Yan Zeng (right) with Professor Lauren H. Cohen (left) and Professor Christopher Malloy (center)
China has long been accused of copying designs from foreign countries and lacking real innovation. But is the time approaching where foreign companies might start replicating China’s innovations, especially those related to the groundbreaking Chinese fintech sector?
During a heated discussion at Harvard Business School on October 30, Craig Yan Zeng, CFO of the Nasdaq-listed and Shenzhen-based online consumer finance company LexinFintech, and two Harvard Business School professors, Lauren H. Cohen and Christopher J. Malloy, shared their insights on the future of the Chinese fintech industry.
(Watch the video interview here)
Zeng said that for many years, the U.S. has been at the forefront of the fintech industry and has created new technologies and business models that foreign companies copied to achieve success. However, in recent years, the trend has changed. Many chinese companies have started to create their own unique business models and are now listed on the U.S. stock exchange. Across many industries, startups are able to compete with U.S. companies, and the fintech industry is no different. Professor Cohen also shared his views, saying that China is a leader in the fintech sector that the rest of the world can learn from.
Where is the Chinese fintech industry today?
When speaking of the current differences between the U.S. and Chinese fintech markets, Craig Zeng said that the consumers in the U.S. have long used credit cards, making it easier to develop a convenient payment processing system. Therefore, there is not much potential for new payment technologies in the U.S. But as recently as five years ago in China, people used cash for the majority of their transactions. The Wall Street Journal reported in 2017 that the average number of credit cards per Chinese citizen was 0.3, whereas for U.S. citizens it was 3.1. Zeng explained that when mobile payments came in, both customers and investors showed strong interest in the technology. This caused the rapid development of the sector which has now become prevalent in China. Based on the universal use of mobile payment processing, Zeng said, the new era for the Chinese financial industry has arrived.
China’s consumer finance industry is projected to grow to USD 1.6 trillion by the end of 2020, according to research company Oliver Wyman. Zeng said that unlike the U.S., with its highly mature credit systems that give credit ratings to 86% of the population, China’s traditional financial institutions are unable to provide unsecured consumer loan services due to the lack of credit infracture. As of 2015, only 28% of the Chinese population had credit ratings, and most of these people were financially stable and did not need consumer finance services. Without such a credit rating system, Zeng and his company attempted to create their own tools for consumer finance markets.
How did Lexin capitalize on this new business opportunity?
Founded in 2013 in southern China’s city of Shenzhen, Lexin’s target consumers are educated Chinese from 18 to 36 years old, who have high income potential, a strong desire to build their credit profile, and an appreciation for an efficient customer experience.
As of 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 of RMB 24.7 billion (USD 3.6 billion), according to the company.
Unlike traditional financial institutions which evaluate customers based on assets or income, Lexin believes that it is better to look at one’s future prospects rather than past habits. Zeng said that the company has built a risk model to predict customers’ future earning potential based on information from their smartphones, such as their educational background, social networks, and consumption records. By using this technique, customers no longer need to fill out documents to prove their financial security. When customers authorize Lexin to gather their information, the verification procedures can be done in one or two minutes on their smartphones. With more than 1,000 decision rules and over 7,500 data variables, its risk management engine is able to generate an assessment within seconds.
In addition, Zeng said Lexin uses many new technologies to drive business and operational efficiencies. Big data, cloud computing, artificial intelligence (AI), machine learning and blockchain are the new technologies that Lexin has used to improve its business. By introducing new technologies, Lexin significantly decreased its total operating expenses as a percentage of its average outstanding loan balance from 17.3% in 2015 to 4.7% in 2018.
The company believes in the power of technology, as CEO Jay Wenjie Xiao openly spoke about how AI has empowered the fintech industry.
“AI has largely contributed to a revolution in increasing efficiency in the financial industry by lowering the costs of lending, thereby making lending more accessible to consumers who were previously underserved,” Xiao said at the World Economic Forum Annual Meeting in Tianjin this year.
With its innovative data-gathering technology, Lexin is also eyeing potential investment opportunities in the U.S. and Southeast Asia.
(Photos from LexinFintech)