate it can charge, while E-commerce companies use technology to lower costs. In 2015, Lexin’s operating expenditure accounted for 17.3% of the borrowing balance; this figure steadily dropped to 8.9% and 5.8% in 2016 and 2017, respectively. In the first half of 2018, the figure dropped again to just 4.7%. As a consequence, the reduction of cost unquestionably translates to increased company profits.
Expansion of online financing market
The expansion of the online financing market is a positive indicator for the surge of Lexin and other E-commerce financial companies. According to Oliver Wyman, in 2016, the scale of China’s online consumer financial market was RMB 419 billion (USD 61.4 billion). In 2017, this scale exceeded the two most profitable Internet business models of gaming and advertising with 235.5 billion (USD 34.5 billion) and RMB 382.9 billion (USD 56.1 billion), respectively.
Apart from the current scale of the market, the potential for consumer financial market in China is tremendous. In 2017, China’s short-term consumption loans accounted for only 8% of GDP, while they accounted for approximately 20% in the US this indicates the potential for growth among consumer financial markets in China. Statistics show that the composite annual growth rate of China’s online consumer financial market from 2016 to 2020 is expected to be as high as 62%.
Last but not least, the government has continued to support the development of internet finance. In China, internet finance can be divided into six forms including internet payment, internet funds, internet insurance, E-commerce micro credit, peer-to-peer lending, and crowdfunding. On August 18, the Banking and Insurance Regulatory Commission said it would actively develop consumer finance, no doubt a boon to key enterprises such as Ant Financial, JD Finance, Lexin, and so on.
Lexin recently released its unaudited financial results for the second quarter ending on June 30, 2018. Lexin’s gross profit reached RMB 619 million (USD 90.6 million) and non-GAAP EBIT reached RMB 353 million (USD 51.7 million), representing an increase of 123% and 343% from the same period in 2017. Apart from that, its total loan originations in Q2 reached RMB 16.6 billion (USD 2.4 billion), up 68.4% year-on-year, and total outstanding principal balance of loans reached RMB 24.7 billion (USD 3.6 billion) as of June 30, 2018, up 97.9% year-on-year.
LexinFintech and other online financial companies are expected to influence not only consumers but also the overall industry. We can predict these platforms to continue to pursue high efficiency by taking advantage of technological advancements, and to ultimately reshape offline financing and the operation of loans in general.
Top photo from Google