IF you’re an SME (small and medium-sized enterprise) in China, who would you go to for financing? A bank? Or a fintech? The answer, of course, depends on your needs.
“The mistake banks make is they think SMEs need loans,” says Soul Htite, CEO of Dianrong, a leading Chinese P2P company. “But SMEs don’t actually need loans, they need cash flow solutions."
In China, fintechs are giving banks a run for their money in providing financing for SMEs. This is driven in part by the ability of fintechs to provide bespoke supply chain finance solutions and flexible online loans.
Fintechs such as Ant Financial, JD Finance and Suning Finance are active in directly providing supply chain finance services to SMEs. JD Finance has served over 100,000 corporates, most of which are SMEs, with supply chain finance solutions amounting to a total of 250 billion yuan (US$37.65 billion).
Fintechs also compete on the loan front. Although they contribute over 60% of China’s GDP, SMEs only received around one fifth of all bank loans in 2016. “If you look at new loan issuance in the first half [of 2016], the deleveraging occurred mostly among SMEs,” says Joe Guo, CEO of Quark Finance. “SOEs continued to get loans that they didn’t necessarily need.”
Chinese fintech companies such as Ant Financial, Webank and Dianrong are filling this gap by directly providing online loans to SMEs. Through packaging different loans into particular short-term wealth management products, Chinese fintech companies are able to bring retail investors to cater to the financing needs of those SMEs.
One major difference between online loans from fintech companies and traditional bank loans is with regards to the flexibility of the instalments of the amortization. Unlike bank loans which require monthly or quarterly payment, online loans can have a more flexible payment scheme.
“When banks lend money to SMEs, they expect them to make monthly payments. But if you are a restaurant, you can pay every day,” adds Htite.
There may be a solution for banks. In a bid to boost financial inclusiveness in China and guide bank capital to the SME sector, the People's Bank of China announced in early October that it will cut certain commercial banks’ reserve requirement ratio (RRR) by 50 basis points next year.
While the funding cost for commercial banks may be reduced under the new interest rate regime, the operating cost for banks to serve SMEs will not be reduced. Whereas fintechs can utilize big data, banks will need to deploy more human capital to analyse SME credit, making it harder for them to compete.