Zhong Liu and Ruifeng Liu give us an insider’s view of the Chinese consumer credit economy

Analytical folk are often drawn towards work in a credit bureau by the sheer volume of data that gets out at your disposal – gone is the restricted outlook of one single lender, to be replaced by a bird’s eye view of the industry as a whole.

However, this is not always the way of the world - when Dr Zhong Liu and I were working together at credit bureau in Hong Kong, the whole industry meant 5 million consumers, and when he left to join AliPay in Mainland China, he took on a portfolio which included as many as 800 million customers! Such is the scale of China. And indeed, when Dr Ruifeng Liu was sent to China by JP Morgan Chase, it was to help the Postal Savings Bank of China roll out consumer banking for the first time…through their 40,000 branches.

Zhong and Ruifeng both have careers that span the West and the East, and so they are perfectly placed to give the rest of us an understanding of what is powering growth in Chinese consumer lending, and the complications that come along with it - in episode 4 of How to Lend Money to Strangers I ask them to do just that.

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

You can read the full transcript with timestamps here:

Zhong Liu 0:00

I think, for myself, I haven't carried my wallet, my actual wallet, for the last five years, if I go out, I just need to my, I just need my cell phone. My cell phone is my most important property, my wallet, it doesn't matter.

Brendan Le Grange 0:16

The very first incarnation of Citibank opened in September 1812, 200 years later, they operate 2,500 branches in 160 countries and employ a little over 200,000 people for a market capitalization in the region of 200 billion US dollars. Ant Financial, on the other hand, has a workforce 1/12th of that, operates no branches, and has a history that goes back only as far as 2014. And yet, in the excitement of last year's later-abandoned IPO, they were valued as much as 50% higher than Citi. This is How to Lend Money to Strangers, a podcast about lending strategy, and I'm your host Brendan le Grange.

In tonight's episode, I take a closer look at the consumer credit marketplace in China, with two expert guests: Dr. Zhong Liu and Dr. Ruifeng Liu. Despite their shared surnames and impressive credentials, they're not related, but both men do share a similar background: both completed their PhDs and began their credit risk careers in North America, ad both have spent much of the last decade back in China shaping the consumer credit landscape that enabled Ant's impressive growth.

We talked about some of the factors that allowed the two big super apps to assume the positions of great power they hold today. And some of the complications these factors have created. We also talk about growth and regulations. We talk a little bit about collections. And while some of what makes the Chinese market tick is unique to itself. I believe that there are plenty of lessons in there for lenders around the world, not least of all, a reminder that consumers see finance only as a means to an end. And so when ownership of the underlying market shifts, so to can ownership or the financial market. We'll start with Dr. Zhong Liu, who I knew as head of scorecard development for a credit bureau in Asia. Zhong, when I was with you in Hong Kong, which is about five years ago, now, mobile wallets were busy becoming the big thing in China. And since debit cards and credit cards hadn't really made a foothold yet, there was a question about whether these would be leapfrogged, and thus whether the apps behind the mobile wallets would be the market owners and the banks would be walled-out. So as an insider, can you expand a little bit on those changes, and where that balance in power currently sits?

Zhong Liu 2:56

Yeah, sure. I think that's what we call in China Mainland, here, it's called the mobile payment: it is probably one of the greatest things that's ever happened, in China Mainland. It basically changed people's habits, I think, especially for the young people, not many people that try to get a credit card because you have a mobile wallet.

So actually, the the usage of the mobile wallets in China Mainland is like this: you have two choice, the first choice you have is that you can have an actual, like a virtual bank account, you don't need to go to the bank counter to apply for a card, either debit card or credit card, you can just use these accounts to do the payments; and another choice you have is, if you've already got bank debit cards or credit cards, you can attach those accounts to your mobile wallet. So when you use your mobile wallets actually are using your credit cards or debit cards, they just change the format of our electronic wallets. So these are the two usual ways that people use mobile wallets in China Mainland.

And another thing is that, because people use a mobile wallets, it creates a lot of transaction data. When I was working at Tencent a couple of years ago, actually the department I was in, it has all the mobile payments data from the Tencent WeChat mobile wallets. I don't remember the exact number, but the daily transaction was about 1.6 billion transactions every day. So it's like a huge amount of data. Amd what we called monthly active users (MAUs) is about 800 million people in China Mainland. So basically almost every one in China Mainalnd, if they're 18 years old, if they're old enough to have a bank account, they probably use WeChat wallet.

Brendan Le Grange 5:04

Dr Ruifeng Liu was born and educated in China, but later moved to the US to gain his PhD, whereafter he entered the consumer credit industry.

Ruifeng Liu 5:14

I went to Household International, at that time, which later was acquired by HSBC. So I worked there for seven years or so. I worked in portfolio management, analytic modelling, acquisition... so all kinds of jobs, went through the entire cycle of cards. I started with the prime cards, then I worked in the near prime, then I also worked in the subprime area. So although in one company, I worked for seven years, but I had several different jobs that worked in different their portfolio, the full spectrum of credit. Then I moved to Washington Mutual, which was later acquired by JP Morgan. I stayed with JPMorgan for a total of eight years. So first five years in the US, then the last three years, I was sent by JP Morgan to Beijing, this was a strategic partnership programme with China Postal Savings Bank.

Brendan Le Grange 6:28

So, as you heard, Ruifeng was very much a credit card man when he was relocated to China - so I pitched him the same question about credit cards being leapfrogged, and I got very much the same answer.

Ruifeng Liu 6:38

So for example, for the credit cards, China actually passed that stage, it didn't go through that stage. Yeah, because of when you buy stuff off of, you know, Alibaba and Tencent. They know your credit history, your transaction history, so they can lend you money, right? Credit cards give you convenience for purchasing, for AliPay and WeChat Pay, it has that convenience. So once you make the purchase, and once you get the money from them, then it's a matter of when you pay back - so they give you a grace period for you to pay back and that's just like a credit card, right?

Brendan Le Grange 7:22

Okay, so we're seeing leapfrogging now, but was that always the intention, do you think? When you were sent to Beijing to help the Postal Savings Bank, was the intention then to help them replicate the Western model complete with cards, was the idea already, then, to accelerate some homegrown innovations?

Ruifeng Liu 7:38

I would think it is in the middle of what you said, because in China, there are four or five big banks, for example, the ICBC, which is Industrial and the Commercial Bank of China, and the Bank of China (BOC) and the CCB, China Construction Bank, and the China Agricultural Bank. So those big bank actually all got strategic partners from the US banks, or European banks, I think the majority strategic partner banks are from USA. So those four big banks and other commercial banks, they all had a strategic partnership with banks. And the China Postal Savings bank was a new bank. The bank was founded in 2007. In terms of managed assets, it is the number 5 big bank. And that's the only bank didn't have any strategic partnership, so because the CEO of the banker and the JP Morgan senior officers, they had a personal relationship, they want to introduce... they wanted JP Morgan to come to help China Postal Savings Bank. So this next to what you said, so for China Postal Savings Bank, it actually was a traditional saving bank, customers come here to save/ deposit the money. They didn't have much direct lending business at that time. So for total... for the total assets, only 20% that of the assets was actually lent by themselves. So we were there to help them, for example, branch management, how to operate a branch for this bank, for the China Postal Savings Bank, they 47,000 branches, how to then lend the money, how to do risk management.

Zhong Liu 10:06

I think probably we are talking about two different things. So if we just focus on the mobile wallets, just the payments approach, it doesn't necessarily give you credit. So you still use your own money just in the format of a mobile wallet. But of course, there are many companies in China now, particularly like those so-called FinTech companies, that provides small loan - I think the average amount of the loan is within RMB10,000 (USD1,500). So it's not a very huge amount compared to the credit cards or the instalment loans offered by the banks, and particularly for the young people, because they are young, and they don't have a very high income, and they haven't been working for a long time, it is not easy for them to get a credit card or a large loan from the banks. So these sort of small loan products were popular for the young people in China. And usually these loans, were what we call a revolving loan, they are not an instalment loan, so they are most like a credit card but the only difference is at with a credit card you have a grace period, but for this revolving loan you don't - but it's much easier for you to use that, it takes you literally, like, seconds for you to apply for the loan online, you don't need to go to any banks, you don't need to produce any documents, and you can get a loan maybe in a couple of seconds.

Brendan Le Grange 11:35

And so when these fintechs are making the loan decisions, or at least their first loan decision before they've built their own data on a customer, can they tap into this data held by Alipay, by WeChat Bank, either directly or via some sort of credit bureau? Or is that data tightly held within each universe?

Zhong Liu 11:53

Oh, actually it is a really good question: who has ownership of this data, and who can use the data. So in China, like the credit bureau business, the credit bureau infrastructure is a bit different from US or Canada, or even in Hong Kong, because in China, if you want to open a credit bureau, you should have the licence from the Central Bank, the People's Bank of China. And until now, there are only two companies who are granted with such license. Originally, in 2014, there are eight companies that are trying to apply for this license, and at that time the Central Bank said that 'I will give you permission for you to operate business, but I don't want to give you the license just now, you can operate for half a year and then I will see whether you are eligible to get that license or not'. And then after six months, none of these eight companies got the license.

And for the likes of Tencent, Alibaba, because they are huge internet companies and they have like hundreds, if not 1000s of internal products, of course, accumulates lots of data, like both in the amount of the data and also like in different dimensions of the data. But it seems that this data, they are sort of like the private properties of these companies, usually they are not going to share this data with any other companies, not even with banks. For one thing, they don't want to share it because this data, of course has a lot of value. And a second because they don't have the credit bureau license, so in theory, they cannot share this data with companies. So in another way, they cannot share this data for profit purpose.

So for the loan products like those offered by Tencent, and offered by WeBank or by the Ant Group, of course they will use the data from Tencent or from Alibaba, but the reason they can use it is because they are a subsidy of Tencent, Alibaba, so it is okay for them to use. But for the other banks, they can't use the data directly. Probably they don't use it in a different way, for example, many of the banks have the so-called joint lending with Ant Group or with WeBank. So basically, the idea is that those banks have their funding, but they don't have the customers or they don't have enough data to do a very good credit policy. So they will join with WeBank or with Ant Group, and as they have this joint lending, so maybe the bank provided, like, 99% of the funding while Ant Group or WeBank only provide 1% of the funding, and then they share the profits.

Ruifeng Liu 14:36

Yeah, but of course, in terms of the profit, because Alibaba, they provide the customer so they will share a big portion of the profit, not proportional to the capital that they provide. Yeah. So Tencent, does the same thing. And all the other big internet companies, they all do the same thing. Yeah.

So, China has a one centralised credit bureau: it's the PBOC, the People's Bank of China. So they own that. And basically, all banks are using that bureau information, all banks. And for other lending institutes, financial institutes, actually, people, every lending institute wants to use that, but, the PBOC credit bureau, they don't just give it to everybody to use it, you need to apply to access it, to use the data. They need to give you permission. And they need to approve that. Yeah, and the, for example, for the P2P companies, there were more than 6,000 P2P companies, But none of those companies were allowed to use the PBOC credit bureau information. And even for each bank, they need to apply individually, to apply, and then the PBOC needs to approval... it's not automatically you will be approved, you need to first share your data for three months, you need to report your data for three months. And then after they say, okay, then they will give you access to get the applicant's credit bureau information. Yeah, so you need to report information first, before you can gain permission from there.

Brendan Le Grange 16:49

Yeah, I think that part's not too far out the ordinary, we would ask for as much as two years of retro data when taking a new lender on board at the credit bureau. But I think what's very different in China is that the balance of power is with all these innovative players that sit outside of the traditional framework. In most other markets, to be honest, the bulk of the market is held by the big banks, and the big banks, you know, they're few in number, and they've got a long tradition of fairly controlled storage of data. So it's quite easy for us to say to them, 'this is how you're going to report data, these are special fields we're using, this is the process' and to cover the bulk of the market in that riggid approach. Now there's coming up some FinTech, some new models that might sit outside of the credit bureau until we've got our heads around how to incorporate them, but they're always just a few percent of the market. So actually, for the industry, it's not a burning bridge, it's on a major problem. So for example, in the UK, the hot new topic is buy now pay later and the biggest name in that game is probably Klarna, the regulator is pushing Klarna to come on board to the credit bureau, because traditionally, the bulk of their business was outside of the remit of the financial regulator and so it wasn't reported to the credit bureau. And that's important, the industry is very keen to get that in, it does play a big role in affordability calculations, or it should play a big role in affordability calculations. However, as much as they're a household name, as much as they're growing really, really fast, you know, the percentage share of credit extensions in the market is still tiny.

But I see it in China the other way around, that maybe it's as much as 80% of the market share on the consumer credit side is sitting outside of the banks. So it's sitting with AliPay sitting with WeChat Bank, and so the pressure to evolve the bureau landscape or to think of ways to incorporate them, must be greatly higher.

Zhong Liu 18:49

Exactly right. Like in US, like in Canada, the banks there, they have the power, so they are on the powerful side. But in China it is the other way around, because Tencent Alibaba, they have lots of customers, and they have lots of data. So actually they are more powerful.

Brendan Le Grange 19:04

Zhong, just to expand on that point, I started to talk about the younger population being especially likely to borrow from these super apps, these mobile wallets, but is that actually the case in China? Or would you say this is so far rolled out now that it's the standard model for most credit active citizens today?

Zhong Liu 19:22

So exactly like you said, for example, for the young people, like, they don't have a very high income and they don't have been working for long time, they're not the target customers for the traditional banks, but these are the targeted customers for WeBank and Alibaba because they have some other data that the banks don't have. So they can do probably better targeting or to do better risk measurement. So these people they are of high risk to the banks, or at least the banks think they are higher risk, but actually, for these two companies, because they have more data, so they can do a better job differentating people, they can still pick up people with good quality and they can do the lending.

But for the more senior people, the people with higher income, like, for example, for myself, sometimes I do lending from the WeBank or Ant Group, but it's very, very seldom it's very, very occasionally. Most of the time, I still do the lending from the banks, because for the traditional banks, if they offer you are loan, usually the price is lower than the price (that) can be offered by the WeBank. Because remember, like I said, the majority of the funding for these companies, for these two companies, is still coming from the banks so their price, in theory, it can't be lower than the banks.

It's not because they can offer you lower price, more loan amounts. I think their advantages is that it is much easier for you to use, it's really efficient. And also, the standard is little bit lower than the traditional banks, especially for those young people that don't care to apply for a credit card from the banks. It's not the only that the banks wouldn't give the card to them, because they are too young, they don't have enough income, or things like that, they just don't want to go through the more tedious, the more painful, process to get a credit card. I think now the situation, it may have changed a little bit but still, like most of the young people, they don't want to go through that process.

And once, when I worked in Tencent before, like we did some, like customers survey, we asked them - because for the for the revolving loans there's no grace periods, once you use it, you have to pay for the interest - we did a customer survey, we asked the customers, like, why do you want to pay for the interest, right, for the credit card you have the grace period. And also obviously people's, particularly for the young people, they're price insensitive, they don't care about the interest since the amounts is... the loan amount is very small, so yeah, absolutely sense the interest you pay, it's not too much. So for the young people, it's like, 'I don't even care', like, if I need to pay as small amount to trade for the convenience, they think it is not a bad choice. So the it really depends on what you want.

But of course, it leads to another problem, and now the regulation agency in China, they have noticed that so in their view that these sort of joint lending, it may cause some problems, because for Tencent, for Alibaba, they are not banks, they don't have capital requirements. But actually, they control the customers, and they control the data, and they basically do the risk management. So, if something is wrong with Tencent and Alibaba, then these sort of risk, it will be passed to the banks for sure, because the majority, like 99% of the funding is still from the banks. Like, no one would've expected this five years ago, that when they start people, people don't think that it can't grow so fast and grow so huge in such a short time. So that does change the market. And it does change the whole environment. Like, for example, for Ant Group as far as I know, assets, they have for now it should be more than one trillion dollars, that's why the regulation agencies are so concerned...

Ruifeng Liu 23:21

Because in China, for lending businesses, you must have a licence. You know, for a bank, you have a capital requirement right, Basel II, Basel III requirement that you can only lend so much. And also you have a consumer lending licence that also has some kind of restrictions on the money you can lend. And another thing is micro lending company that also has some kind of restrictions. So for all those kind of ways to generate the lending money, at most by the regulation is you can only lend about five times of the risk-weighted capital.

Brendan Le Grange 24:14

Speaking of risk weighted capital, let's talk about risk. What is risk like in the consumer credit market in China? With the advent of these FinTech powerhouses who also have interest in other parts of the business, have you seen risk rise or, so I guess more generally, what is the state of risk in lending in China today?

Zhong Liu 24:34

And then for the on the risk management is a bit different, and the difference is not about the techniques you use or the data you use, I think it's more about the logic of the risk management - because in the traditional banks, risk management is more about how you can develop a better model, how you can develop a better credit policy like using probably more data, use more advanced modelling techniques, but for the internet lending, you should combine the risk management with a product. For two different companies, the model is more or less the same, the data you are using is more or less the same, but the default rates is quite a difference, simply because one products can offer better customer experience than the other one. And because, if there are two products, internet lending products, you can choose and one it they have a really good customer experience and at the other one the customer experience is very bad, then it is quite a significant when it came to the internet lending.

Ruifeng Liu 25:40

And also, they can control the customers behaviour because of the platform itself. Because if, for example, the customer borrow the money from this platform, and if at the end there, the customer doesn't pay, then Alibaba can close the account. Because everybody use Alibaba or Taobao - that's something that you cannot avoid.

Zhong Liu 26:08

Yeah, because the reason I realised this problems is that for my current employer, we also provide some lending products to our customers and from time to time I would like to talk to the customers on the phone, esspecially talk to those in delinquency - when our collection team calls and sometimes I'll ask them question directly. So one... I ask several people the same question, like when you borrow the money from us, like what is the usage of your money, you use it for buying something or just the like travelling or things like that? And for the delinquent people, a very high percentages, almost 15% of the people, they borrow the money from us and payoff the debt to the We Bank or to Alibaba. Because, to them, it is like you said, it's like a hierarchy thing: Tencent, Alibaba, like they're so dominant in their life, that they don't want to break the agreement issue with those companies. But for us, like we are small companies, they don't really care about us, so they have no problem borrow our money to pay off their debts with them. So naturally, it is very hard for you to get to get as low delinquency rates as those companies, it's not that you don't have a better model, or you don't have better credit policy, it is just the the willingness of your customer to pay back to you is smaller than they have to pay to those big companies.

Brendan Le Grange 27:34

Yeah, that's interesting, because normally it's sort of part and parcel of being a micro lender is knowing you're bottom of the pile when it comes to the hierarchy of repayments, but AliPay and WeChat Pay, because they're part of these organisations that touch every part of Chinese life, they flip that around, and suddenly, even though it's a small debt, it's gained itself top billing in the consumer's mind.

Zhong Liu 27:56

And another thing that I want to say is that, it's also the same problems that my friends at the banks, they're very concerned of: the banks have this business partnership with Alibaba and Tencent, so that is, always the customers, they don't know the banks behind those lending products, because they're just the funding providers. And what they see is the brands of Tencent. So, in theory, their customers, they are taking loans from the banks, and the banks have all the customers information, but actually like the banks are invisible to the customers. Like starting when you are a young student, and you have the student loan,then you graduate, you have your first job, you got your credit card, and then you can have your instalment loan, and when you get married, you need to buy a house and you need to have a mortgage. Because in different stage of your life, you have different needs for the lending products, for some product from the banks. So the customer actually is the most valuable asset for the banks. But the for most of the banks now if they have this, when they have this partner relationship with Tencent/ Alibaba, actually they don't have the customer. So this is the biggest problem for them.

Brendan Le Grange 29:13

Now, just a bit of a change in direction, I guess, but Ruifeng, I'm not sure if you've done a lot of work in collections, but I'd be quite interested to know how that side of risk works - once consumers do go delinquent, or starting to get into financial trouble, what is the normal approach to collecting these debts?

Ruifeng Liu 29:31

Yeah, so I will say depends on who the lender is. For banks, for example, the delinquency rate is very, very low. And especially in the last few years. 40 years ago, the delinquency rate for all the Chinese banks are very, very high. The bad rate, 90 plus days delinquency rate, is over 40%. That's forty years ago. But later, the delinquency rates for banks are very low. The reason is because there are lots of new lenders came out, as I said, that micro lending companies and the P2P companies, so if if a consumer has a difficulty to pay a bank, then they will borrow money from a micro lending company to pay the bank. And if they could not get it from a micro lending company, they could borrow from a P2P company to pay.

And for China, for example, for credit card, if you charge a credit card and you don't pay back, it's not a credit issue, it's a crime issue. So you could be put in jail. So that makes the bank's delijnquency rate very low in the past years. But went up, I believe, in the last one year, because all the P2P companies are gone, the Chinese government doesn't want this P2P companies to exist anymore. So they are all gone. So now, that means they don't have any new sources to borrow to pay the bank. So that naturally put the banks' delinquency rates high.

In terms of a collection before, with the Chinese mindset, if you borrow money, then you have to pay it back. There is no bankruptcy, personal bankruptcy. Even if you cannot pay back, your son, your daughter will pay for you. That's the history of the mindset in the Chinese. But now, this changed also quite a lot, especially started from two years ago in China. So before, for example, you can go to the borrower's home, getting into the house or the home to ask them to pay. Now, you cannot do that. If the borrower doesn't give you a permission to enter the home, it's against the law. If you do collection through a phone calls, only make a phone calls at a certain time, and the number of calls for one day is only three, and you cannot make a connection phone calls to the relatives. Two years ago, three years ago, when I make that credit decision, lending decision, to the person I will collect the phone numbers of the relatives, friends and the work numbers, then I can make phone calls to anybody that forces them to pay. But now this situation changed, you can make your only three calls, collection calls a day, and you cannot go to the person's home. But for banks, they can still file or lawsuit to the person who doesn't pay. Right. And this is protected by the law.

And also, actually, the credit data sense is stronger than before. So people all care about the credit history. Yeah, so if they don't make a payment, especially for a small amount, and they put a record in the credit history - it's not worth it. So people all have that kind of sense. Of course, if the amount is too huge and it's worth to not pay, then it's different.

Brendan Le Grange 33:43

Ruifeng, right in the introduction, you talked about your experience working in the different risk grades of the credit cards, and working subprime through to super prime. And obviously the States probably leads the way in terms of consumer awareness of the detail of their credit scores, where quite a lot of consumers will even know that whether they're super prime, even know what the score cut off is they're aiming for, but certainly it's safe to say the majority of people know about the concept of prime, super prime, subprime... and will be familiar with your own credit score and where they sit on that spectrum. When you talk about this growing awareness of the credit profiles in China, does that extend that same depth, that people are striving to be super prime and looking for help and looking for strategies to manage their credit upwards? Or is it so a little bit more rudimentary, where people are mainly just trying to avoid a black mark on their record?

Ruifeng Liu 34:41

Actually, the PBOC credit bureau, they built a score, but that score was never populated. So for general customers, they don't know such a score exists. They just know that I have delinquent history or not. But there is a similar score, it's built by Alibaba - but the Alibaba score is only an internal score for Alibaba.

Brendan Le Grange 35:13

To the doctors Liu, thank you very much for making the time to appear on the show today. China, I think, is a market that all of us in the West look at and, you know, the scale of it can can leave us somewhat in awe, but also we sometimes feel like we might be missing the nuances. And it's interesting to hear that, yeah, there are these names that don't exist in the western lending, there are these models where the power is shifted, but actually a lot of what's happening is very familiar to us. And I think as I said, in my introduction, there's actually a lot of lessons, it might be different times, it might emerge in a different order, but some of this interplay between what a consumer wants to do with their money, and where they get that money is something that all lenders need to bear in mind as they look at the future, and the trends they're seeing. So thank you again, for making that time and for joining me.

And for those of you listening, thank you for joining the show. This has been How to Lend Money to Starngers, the podcast about lending strategies across the credit lifecycle and around the world. Today, we were talking about China, a country with 1 billion people, next week, we're shrinking it all the way down and we're going to find a little country called Georgia, in between Eastern Europe and Western Asia with a population of just 4 million. I'm speaking to Joffre Toerien, a scorecard builder and consultant based there, about lending in Georgia, and about building scorecards for micro finance - please do join me next Thursday for that.

Ruifeng Liu 37:08

But things have changed quite a lot in the last 10 years, and basically before, they don't have the technology didn't have that much of models to judge the risk and therefore the credit sense is not there. But in the last 10 years, things change a lot. And therefore the big banks, that they actually shifted a lot from enterprise lending to consumer lending. Yeah.