Commercial banks use fintech to back micro and small enterprises

Chinese commercial banks are exploring technological and digital measures to give small business owners wider access to loans and tackle risk management challenges.

"The dominant thinking in our exploration is to offer clients standardized products based on the use of data and technologies, so that we are able to serve a wide range of micro and small enterprises, improve risk management and reduce costs effectively," said Zhao Xiaojun, deputy general manager of the retail credit department of China Merchants Bank Co Ltd.

Over the past three years, the Shenzhen-based commercial lender accelerated its exploration of digital transformation, technological transitions and financial inclusion for small businesses after its president Tian Huiyu announced in 2017 the goal of transforming China Merchants Bank into a fintech-powered lender.

Having made a lot of negotiations with various authorities, the bank now has access to a large amount of data collected by local administrations governing industry and commerce, taxation bureaus and courts, in addition to its data on clients' transaction behavior and financial assets. Its credit risk models based on data analytics are constantly optimized.

"Relying on mobile internet and digital data, we try to offer completely new borrowing experiences to our clients by remodeling the entire lending process and service flow. Our clients can use their smartphones to acquire information about loans, apply for loans, obtain and renew loans, check the loan progress and handle other services," said Zhao at a meeting held by the China Banking Association in Shenzhen, Guangdong province, on Aug 6.

Small business owners who want to apply for loans at CMB will learn whether or not they meet the bank's lending requirements a minute after they enter basic personal information, like identification number, smartphone number and housing properties, into the bank's credit application system.

For borrowers who meet the requirements, client managers at the bank will process their applications and forward the verified materials to the credit approval center at the bank's head office. This process will result in formal decisions within 48 hours.

Historical data of CMB show that more than 90 percent of the applicants who passed the preliminary review went on to receive loans.

"To ensure unification of risk management standards and improve the efficiency of credit approval, we made it clear that only loan approval officers at the head office of CMB are authorized to approve loans. By contrast, our branches may have difficulty in identifying risks highly efficiently based on unified standards, as the level of professionalism and the risk culture varies among branches," said Zhao.

Today, CMB relies on data analytics to approve or reject online applications for loans worth less than 500,000 yuan ($69,912) each. This enables the bank to serve a large number of small businesses and makes its loan approval process smoother than before.

But for every loan of more than 500,000 yuan, apart from digging into data, the bank still needs experienced loan approval officers to help identify risks of potential fraud. For this, it uses certain techniques.

Just like CMB, many other banks in China have also ramped up support for small businesses with the help of financial technologies.

Ping An Bank Co Ltd, another national joint-stock commercial lender headquartered in Shenzhen, has decided to build three major digital platforms to help small businesses address operational challenges and reduce operating costs.

The bank and Ping An Securities jointly launched a digital investment banking platform on July 30. The platform aims to give micro, small and medium-sized enterprises access to services provided by commercial banks, investment agencies and financial advisers, so as to meet their demand for funds efficiently.

It also gives an opportunity for Ping An Bank to find suitable projects for other financial institutions that have connected to the platform, so as to offer services like asset custody and financing for mergers and acquisitions according to their needs.

Furthermore, the bank is planning to launch a digital management platform and allow small businesses to get free usage of the platform, which covers a number of areas, including client relationship management, human resource management and financial management.

This will increase the efficiency of small business owners to deal with operational difficulties and improve their levels of management. The bank, on the other hand, will be aware of the operating conditions of those companies that use the platform and make better decisions on whether or not to offer financing to them, said Li Yue, head of the strategic development center at Ping An Bank.

The commercial lender will also provide users who have created digital accounts at the bank with unified access to all of its financial and nonfinancial services.

As the digital accounts will be open to other platforms offering scenario-based services, Ping An Bank will eventually build an ecosystem with a network structure that is connected by digital accounts, said Li at a news conference in Beijing on Aug 22.

He said the bank will solve the problem of information asymmetry between commercial lenders and small businesses by building a series of digital platforms.

"We firmly believe that with the popularization of 5G technology, the internet of things devices will become widespread rapidly. This technology will help us obtain reliable sources of information on small businesses," he said.

The bank and Ping An International Financial Leasing Co Ltd jointly developed a smart bracelet that is placed on the cable of electrical equipment. The sensor on the bracelet can feel the changes of electric current and identify whether the equipment is started up or shut down, and whether it is idle or in normal operation.

Based on the knowledge of locations and operating conditions of a company's equipment, the bank is capable of making a judgment on business conditions of the company.

Since the beginning of this year, banking institutions have deepened exploration of fintech adoption, matched their services precisely with client needs, and improved their capabilities and the efficiency of delivering financial inclusion services, said Pan Guangwei, executive vice-president of the China Banking Association, at the second China Financial Inclusion Innovation and Development Summit on Aug 2.

At the end of the second quarter, the balance of loans granted by banking institutions to micro and small enterprises was 35.63 trillion yuan. Of the total, the balance of loans issued to small businesses with a total credit line of up to 10 million yuan for each borrower was 10.7 trillion yuan, up 26.6 percent year-on-year, according to the China Banking and Insurance Regulatory Commission.

The financing costs of micro and small enterprises also dropped significantly. Central bank data showed that in the first six months of this year, the average interest rate of new loans extended to small businesses with a total credit line of up to 10 million yuan fell 58 basis points from that for the full-year 2018 to 6.82 percent.