A new generation of small and micro-sized enterprises (SMEs) and merchants have been mushrooming on e-commerce platforms with low entry threshold and operating costs. As most are online shops for small commodities, they have neither physical stores or fixed assets to mortgage, nor decent inventory for value assessment. As a result, financial institutions had long been reluctant to lend money to these small merchants.
According to the Ministry of Commerce, the total online retail sales in China exceeded RMB 9 trillion in 2018. Benefiting from the maturity of e-commerce and the development of risk management with big data, the financing of SMEs on e-commerce platforms is now being served by micro-lending companies, traditional banks, Internet banks and other financial institutions. The credit problem of SMEs on e-commerce platforms has been largely solved.
Pintec Academy analyzes the development path of SME loans on e-commerce platforms and discuss the current status and existing problems of the industry. The article was published on the market and finance section of Bloomberg Businessweek (CN version) .
1. The rise of loans for SMEs on e-commerce platforms
Digital lending for SMEs can be divided into four main scenarios: e-commerce, logistics, taxation, and consolidated payments. Among these, the e-commerce scenario started the earliest and is the most mature.
In 2010, under the impetus of shareholders such as Alibaba, Fosun, Wanxiang and Yintai, Zhejiang Alibaba Small Loan Co., Ltd. was established with a registered capital of RMB 600 million, becoming the first micro-lending company to meet the demand of SMEs for financing in the field of e-commerce. Since then, e-commerce loans have become a key scenario for SME financing.
E-commerce loans are mainly composed of four participants: e-commerce platforms, small and micro-sized enterprises, traditional financial institutions (mainly micro-lending companies and banks) and fintech service providers.
The main credit logic of e-commerce loans is: after a merchant opens a store on an e-commerce platform and has operated for a period, the platform will give the merchant a certain credit line based on its credit and behavior data tracked and accumulated by the platform. Such credit is normally characterized of short duration, high flexibility and can be borrowed anytime and returned anytime. Moreover, when the merchants repay the loans on time, they can further increase their credit limit through their good credit qualifications. The total amount ranges from tens of thousands to hundreds of thousands yuan.
There are two models of operation. The first one is the e-commerce traffic diversion model. Fintech solution providers customize a set of small and micro-sized enterprises lending solutions for e-commerce platforms, and connect with financial institutions to develop a whole process of digital lending. E-commerce platforms only need to provide their product requirements to the fintech service provider and complete a small amount of development work, then the fintech service provider will take care of the remaining steps including product design, traffic selection and operation, connectivity with financial institutions and post-loan management.
For example, in 2017, Pintec partnered with WeStore to launch SME e-commerce loans. After the product development and connectivity completed by Pintec and WeStore, Pintec was responsible for the pre-loan phase operations including customer acquisition, preliminary screening and decision-making assistance, as well as connecting with financial institutions for the follow-up in-loan and post-loan phases.
The other model is self-operating financing by e-commerce platforms. This type of e-commerce company not only intends to develop their own SME lending functions, but also to be deeply involved in the financing process and operations of financial resources and channels. Under this model, e-commerce platforms and fintech service providers will jointly participate in product design and development, as well as the whole process of pre-loan, in-loan, and post-loan phases. Generally speaking, such e-commerce companies will source capital from financial institutions by themselves (sometimes they own licenses for lending services), so they can better penetrate into different financial services on the platform. In some cases, they will rely on fintech solution providers to connect with financial institutions.
Under this model, SMEs and e-commerce platforms can establish a long-term stable credit relationship. From the perspective of customer experience, e-commerce platforms can shorten the review process and increase the loan limit for repeated customers, which helps small and micro-sized enterprises on the platform continue to operate. For the e-commerce platform itself, it also improves the traffic monetization and converts transactional customers into financial customers.
2. Loans for SMEs on e-commerce platforms is going mainstream
From 2010 to 2015, there were hundreds of e-commerce companies on the market, including comprehensive e-commerce platforms such as Alibaba and Suning, and vertical e-commerce companies such as Vipshop and Beibei. With the success of Zhejiang Alibaba Small Loan Co., Ltd., more and more e-commerce companies have entered the SME lending market. However, given these e-commerce companies’ traffic and channels were scattered at the time, they lacked the ability of independent development and bargaining power. E-commerce traffic diversion was the main cooperation model and the funds were mostly from micro-lending companies.
In 2015, e-commerce loans entered a more mature stage. As the effect of Pareto principle (also known as the 80/20 rule) was increasingly significant in e-commerce market, the previously dispersed traffic was increasingly concentrated in the top e-commerce companies. With the core data of transactions, payments and logistics, these top e-commerce platforms also have access to high-quality funds and the most advanced fintech solution providers.
Some e-commerce giants have developed their own Internet finance business with closed loop process, from traffic acquisition, fintech solutions, to capital sourcing. For instance, based on Tmall and Taobao platforms, Alibaba has fintech support from Ant Financial, and funding from the Ant micro-lending and Alibaba micro-lending institutions. Alibaba, Suning, JD.com, Vipshop and other mainstream e-commerce companies have all obtained their own micro-lending licenses, and e-commerce loans have been dominated by e-commerce giants.
In 2015, the funding source also expanded from micro-lending companies to mainstream banks. A large number of traditional banking giants such as ICBC, China Merchants Bank, Guangfa, Huaxia, and Postal Savings Bank have successively launched e-commerce loan products. With adequate funds, high credit limits and lower interest rates, traditional banks quickly attracted a large amount of traffic and took over the high-quality customers from e-commerce platforms.
Taking the data of Huaxia Bank's in 2016 as an example, the daily interest rate of its e-commerce loan products was about 0.024%, and the annualized interest rate was generally 8%-9%, while the annualized interest rate of the e-commerce loan on Alibaba platform was over 10%. According to the Huaxia Bank Hangzhou Branch, it launched the first e-commerce loan product in September 2015, and provided loans worth RMB118.04 million to 379 clients within the first six months, and the average loan size reached RMB300,000.
Traditional banks have seized high-quality customers with their advantages, but they cannot solve the financing needs of most e-commerce merchants. According to a banker, the actual process of e-commerce lending from a bank is not as simple as advertised. The “face-to-face” interview is inevitable for many traditional banks. In addition, the access to bank loans is relatively strict, and the requirements in personal credit information and operation performance of physical stores and online store are generally higher. Therefore, the banks are more to serve the best-performing small and micro-sized enterprises.
3. Different financial institutions serving different clients
As the fastest-growing credit scenario in digital lending, e-commerce loans have the advantage of generating core data within the e-commerce system, including transaction data, payment and logistics. Transaction data can reflect business conditions, repayment ability, business scale and growth potential. Logistics data can provide information such as the supply chain and transaction scale. SMEs normally lack operation data, and the data from e-commerce platforms is a good supplement.
For risk management, banks rely on different data from micro-lending companies. Banks mainly rely on e-commerce data and credit reports from the People’s Bank of China. As micro-lending companies do not have access to the central bank’s credit reports, they often cooperate with fintech service providers for risk control based on e-commerce data and big data analysis.
They evaluate SMEs credit level with multi-dimensional analysis based on third-party data. Since most small and micro-sized enterprises don’t have enough credit data in banks, they have been served by both banks and micro-lending companies. The key and best-performing small and micro-sized enterprises are served by banks, whereas the long tail small and micro-sized enterprises are served by micro-lending companies.
In 2015, the first five private banks (WeBank, MYbank, Shanghai Huarui Bank, KCB Bank, and Wenzhou Minshang Bank) were established, and these internet-based banks also entered the small and micro-sized enterprise financing market.
Among the internet-based banks, MYbank’s largest shareholder is Alibaba; WeBank’s largest shareholder is Tencent; XWBank’s major shareholders are New Hope Group (holding 30%) and Xiaomi (holding 29.5%); Suning Bank's largest shareholder is Suning Yunshang... They all own Internet traffic, e-commerce platforms and subsidiary fintech companies.
Internet-based bankers have some advantages over traditional banks and micro-lending companies. As banks, they have access to credit reports from the People’s Bank of China. With fintech capabilities, they can realize big data risk control with their own digital lending technology. In addition, they have more diversified funding sources. They can work together with traditional banks to serve large clients through joint lending, and they can also provide financing for e-commerce small and micro-sized enterprises through ABS issuance and their own funds.
Taking MYbank as an example. After the establishment of MYbank, the micro-lending business such as Ant micro-lending and Alibaba micro-lending were merged into MYbank, and then the “MYbank Loan” was launched for small and micro-sized enterprises within Alibaba system. It was reported that in 2018, MYbank provided more than RMB 1 trillion of financial support for small and micro-sized enterprises, covering 342 cities in 32 provinces across the country, with a default rate of 0.78%, which was higher than the overall default rate of 0.53% for private banks.
4. New challenges for micro-businesses
Online shopping has been gradually evolving from a shopping style to a lifestyle. E-commerce has also gradually extended to cover micro-stores based on WeChat Moments and developed the social e-commerce ecosystem, including WeStore, Pinduoduo, Youzan, Yunji, etc.
Many micro-stores, originally directly selling products on WeChat Moments, have upgraded to professional multi-platform micro-businesses with professional marketing tools, cross-device terminals and cross-payment scenarios. Some have transformed from the traditional SME entities and to become new famous brands through the distribution of micro-business channels. E-commerce platforms such as WeStore and Youzan tried to provide financing services to merchants on their platforms.
However, the financing business for the micro-stores did not expand as quickly as the e-commerce platforms.
Pintec Academy found that the data from micro-store platforms are different from traditional e-commerce platforms.
First of all, compared to e-commerce platforms with professional and unified management such as JD.com and Taobao, the quality of merchants on the micro-store platforms is uneven. Besides high-quality small and micro-business merchants, some merchants are individual entrepreneurs (family small workshops, etc.) without corporate registration. Although some are registered companies, little corporate credit data is available. Therefore it’s difficult for them to use financing services by financial institutions, posing higher requirements for the accuracy of the risk control model.
Secondly, the available data dimensions in the micro-store platforms are limited. Generally speaking, with the low frequency of micro-store transactions and small transaction amounts, more external data sources are necessary as supplements, which requires higher integration capability of big data risk management.
Thirdly, as a consequence of individual entrepreneurs, family workshops and part-time micro-store owners entering micro-store platforms, the platform management of transaction behaviors is more difficult, resulting in lower costs for click farming and cheating and higher risk of fraud.
These difficulties for risk control cannot be underestimated, which needs higher requirements for risk management. To serve such platforms, fintech service providers need more experience and advanced technologies. The micro-store social e-commerce scenario has not yet been accepted by mainstream banks, but still deserves attention.
Among the SME digital lending business, the e-commerce loan is the earliest scenario with relatively mature development.
With the development of domestic e-commerce business, e-commerce platforms have gathered a large number of small and micro-sized enterprises, and accumulated small and micro-sized enterprises operation data, such as their transactions and scales, and relevant information of business owners. These data have become the important source for credit evaluation of e-commerce merchants, helping them obtain more credit qualifications from mainstream financial institutions.
Banks provide small and micro-sized enterprises loans to key customers through e-commerce data and credit data from the People’s Bank of China. Micro-lending companies cooperate with fintech companies to serve the long tail market through multi-dimensional profiling with big data and AI. Internet-based banks (such as MYbank) focus on e-commerce loans and provide more comprehensive services.
In recent years, e-commerce loans have extended to micro-store platforms, pushing fintech further to serve the long tail market. It will be another battle for technology.