The underbanked small business population of the world poses a challenge for local economies. But it can also offer an opportunity for FinTech innovators to use technology to meet the needs of these business owners in ways traditional banks can’t.
China may be a global economic powerhouse, but analysts say it’s also a hotbed of case studies experimenting with ways to address underbanked small business owners. Reports by Bloomberg this week pointed to the role of Big Data, specifically, and the unusual — bizarre even — ways FinTech players are using data analytics to ensure SMEs can access working capital.
Photography Vs. Lotto Tickets
According to Bloomberg, there are 500 million underbanked citizens in China, consumers and small business owners that have never borrowed from a financial institution, central bank figures show.
The data also reveals that 80 percent of the estimated 50 million microbusinesses in the nation cannot access a bank loan because they lack collateral, reports said, citing research from China Guangfa Bank Co.
[bctt tweet=”80% of 50M Chinese microbusinesses cannot access a bank loan.”]
The issue has given rise to FinTech players mining Big Data to reach out to small business owners through an array of tactics, including providing personalized online and mobile loan offers based on browsing history and other information.
Last month, reports emerged of China’s efforts to introduce a social credit scoring system that uses Big Data to calculate credit scores. The effort was launched in partnership with several technology conglomerates, including Alibaba-owned Sesame Credit Management and Tencent Credit Bureau.
It’s an effort to use an individual’s “digital footprint” — the collection of information of someone’s online activities and behaviors — that can have far-reaching effects for the lending industry.
Broadline Capital is one peer-to-peer lending platform that has emerged within China’s alternative lending industry that uses Big Data to reach borrowers. The company accesses Tencent data, aggregating and analyzing statistics around instant messaging, number of online friends, use of mobile shopping and apps and other digital behavior.
China Rapid Finance is yet another example, reports pointed out, using search engine data aggregated from Baidu Inc. to connect to potential small business borrowers.
China Rapid Finance Founder Zane Wang told Bloomberg that the data reveals correlations between search engine phrases and borrowing needs and behavior. For example, small business owners that search keywords “photography” or “hiking” are likely to need an unsecured small loan and are likely to be looking for their first loan, too, compared with individuals searching keywords like “cars” or “scuba diving.”
On the other hand, small business owners searching online for “lottery tickets” are unlikely to be a safe bet for lending platforms, according to Wang.
[bctt tweet=”SMEs searching online for “lottery tickets” aren’t a safe bet for lending platforms.”]
The possibilities are seemingly limitless, from using an existing small business’ transaction data to assess cash flow and risk to accessing bank transaction records, allowing alternative lenders to see whether a small business owner has recently been denied a loan from a bank, therefore making them a prime target.
Dianrong.com is another platform using Big Data to assess borrowers’ potential. According to its founder, Soul Htite, also a cofounder of Lending Club, the information doesn’t just mean mitigating risk in small business financing; China has a blossoming services industry, Htite told Bloomberg, leading to a slew of new potential borrowers that need money quick.
“That new economy needs forms of financing,” he told the site. “Before we came, you have to go to the bank and wait weeks and months. Today, you apply, and you get an answer in 24 hours, yes or no.”
Unregulated Risk
Big Data may be used to mitigate risk for small business lenders, but experts warn that the rise in these alternative lenders, which make up part of China’s expanding “shadow economy,” may be heightening risk for China’s economy overall.
As exemplified by the use of Big Data to develop a new credit scoring system, the Chinese government appears in favor of such small business lending tactics, using data to both reach out to potential borrowers and to assess creditworthiness.
And while the nation’s State Council voiced support for the nation’s emerging alternative lending sector earlier this year, reports noted that the European Central Bank highlighted the risk of China’s shadow lending industry last month. Ernst & Young LLP Senior Partner Keith Pogson, based in Hong Kong, told Bloomberg that while the use of Big Data allows new players to enforce the concept of financial inclusion, the tactics have yet to prove resilient in times of economic stress.
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