Chinese Technology Companies Hope to Leverage Consumer Data to Sell Financial Services - WSJ
By Stella Yifan Xie
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 23, 2019).
China's biggest internet and technology companies are crowding into the financial-services business, hoping to monetize troves of data they've collected on millions of people in the country.
Didi Chuxing, the country's largest ride-hailing company, smartphone maker Xiaomi Corp., web-search giant Baidu Inc. and online retailer JD.com Inc. are among companies that have set up finance arms providing personal loans, insurance and investment products. Many of those products are offered and sold via the companies' smartphone apps that connect directly to individuals' virtual wallets or bank accounts.
The biggest impact on consumers is that these companies have helped make credit more freely available to many people, including those who don't qualify for traditional bank loans or who lack established credit histories. The interest rates on short-term loans offered by tech companies differ based on the companies' assessments of borrowers' creditworthiness, but are often in line with rates offered by banks for unsecured loans.
Analysts say the tech companies are trying to find new growth areas and sources of profit. Because their rapid growth in users in recent years has reached a bottleneck, "tech companies are keen to monetize customer information and tell sexier stories" about themselves for consumers and investors, says Chen Lin, an assistant professor of marketing at China Europe International Business School in Shanghai.
On the customer side, the proliferation of online financial platforms is being driven by China's younger, tech-savvy generation of consumers, who spend hours a day on their mobile devices on average and have become accustomed to spending, borrowing and investing cash with a few taps on their smartphones. They have powered the rise of the world's largest and most valuable financial-technology company, Ant Financial Services Group, which has built a profitable business handling mobile payments, making loans and selling investment products.
Most technology startups, however, have limited experience assessing the credit risks of individuals and gauging their ability to repay loans. Some analysts worry the companies are applying loose lending standards in order to get more business and may struggle if worsening economic conditions in China lead to sharply higher loan-default rates.
Early this year, Didi Chuxing rolled out a suite of financial products for its drivers and passengers. They include auto-insurance policies that pay for collision damage and theft, crowdfunded coverage for major illnesses, unsecured loans and short-term investment products.
The Beijing-headquartered company, which was founded in 2012, is one of China's most valuable tech startups. It said in June that it works with more than 31 million drivers across China and has more than 550 million users.
But after growing strongly for years, Didi's main ride-hailing business has encountered major setbacks, leading to layoffs. One serious blow came last summer when Chinese regulators suspended the company's Hitch carpooling service -- which is still shut down -- after two murders of female passengers. Didi says it has been trying to improve safety measures.
In its fledgling financial business, Didi has formed partnerships with banks and licensed consumer-lending companies to offer loans to individuals on terms comparable to those available from established financial institutions, and lets them repay the funds in up to 36 installments.
Over the years, Didi has collected large amounts of data on how often customers use its ride-hailing services and on the locations they frequent, including their workplaces, says Chen Maochuan, an analyst at research firm Analysys. That information can help the company gauge its customers' creditworthiness, he says. Didi declined to comment.
Laura Liang, who works at a nonprofit organization in Shanghai, is a regular user of Didi's ride-hailing services. In early August, she came across Didi Finance while on a ride and applied for a loan of 40,000 yuan ($5,640) on the company's app to try it out, she says.
The loan charged interest of 0.035% a day, or about 12.78% on an annualized basis. Ms. Liang says the rate was close to that on a similar loan offered by a financial unit of internet giant Tencent Holdings Ltd. "What matters is the convenience and interest rate," says Ms. Liang, who is 45 years old. She adds that she repaid the loan within days.
A Didi spokeswoman declined to say how much the company has extended in loans so far.
Growth at Xiaomi
Xiaomi, one of China's largest smartphone makers, has a finance arm that offers loans, insurance policies and stock and bond investment funds to individuals who have its financial app on their phones.
Hao Jianyu, 26, who works at Google in Beijing and owns a Xiaomi phone, says he holds credit cards from China's four biggest banks but prefers taking out loans from Xiaomi Finance to fund his daily spending. He says daily interest on what he borrows is 0.065%, an annualized rate of 23.4%. That's higher than the interest rate on his credit cards, Mr. Hao says, but he has been able to increase his credit limit much faster with Xiaomi. The more often he uses Xiaomi's short-term loans and repays on time, the bigger his credit line, which now exceeds the limits on his credit cards. He says his credit limit from Xiaomi has increased to 60,000 yuan from a few thousand yuan over two years.
In a stock-exchange filing last year before Xiaomi went public, the Beijing-headquartered company said its finance business had a "highly advanced and customized credit assessment and risk management approach" that was built on its big database of users. The company said its proprietary risk-assessment model is used to preapprove individuals for certain amounts of credit. Xiaomi said in reporting its results for the second quarter of this year that revenue from its fintech business grew 63% from a year earlier to 792 million yuan ($112 million) in the three months through June.
To fund their loans to consumers, many tech companies have turned to the market for asset-backed securities. Investors have been buying up bonds that are backed by bundles of consumer loans, and the interest and principal payments that individual borrowers make go toward paying off the bonds over time. Some tech firms have also formed partnerships with banks that provide funding for their loans.
By lending to individuals and providing them with other financial services, China's tech companies are also gathering more data about their customers' spending habits and lifestyles, which can help the companies expand their other businesses, analysts say. "More than profitability, the key motivation is expansion," says Yinglan Tan, chief executive of Insignia Ventures Partners, a technology venture fund. "Covering financial services entrenches their position in the market and can create stickiness with existing customers."
Ms. Xie is a Wall Street Journal reporter in Hong Kong. She can be reached at [email protected]
(END) Dow Jones Newswires
September 23, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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