Ant Group (Part 4) - Decoding the Success of a Miniscule Behemoth (Consumer Credit Edition)
Previously in Part 3, we provided an overview of the Chinese SMB credit market and discussed the factors that led Ant to succeed and become an industry leader in small business lending. Now in Part 4 of the Ant series, we give a walkthrough of China's consumer credit market, in addition to explaining how and why Ant's CreditTech platform, through the Huabei and Jiebei products, have been pivotal in shaping the consumer credit sector over the past decade.
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A Growing Consumption Potential, Little Credit Access
Both personal disposable income and consumer expenditure in China have been increasing steadily along with the country's economic expansion.
The red bars in the graph below from the Chinese Bureau of Statistics display the average disposable income in mainland China (labelled in RMB terms on the left axis) which has increased from RMB21,966 in 2015 to RMB30,733 in 2019. The year-on-year growth is indicated by the green line and labelled on the right axis. During the 2015 to 2019 period, the year-on-year growth in personal disposable income averaged around 6-7%.
The blue bars in the graph below from the Chinese Bureau of Statistics display the average consumer expenditure per capita in mainland China (labelled in RMB terms on the left axis) which has increased from RMB15,712 in 2015 to RMB21,559 in 2019. The year-on-year growth is indicated by the green line and labelled on the right axis. During the 2015 to 2019 period, the year-on-year growth in consumer expenditure averaged around 7% to almost 9%.
In spite of the growing consumption potential in China, many Chinese consumers could not obtain the credit they needed to meet their increasing demand. As mentioned in previous posts (see Parts 1 and 3), Chinese banks traditionally did not lend to individual borrowers because they profited sufficiently highly from lending to large corporates, and did not see a need to invest the time and resources necessary to expand to retail lending, especially for unsecured loans. Moreover, credit cards were also very rare and difficult to obtain, where an Oliver Wyman study shows that in 2019 only 25% of the Chinese population owned a credit card. These factors meant consumers had minimal credit access to fund their daily expenditure purchases or large consumption transactions.
In Step Huabei and Jiabei
To meet the unmet demands of the increasingly wealthy Chinese consumers, Ant launched two products as part of the CreditTech platform: Huabei and Jiebei.
Ant launched Huabei in 2014 as a virtual credit-card-like product to tap into the large consumption potential of young Chinese consumers who had significant consumption demand but lacked the credit history needed to access additional credit. Huabei was one of the first digital unsecured revolving credit products for daily expenditures in China, where it has since grown to become the largest digital consumer credit product by credit balance.
A Huabei credit line is made available to Alipay users and is instantly usable at the point of sale. The minimum credit line starts at RMB20, although the specific credit line for each individual customer is determined based on Ant's gathered customer insights and credit assessment models. Consumers are given an interest-free period of up to 40 days after purchase, and can pay back in monthly instalments over a period of 3 to 12 months.
During the 12-month period ended June 30th, 2020, the daily interest rate for the majority of Huabei users ranged between 0.02% to 0.04%, while the average outstanding balance was RMB2,000.
Whilst Huabei was intended to meet the needs of consumers' daily expenditures, Jiebei was launched in 2015 as a digital, short-term unsecured product to provide credit for larger consumption transactions. Customers can apply if they have sufficient Huabei credit history or have a credit history on the Ant platform.
Customers who apply for a new credit line will have the decision result made available within seconds, and once approved, access to the credit line is instantaneous. When a credit drawdown request is made, the customer will receive funds in their Alipay account or any debit card that is linked to the Alipay app. The minimum credit line is RMB1,000 and loans last anywhere from 3 to 12 months, with no prepayment penalty in general.
Similarly to Huabei, during the 12-month period ended June 30th, 2020, the daily interest rate for the majority of Huabei users was between 0.02% to 0.04%.
It's worthy to note that Ant does not take on credit risk itself, and 98% of the total consumer credit balance enabled through their platform was either underwritten by partner financial institutions or securitized. Ant works with a wide range of approximately 100 partner institutions ranging from large state-owned banks to regional, city-level and rural banks, as well as international banks and trust companies.
Overall Consumer CreditTech Performance
As of June 30th, 2020, the total consumer credit balance enabled through Ant was RMB1.7 trillion, while the delinquency rate during 2017 to 2019 was between 1.08 to 1.56%. With the onset of the COVID-19 pandemic, the delinquency rate increased but only peaked at 3.01%.
Ant does not provide a breakdown of its CreditTech revenues, although the consumer credit function and SMB credit function combined generated revenues of RMB28.6 billion and an operating profit of RMB24.9 billion during the first half of 2020. CreditTech's share of Ant's total revenues has also been increasing each year, from 24.8% in 2017 to 39.4% in 2Q2020 (read more in Part 2).
Factors for Success
The key ingredients to Ant's success in the consumer credit sector are very similar to their factors for success in the SMB credit markets discussed in Part 3.
Abundance of Data
The massive amount of data available through the Ant-Alibaba ecosystem meant that the company was able to develop algorithms and models that could quickly and efficiently assess customers' creditworthiness and update this information in real time. As the CreditTech platform expanded, the track record of billions of loans also allowed Ant to further enhance its AI technology to determine the appropriate credit line balance and other product parameters specifically targeted to each customer, where Ant currently has more than 100 credit assessment models for its consumer credit function. Ant also engages in information sharing contracts with partner institutions that helps to reduce information asymmetry frictions and allows for a better matching of consumers and credit products from third-party banks, while the extensive amount of shared data allows for the development of complex risk models with dynamic risk management and advanced anti-fraud capabilities.
Quick and Efficient Digitalized Application Process
Traditionally, potential borrowers had to go to a physical bank branch to fill out complicated paperwork and submit many verification documents in order to apply for credit, where most of the time the decision was a rejection, especially for unsecured loan applications. This led many borrowers to borrow from the shadow banking sector (with peer-to-peer lending being a particularly noteworthy mention), typically with extortionately high interest rates and relatively small credit amounts.
With the advent of CreditTech, borrowers could easily apply for credit on the Ant platform where their information is already stored, and a decision would be available within seconds. Once granted, consumers would have immediate access to a credit line, with the Alipay app and their chosen debit card being seamlessly connected for ease of use. The streamlined, digitalized application process is particularly useful to borrowers in more segregated areas who may have struggled with the traditional means of obtaining credit, as well as young people who lack a sufficient credit history.
A Growing Market + Structural Changes in Consumption
As discussed above, consumption potential in China has been increasing every year as a result of the country's rapid economic growth, and naturally, Ant benefited from advancing credit to unlock this consumption potential. However there are structural changes in consumer expenditure that occurred in tandem. Specifically, the younger segment of the Chinese population, such as the millenials and Gen-Z, grew up in economic conditions that were significantly more prosperous than their elders and feel less of a propensity to save, where young consumers have been driving the demand for e-commerce, electronics, and luxury goods in China.
Here we discuss relevant government policies and macroeconomic trends that will shape the future of CreditTech and the consumer credit industry.
During the past couple of years, the Chinese government has been trying to shift to a reliance on domestic demand rather than exports as the main economic driver, through the promotion of innovative, new forms of consumption such as online education and online healthcare, encouraging consumers to replace durable goods such as cars and large household electronic appliances, in addition to unlocking the potential for consumption in rural areas by building delivery infrastructure for e-commerce and accelerating the expansion of standardized services to enhance consumer protection.
Macroeconomic Trends - China's Still Getting Richer
Analysis by Oliver Wyman predicts that personal disposable income and consumer expenditure in China will continue to grow in the next five years. The total personal disposable income in China was RMB36 trillion in 2017 and is expected to grow to RMB67 trillion in 2025, while total consumer expenditure was RMB25 trillion in 2017 and is expected to increase to RMB51 trillion in 2025.
Macroeconomic Trends - More and More Rural Users Getting Connected to the Internet
As discussed in Part 3, the internet penetration rate in China has increased significantly over the past decade and is still projected to keep increasing, where 1.1 billion Chinese citizens are expected to use mobile internet by 2025 according to an Oliver Wyman study. The expansion of internet usage is primarily in rural areas where a lot of consumers still remain underserved in terms of their need for credit.
The Future of Huabei and Jiebei
Although Ant hasn't released any specific details of future plans for Huabei and Jiebei, we believe that the two platforms still have significant potential for growth in the next three to five years, given the expected continued rise in overall disposable income and consumption expenditure, the spending habits of young Chinese consumers and the increasing internet penetration rate that is conducive to digital finance.
Check out the entire Ant Group series here:
Ant Group Updates:
Investing in China (Equities)
Investing in China (Fixed Income)
Glossary of All China-Related Terminology:
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