China is currently undergoing a digital revolution of an unprecedented scale never before seen. The rollout of digital financial services to all sectors of their vast population is nothing short of incredible. China has many similarities to the African story as well as many differences. Could some of what China is doing to achieve financial inclusion be used in the African context to bring digital financial services to the huge unbanked and underserved population there? I was fortunate enough to be invited on a trip to China to explore this further. The trip was very generously arranged by the Mastercard Foundation Partnership for Finance in a Digital Africa (FiDA Partnership).
In this short blog I focus on some highlights from the trip, namely:
- How tech platforms have leveraged their user base to drive adoption of digital financial services (DFS)
- The innovative ways that financial services are offered to SMEs
- How Chinese tech companies are delivering financial services to rural customers
- How data and AI is used to understand customers, deliver tailored products and reduce risk
Tech Platforms driving DFS adoption
The first thing that strikes you when you wander the markets, shops and restaurants in China is the lack of cash or even card transactions. The majority of face-to-face payment transactions you see in these places are done via mobile payments, namely using a QR code system.
The de-facto way of paying in China
Why this massive take-up of mobile payments? South Africa, where LulaLend is based, has similar QR code based payments systems which are enjoying consistent growth but not at the rate seen in China. One key difference in China is that the mobile payment systems are generally leveraged from existing, non-financial platforms that already have huge uptake. For example, WeChat Pay is leveraged off the WeChat social messaging app (similar to WhatsApp) which has around a billion users. So iwhen WeChat Pay was released it was already accessible to a huge user base.
The Wechat app
While this might sound impressive, WeChat Pay is not even the most popular mobile payments platform in China. That title goes to Alipay. Alipay was originally developed to facilitate transactions across Alibaba, the largest e-commerce site in China, which now has an enormous over half a billion customer base. With such large tech players offering financial services on top of non-financial platforms, it becomes clearer why there is such a massive uptake of mobile payments.
Another benefit of leveraging financial services from an existing platform is that identity can be accurately verified which leads to much lower fraudulent rates. From our meeting with Ant Financial we learnt that less than 0.001% of transactions are fraudulent on Alipay, compared to circa 0.2% on PayPal. Lastly, the tech companies are making huge drives to grow their customer bases, and in doing so building up a bank of data on their customers. This is done by offering incentives and discounted charges on some of the services – payments commissions being one – with revenue generated from other sources such as e-commerce sales and in-app purchases. While customers benefit from really low commissions, platform providers are able to capture a lot of payment data which can be used for credit assessment and delivery purposes.
Innovative ways Chinese tech companies deliver financial services to SMEs
JD.Com is a big B2C (business to consumer) player which focuses on an Amazon-type approach thats sells directly to its 300 million customers. This means it is responsible for delivering the goods themselves and therefore has developed a vast distribution network to support this model. Its strengths lie in its customer and supplier interfaces and management systems, and its supply chain network. JD Finance is the finance segment that was spun off recently to focus on financial products.
The JD.com brand
By managing all aspects of the process, from purchase to delivery, JD.com gains access to a huge amount of data on its customers and their behaviour. The data is turned into insights and understandings, allowing JD Finance to offer unique products to the various elements of the process. For example by observing user behaviour on the platform and transaction history they are able to accurately assess the eligibility of their merchants for credit. This can be unsecured as is the case for suppliers, or secured for the merchants who use their warehousing services and have stock in them. Interests are charged at a daily rate and paydowns are generally flexible.
Alibaba is the biggest e-commerce firm in China. Their Taobao business is a B2C company that focuses on their marketplace that connects business and consumers, much like the eBay model we understand. Their finance focused arm is called Ant Financial. They too offer various merchant funding that is driven off data collected from interoperation with their site. But their main offering is Alipay, their digital payments system. The payment data from Alipay is also leveraged allowing them to segment an incredibly low risk SME base to offer funding too.
Serving the rural population
What was really fascinating and inspiring to see is how financial services are being rolled out to rural populations. This is probably the most relevant aspect to the African context. It involves extraordinary coordination and strategy between government, the banking industry, tech infrastructure companies and new internet based technology companies. The first step was a massive push to get connectivity and ICT out to the rural populations. This created the infrastructure that could essentially leverage smartphones to the majority of people.
Then, the banking industry did a massive push to get branches out as far as they could and drastically increase their number of rural customers. But what is the use of a bank account if you don’t have any money coming into it? That is where technology companies come in. Companies like Alibaba have focussed their efforts into capturing the essence of rural economy. Taobao, their eBay like site, allows any merchant, no matter how small, to sell their wares or services. This has enabled even a producer to link up to a larger supply chain and eventually deliver their goods to an international market. So the supply chains are made up of many merchants supplying goods, logistics, and brokering agents all working cohesively together using the specialist management functions of the platform. The process has become so popular that whole villages have been focussed to cater for specialities required. Rural Cuntao (Rural Taobao) is the term coined for this product. For example, we visited a Taobao village that focused on manufacturing shoes.
A typical production element for this type of supply chain
Perhaps in the African context this is not yet possible due to the still relatively low penetration of smartphones. But companies like Huawei are developing innovative ways of increasing access in rural Africa at a much lower cost than previously. This involves new communications technology to optimise usage across the frequency band and much more efficient infrastructure (e.g. much smaller tower networks needed to support this than previously).
Huawei showcasing some of their technology goods
It was fascinating and inspiring to see how fintech in China is being used to offer digital finance, and how funding products are offered to all areas of the populations. Below are summed up keys of what we would like to pervade our thinking going forward:
Scale. The awe-inspiring size of the audience Chinese digital finance companies reach and the pace with which they are growing is staggering.
Data and AI. The use of data and AI to understand all aspects of this customer base and enable in-depth offerings at incredibly low default rates.
Innovative lending products. Drawing on the vast amount of information available to focus specific credit products to specific sectors.
Reaching rural communities. The coordination of all sectors to reach out to the underserved and provide innovative products to get them onto the platforms. Then providing the supply chain management to keep them on.
A new approach to data sharing. Customer data is seen as an asset that can be shared with competitors to improve your own offering and the value to the customer.
Understanding customer needs. Constant focus on what customers use in their everyday lives and adding platforms and products around this.
Cool, but how does this affect my business?
At Lulalend, we are looking forward to using these insights to add to and shape our strategic thinking to offer a better experience to the SME owner. A lot of the concepts we saw are already incorporated on some level in our platform so it was amazing to get insight into the most advanced platforms. Lulalend are on the forefront of championing digital lending in South Africa and a lot of what we have seen will result in direct improvements or those inspired by the strategies seen:
- Increased refinement and accuracy of our machine learning models to assess a business.
- Increased use of AI technology to drive down fraud and risk, so that better rates could be offered to customers.
- Pragmatic usage of AI in the application and onboarding process, including serving customer queries. Being a data driven company, a big part of what we do is around handling and processing data, and there were some great lessons to see how truly big data is being handled.
- Deepening the relationships we have with our partners to compliment and leverage different services.
- Increasing the potential base of the local SME ecosystem by focussing on alternative methods of credit assessment, rather than being totally reliant on credit bureaus for this.