Editor’s note: This was contributed by Hao Huang, President of MYbank. MYbank was established in June 2015 and was among the first batch of pilot private commercial banks in China and is part of Ant Financial Services Group. It was also the first bank in China that was set up entirely on the cloud, without physical branches. Before joining MYbank, Hao Huang held positions at China Construction Bank, Sino-German Bausparkasse, CCB Principal Asset Management.
Imagine for a moment the plight of a small business owner in China. Let’s use as an example the owner of a spicy hotpot restaurant who employs a number of cooking and serving staff. Business is good, and he wants to expand and open a couple more outlets. In the US or Europe, he might go to a bank for a small business loan. But in China, he knows that a loan is not easy coming, so he has to rely on profits to grow. New restaurants will eventually open, but at a much slower rate than if they could borrow money.
The case of a solitary entrepreneur is not common when thinking about China’s extraordinary growth story since it is the country’s corporate titans that attract the most attention. The big companies power ahead with overseas acquisitions, complete record-breaking IPOs, and introduce innovative technologies. But it is important not to overlook the 73 million small and micro-sized businesses that make an important contribution to national economic development.
There is enormous diversity among these small businesses. Many are run by individuals – such as a farmer selling their produce or a parent operating an online store in their spare time. Others are slightly larger, such as a local mechanic that employs some assistants. Despite the wide range of companies in this category, there is one longstanding issue that affects them all – namely, difficult access to credit.
The inability to get a small business loan does not just stifle expansion. It can also impact chances of survival, due to cash flow issues. A small business, for example, might need a short-term loan to carry on operating when it is waiting on several overdue payments.
Data from a World Bank report on financial inclusion helps put this problem into perspective. Only 14% of China’s small businesses have access to loans or line of credits, compared to 27% of smaller firms in G20 countries. The same report cites a survey highlighting a number of reasons that small-scale entrepreneur might not apply for a line of credit. These include complex application processes, the insufficient size of the loan, and a belief that it would not be approved anyway.
This situation might sound somewhat strange since China has the biggest banks in the world. But large banks with their traditional brick and mortar business models, favor a paper-based application process which is not designed to handle many thousands of small business loans. Large banks also tend to have little information about the creditworthiness of small businesses, while they are also cautious about lending to borrowers with no collateral.
The solution lies in a new banking business model that takes advantage of the latest technology. At MYbank we have integrated cloud computing, artificial intelligence, and real-time risk management to create a solution that allows us to quickly meet the demands of millions of small business owners. With just 400 employees, more than half of whom are AI experts and risk management scientist, we have already extended credit to more than seven million firms, with a total value exceeding RMB 700 billion yuan ($110 billion) as of March 2018.
The trick is to use artificial intelligence to automate the application process. It takes only less than 3 minutes to apply for a loan on one’s mobile phone, while approval takes less than 1 second without any human intervention. Our risk assessment AI ensures that money goes to creditworthy businesses, and our non-performing loan ratio is around one percent – a level significantly lower than when the big banks make small business loans.
Our business model fits into a broader shift in China towards an inclusive digital financial ecosystem. The most dramatic development in recent years is that incredible growth in the use of mobile payment platforms, an area where China is clearly the world leader. Consumers no longer need to carry coins and notes around with them, while businesses can avoid the transaction costs associated with cash and cards.
The next step is to support technological innovation in inclusive finance so more small businesses and farmers can access the funding they need to survive or scale up. This is another area where China is also in the lead, where regulators are playing a highly supportive role. This year, we have already seen a significant acceleration of technology adoption among major Chinese banks, which have set their up their own inclusive finance departments and while at the same time partnering with FinTech companies to reach small businesses and farmers that were traditionally too costly to serve.
This is a business model that is not limited to China, as the International Finance Corporation and other global development banks have expressed interest in how smart lending can be applied in other countries, especially with regards to supporting farmers.
The economic impact of providing widespread access to credit for China’s small companies will be significant, as it will allow more people to set up on their own and try out new business ideas in the real economy. In effect, it is a way to empower the entrepreneurial spirit. Some of China’s largest companies started out as tiny companies with a will to succeed. The small businesses we lend to today could be on their first steps to greatness. All they need is access to the credit that has for so long been out of their reach.