Alipay, Alibaba’s electronic payments application, has more than 700 million users in China and is widely used. When making a payment in that ‘app’, users can select how to do it: between several cards, accounts, using the available balance of the wallet … But it also offers another method: installments. According to a report by Alipay itself from November 2020, 40% of the Chinese adult population under 30 has ever used this modality, a total of 65 million young people. They have a difficult escape. Even in non-financial ‘apps’ like WeChat (the Chinese WhatsApp), Didi (the local Uber) or Meituan (a kind of Glovo) they are tempted with loans and other financial products. These ‘apps’ in China are much more than ‘apps’, they are the new banks.
Young people are the ones who have been most influenced by the omnipresence of easy loans at the click of a mobile phone. Those born in the 80s and 90s have only known times of economic growth and their consumption habits differ from those of previous generations, more cautious because they have known scarcity and poverty. China stands out for being one of the ten countries with the highest rate of gross domestic savings with 44.2%, according to the World Bank. Judging by the consumption and debt data of young Chinese, that could change in the future.
A. Ruiz (Beijing)
According to a 2019 Nielsen report based on surveys of more than 3,000 young Chinese, only 13% of those born after 1990 have no debt. This generation, for which electronic payments are completely internalized, it is easy prey for these ‘neo banks’. An installment payment or loan application is just a click away from the applications they use every day. According to the financial publication Rong360, almost half of those who take out consumer loans in China were born after 1990.
This newspaper has made a simple review of several very common ‘apps’ in China and has found loan offers in less than two clicks after opening: WeChat (instant messaging), Didi (VTC service), Alipay (payment service), Toutiao (news aggregator), WPS Office (office automation), Meituan (food delivery) and more. Even the Sogou keyboard itself, one of the most popular input methods among smartphone users, offers loans. Many young people have fallen into this temptation and they sport a lifestyle on their social networks that may be beyond their means.
The situation now worries the Government. According to the Nielsen report mentioned, 56% of those under 35 have not started saving for their old age. To try to prevent young people from falling into a loan spiral and the ensuing social instability, China’s Central Administration of Cyberspace and the Ministry of Education in March banned “small businesses from granting loans specifically aimed at university students.” In addition, colleges and universities should cooperate with banks to develop products with “reasonable interest rates and controllable risks“Following the government’s slap on the wrist, Ant Financial, Alibaba’s financial arm, announced that it would limit the amount of money that young people can borrow.
How did China come to this?
At the end of the 2000s, hundreds of millions of Chinese lacked access to financing in traditional banks due to their high requirements. They also did not have credit cards. Loan companies began to emerge between individuals, also called P2P loans, a concept brought from the United States.
These platforms began to experiment almost blindly. “They focused on young college graduates that they needed money for training courses, “Bin Shuang, a former senior manager at a fintech company, tells Teknautas.” Then they expanded their services to skilled workers who already had a credit card that didn’t meet their needs. ” A real boom in these platforms, which began to lend more widely. According to the data provider Wangdaizhijia, at the end of 2011, there were about 50 P2P lending platforms in China. At the end of 2014, the number had already reached 1,575. SMEs, for which it was difficult to obtain credit from traditional banks, suddenly had more financing options than ever, and without government restrictions.
Some of these ‘startups’, such as Yirendai or Qudian, even went public in the United States. “The platforms began to cooperate and share information thanks to an ambiguous regulation on privacy and to build a database to identify the most trusted customers,” explains Shuang. At the same time, the 2010s also brought with it the popularization of smartphones and the rise of several local tech giants: Baidu, Tencent, Alibaba, JD, Meituan … They also began to accumulate valuable data about the consumption, location and behavior of users that could predict their financial needs and their reliability. Above all, following the emergence of Wechat Pay and Alipay, Tencent and Alibaba’s electronic payment services that already had 910 million and 740 million users in 2018 respectively.
Authorities turned a blind eye to the P2P sector until 2015. At that time, Chinese apps had loaned individuals and businesses a total of $ 100 billion according to the Asian Development Bank Institute. In the United States, the figure was 34 billion. From then on, it was required that P2P platforms collaborate with traditional banks, which became custodians of the funds to control cash movements. This left the field open to tech firms.
Large Internet companies already had huge traffic, which they sold to lending platforms. “However, they realized that, if they did it themselves, they basically had no acquisition cost“explains Bin Shuang. Another important factor was risk control.” These large Internet companies did not have the need to pay third parties for basic information about a user, “says Bin. They already knew their usual locations, their history of consumption, their education …
“In addition, when it comes to repaying the loan, the client is more likely to do so if they got it through an application such as WeChat or Meituan, for fear of being blocked in an application that you use every day and that may be necessary in your life or work“, Bin explains. On the other hand, if it is a purely financial application, the customer in distress will be more tempted to uninstall it and disappear.
In the following years, several scandals related to the P2P lending sector took place. The law capped the annual interest rate for loans to 36%, a severe blow to the sector. Several platforms collapsed and many investors lost their savings. In 2018, protests broke out in Beijing at the headquarters of several dying platforms. The authorities tightened the regulations even more and proposed “eliminate high risk companies“From fraud, violent debt collection or illegal fundraising. The number of these platforms peaked at 3,500, but last year, right at the beginning of the pandemic, fewer than 400 were left alive.
“Without a doubt, the P2P lending sector accelerated the arrival of a more mature credit system in China,” says Bin. Part of his legacy it has now been picked up by large technology companies. And there is no turning back.