IN China, an alternative capital market is taking shape with the rise of fintech companies. Fintechs are playing the role of intermediary in peer-to-peer lending, challenging the regulatory framework, and edging into the credit rating space by leveraging on their big data capabilities.
“If you want to do lending in the future, there are probably two ways. One is balance sheet lending, and the other is peer-to-peer,” says Clifford Sheng, partner at Oliver Wyman, a consulting firm based in New York.
Whilst fintechs in China do not do balance sheet lending, fintechs such as Ant Financial and JD Finance are already in the peer-to-peer and consumer finance space, facilitating loans for small businesses and retail customers.
This burgeoning fintech sector is challenging the current regulatory framework. “It’s an online version of the capital market. If you compare the physical capital market with the online capital market, the difference is in the regulation,” says Sheng.
While most fintech companies are regulated by the China Banking Regulatory Commission, there are still companies and businesses not well covered by the existing regulations. According to Sheng, some regulatory arbitrage opportunities still exist where fintech companies can easily raise funds from retail investors at a low rate and then provide loans at a higher rate.
One core competence of fintech companies is their IT stability in the areas of payments and cloud computation. The strength of their IT infrastructure makes the technology players resilient under extreme conditions. During the recent Singles’ Day sale on November 11 – China’s online shopping bonanza equivalent to that of the US’ Black Friday – Alibaba’s Alipay processed a peak of 256,000 transactions per second and Alibaba Cloud processed as many as 42 million instructions per second.
It is likely that the technology companies, with this competence and a digital record of corporate transactions, will provide credit rating services. Currently, although not yet mature in the corporate credit analysis business, Ant Financial, Tencent and JD.com have already adopted their own credit rating system for analysing retail credit.
Instead of relying on financial reports and field research, fintech companies gather information on corporate cash flow transactions on a regular basis. It is widely believed that the flow data is more helpful in determining a corporate credit rating, as opposed to static data.
“If you look at rating agencies in China, they are not really helpful in supporting risk discovery,” says Sheng. “Fintech has an advantage here. When it becomes larger, it will get into this space.”