Tech Changes Lending And Payments The World Over

On a business trip to China last summer, Matt Burton had plenty of money in his wallet but it was practically useless.

Case in point: He had a lengthy standoff with a Shanghai taxi driver who insisted on a mobile-phone payment. “I spent 20 minutes arguing with the cabbie,” says Burton, one of the founding partners at Orchard Platform, a leading provider of technology and software to the alternative lending industry. “You’d think that — out of all of the professions — a taxi driver would accept cash.”

The New Yorker finally convinced the cab driver to take the payment in renminbi, China’s paper currency. The incident, meanwhile, is illustrative of how deeply and widely mobile payments have penetrated the huge Chinese market. “No one in China carries wallets anymore,” Burton reports. “Everyone pays with their smart-phones. Even the elderly women selling vegetables on the side of the road accept mobile payments,” he adds. “Cash has become a hassle.”

Welcome to China’s financial technology revolution. Almost overnight, China’s population graduated from calculating with the 16th-century abacus to showcasing what is arguably the world’s most sophisticated system of mobile payments. Thanks to financial technology, China is fast becoming a cashless economy. China is just one place outside the U.S. where financial technology is catching on in a big way. As Americans remain, for the most part, wedded to suburban drive-in banks, walk-up automated teller machines, and plastic credit and debit cards, the rest of the world is rapidly embracing digital solutions. And nowhere is that happening more dramatically than in China.

According to the most recent figures released by China’s Internet Network Information Center, the country had 724 million mobile phone users at the end of June 2017. China’s Ministry of Industry and Information Technology reports, moreover, that consumers paying for everything from food and clothing to utility bills to movie tickets and – you guessed it, cab fare — engaged in 239 billion mobile payment transactions in 2017, a surge of 146 percent over the previous year.

Mobile payments have become a $16 trillion industry in China, the ministry adds, accounting for about half of all such transactions in the world.

And there’s ample room to grow. The World Bank discloses that there are now 772 million Internet users in China, more than double the entire population of the U.S. Yet that leaves 50% of China’s population – mostly in the countryside and rural areas – who are not yet plugged in to the Internet.

Two Chinese mobile-payment platforms dominate the industry. Ant Financial is the 800-pound-gorilla, its Alipay program boasting 520 million global users on its website. It’s an affiliate of publicly traded Alibaba Group Holding, an online merchandiser known as the “Amazon of China” which was founded by entrepreneur Jack Ma, reputedly the richest man in China.

Alipay not only has bragging rights to roughly 60 percent of China’s digital and online payments market but, in 2013, it overtook PayPal as the global leader in third-party payments. With deep roots in e-commerce, Alipay is the go-to payments option for online shoppers, who are steadily migrating from laptops to mobile devices.

WeChat Pay is the upstart in the duopolistic rivalry. Launched in 2013, nearly a decade later than its rival, it’s a unit of conglomerate Tencent Holdings, a social network and messaging platform often compared to Facebook. As WeChat continues to add subscribers, its Tenpay app has been growing accordingly, eroding Alipay’s market share as new users gravitate to the e-payments program. While WeChat records fewer payments than Alipay, Forbes magazine reports that it claims more users.

Whatever WeChat’s virtues, Ant Financial continues to chew up the scenery. It recently topped the charts as the world’s “most innovative” fintech in 2017, as reckoned by a research team formed by accounting giant KPMG and H2 Ventures. China scored a hat trick, moreover, as two additional homegrown fintechs — online property-and-casualty insurer ZhongAn and credit-provider Qudian Inc. — took second and third place, respectively, in KPMG/H2’s rankings. For good measure, China also claimed five of the top ten spots on the “most innovative” list, edging out the U.S., which had four.

Financial analysts recently surveyed by the Financial Times reckon Ant Financial’s market valuation at $150 billion, catapulting the company into the rarified status of not just a “unicorn,” but a “super-unicorn.” (Named after the rarely seen mythical one-horned horse, “unicorns” are start-ups valued at $1 billion). So robust is Ant Financial’s market valuation that the global investment community is salivating over its impending initial public offering.

(Ant’s progenitor, Alibaba, holds bragging rights as the largest IPO ever, according to the Financial Industry Regulatory Authority. It raised $21.8 billion in 2014; its NYSE-listed stock was trading at $194.36 in mid-May, essentially in the same league as Apple and Facebook, trading at $188.80 and 187.08, respectively, on Nasdaq.)

“Four of the largest fintech unicorns in the world are coming out of Asia,” notes Dorel Blitz, the Tel Aviv-based head of fintech at KPMG. “The companies are getting bigger and stronger,” he adds, “and you’re beginning to see more direct investment in public fintech companies as well.”

Adds Orchard’s Burton: “I think it shows you how massive the opportunities are outside the U.S.”

Ant Financial and WeChat are also serving as a world-class demonstration project on how fintechs can turn a tidy profit while opening up financial services to large populations who lack access to basic financial services, thereby providing entry to the middle class. The two platforms have provided “financial inclusion for tens of millions, if not hundreds of millions of people” who previously were on the periphery of the banking and financial system, says Kai Schmitz, a fintech lender at International Finance Corporation that lends to private businesses in the developing world.

Once people are making electronic payments on their mobile devices, Schmitz notes, it creates a “pathway” to a whole panoply of financial services, including personal and business loans, savings, insurance, and investments.

“You can create a user profile so that a large part of the population that could not be reached (by traditional financial institutions) are now making payments and can be followed on the data track,” he says.

The World Bank reports that two billion adults and 200 million businesses in the developing world are currently unable to access even basic financial services. Through IFC, the World Bank has invested $370 million in fintech companies operating throughout Asia, the Middle East, Africa and Latin America. The fintechs, an IFC communications manager told deBanked, offer “a range of products and services — from e-wallets, virtual banks, lending, and online payments to retail payment points and exchanges.” IFC, she adds, also invests in fintech funds.

Anju Patwardhan is the U.S.-based managing director at CreditEase Fintech Investment Fund, a $1 billion Chinese venture capital firm that invests in fintechs delivering financial services to “unbanked” and “underbanked” populations. “They are living in Africa, Bangladesh, China and elsewhere on less than two dollars a day and have no access to financial services,” she says.

“But there are also a very large number of people who may be technically included in the financial system but still don’t have access to a full range of financial services at reasonable prices,” she adds. “If someone is borrowing from a moneylender or pawnbroker, it doesn’t count (as financial inclusion). In that case, the number of people is very much more than two billion.”

Once phone towers are built and a payments infrastructure is in place, fintechs promising more sophisticated financial services can operate similarly to the settlers who followed pioneers in the U.S.’s westward expansion. That’s been the story in Kenya and other African countries where M-Pesa (“pesa” is Swahili for money) and other mobile-phone payments systems set up shop a decade ago.

Branch International, based in San Francisco but doing business exclusively in emerging and frontier markets for only three years, is one of the settlers. It boasts that it now has the “No. 1 finance app in Africa.” In March, Branch raised $70 million in a second-stage round of debt and equity financing from a group of venture capitalists led by Trinity Partners that included Patwardhan’s CreditEase and the IFC. Patwardhan will serve as an advisor to Branch’s board.

Branch’s principal business is making loans and micro-loans ranging from as little as $2 to $1,000 in Nigeria, Kenya, and Tanzania. Despite its name, Branch touts itself as a “branchless bank”, all of the credit transactions taking place on mobile devices, says Matt Flannery, Branch’s chief executive and founder. Its average loan amount is $25.

Many of Branch’s customers are individuals and businesses who often had trouble obtaining credit from established financial institutions or were ineligible for loans. But, according to Branch’s website, it’s possible for a prospective borrower to obtain a loan in just a matter of minutes. “Branch eliminates the challenges of getting a loan by using the data on your phone to create a credit score,” the website says. Branch promises privacy, fees that are “fair and transparent,” and terms that “allow for easy repayment” with no “late fees or rollover fees”. “As you pay back on time,” the website also says, “our fees decrease, and you unlock larger loans with more flexible terms.”

The platform, CEO Flannery says, has lent out $100 million dollars to roughly that same number of people. “The formal financial system in African countries is generally composed of old-fashioned banks that are risk-averse and fairly slow to make lending decisions,” he says. “People really appreciate us,” Flannery adds. “I’d say we’re like Uber and they’re the horse-and-buggy.”

The company is growing by 20 percent month-over-month and expects to disburse more than $250 million in 2018. Asked to describe Branch’s typical borrower, Flannery says: “We have some rural users (of Branch’s finance app). But in general we’re serving the commercial middle-class — shopkeepers and entrepreneurs – in urban capitals.” Want to know precisely who Branch’s customers are? “Just go to downtown Lagos (the capital of Nigeria and the largest city on the African continent) and you’ll see all different kinds of businesses and single-owner merchants on street corners,” Flannery says.

Jeff Stewart, the founder and chairman of Lenddo (which recently merged with competitor EFL) asserts that his firm’s machine learning technology and risk modeling techniques, which are being deployed in emerging countries from Costa Rica to The Philippines, have the capacity to assess the “creditworthiness of everyone on the planet.” In the absence of credit history in much of the developing world, he explains, this can done by constructing a risk profile combining both “psychometrics” and a “digital footprint.”

Psychometrics is a behavioral assessment tool based on a prospective borrower’s “Big Five” personality traits: openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (OCEAN for short). “What we’ve been able to show,” Stewart asserts, “is that certain personality types have a positive and negative correlation with repayment. It’s not 100 percent accurate. But you can predict the statistical recovery ratio on repayment. You can say that, for a person with a high score, something like 88 out of 1,000 people (with his or her profile) would not repay.”

The digital footprint, which is the second “critical component,” Stewart says, analyzes a prospective borrower’s reliability by reconnoitering their smartphone usage. “We’ll look at everything on your phone,” he says, “How you use the phone. Whom you interact with. When you use your phone. There are thousands of features that generate a digital footprint. Everything from meeting someone at a sports bar to the apps on your phone to things like e-mailed receipts that show your financial activity.”

Such methods help build credit for those lacking credit history while rehabilitating those whose credit history is blemished. And all that’s needed is a smartphone. “We’ve turned the smartphone into a credit bureau,” Stewart says.

The acquisition of smartphones is taking place at a blistering pace, Stewart notes, now that cell phone costs are “at the bottom of the cost pyramid” in many countries. For example, a “low-end Android” now fetches as little as $25 in Africa. “One credible study I’ve seen shows that every 10% percent rise in access to smartphones translates into a 1/2 percent rise in a country’s gross domestic product,” Stewart says.

While the private sector is driving the trend to financial inclusion in China and Africa, India’s government-driven model “is setting a new global standard in using financial technologies to support financial inclusion,” declares Patwardhan of CreditEase, who also lectures at Stanford. “The country has become a giant testing ground for financial inclusion and innovation,” she argues in a recent academic paper, “and may become a role model for other emerging economies.”

India’s state-run effort includes a $1.3 billion digital identity program known as Aadhaar. Under Aadhaar (which means “foundation”), the state issues residents a 12-digit identity number that’s based on their biometric data –such as fingerprints and iris scans — and personal information. The ID number covers more than 1.19 billion residents. In just the first two years after Aadhaar’s 2009 debut, Patwardhan says, more than 250 million Indians were able to open bank accounts.

Jo Ann Barefoot, chief executive at Barefoot Innovation Group in Washington, D.C. and a senior fellow emerita at Harvard’s Kennedy School of Government, agrees. She notes that Aadhaar opened up access to both fintech services and bank accounts to women who were long treated as second-class citizens by the social and economic system. “India’s digital ID program means that wives and daughters have identity now,” she says.

“In the past,” she adds, “only (male) heads of households would have family identity documents and a government card — which would be the equivalent of having a Social Security number in the U.S. But the wife wouldn’t have her own card. So this is a massive door-opener to fintech growth. And it’s also opening up (all areas of) finance to millions and millions of people.”

India’s “digitalization” program, moreover, has entailed development of a national payments network called “unified payments interface,” or UPI. The combination of UPI and Aadhaar as well as other digital initiatives have resulted in “a surge of online lending platforms,” says Patwardhan, citing Capital Float, NeoGrowth, Faircent, LendingKart, Quiklo, IndiaLends, CreditExchange, and Onemi.

The homegrown fintechs, however, will be up against tremendous external pressure as India, with 1.3 billion people and poised to overtake China in population growth, is generating enormous interest from global fintechs. Among outside platforms piling into the country are China’s Ant Financial and WeChat. The former took a $1 billion stake in Paytm, an Indian mobile payments and e-commerce company. Similarly, competitor WeChat’s parent, Tencent, has invested in Hike, a mobile wallet valued at $1.4 billion last June, according to CNBC, exciting investor interest as a unicorn.

U.S. companies are getting into the act too. Google launched digital payments app Tez last September, which “is taking advantage of India’s infrastructure and has already gotten 30 million downloads,” Patwardhan says. In February, Facebook rolled out a peer-to-peer payments feature on WhatsApp. Even Branch’s Flannery has announced that his “branchless bank” plans to earmark part of its $70 million war chest to offer $2-to-$1000 loans on the subcontinent.

Having banned high-denomination paper bills as a way to rein in corruption and aiming at a cashless economy, India has been innovating in ways that “have gone the Chinese one better,” marvels Patwardhan. “Their payment systems going through the UPI network are interoperable,” she notes, for example. “You don’t have to be on the same app or with the same bank. India is now on the cutting edge.”