Flash Report /
China

Ant Group now makes more money from lending than from payments

  • Ant is the leading online lender to consumers/small businesses in China (25% market share) with 60% pa top-line growth

  • Its capital-light model focuses on product design/ distribution/ servicing, leaving partners taking on most credit risk

  • Future growth will be driven by targeting underserved constituencies and through international expansion

Ant Group now makes more money from lending than from payments
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
30 October 2020
Published byTellimer Research

One of Ant Group’s CreditTech goals is to address unmet credit demands in China, particularly for unserved and underserved consumers and small businesses. The firm provides technology services to partner financial institutions to enable them to deploy credit to these constituencies at scale. Oliver Wyman data indicates Ant Group was the number one provider of credit to these two customer groups as at June 2020.

To achieve this market leadership, Ant Group partners with around 100 banks, who underwrote 98% of the loans enabled through the platform as at June 2020. Ant Group charges a fee to these institutions (as a proportion of interest income earned by these partners) in lieu of the product development, customer reach and risk management solutions provided by the firm.

Ant Group’s CreditTech division has experienced strong growth in recent years, and is now the largest single contributor to group revenues.

CreditTech as % Ant Group revenues

Industry growth drivers

Consumer credit

According to Oliver Wyman, consumer credit balances in China (which include credit card and unsecured loans) are expected to grow from RMB16tn in 2019 to RMB25tn by 2025, a CAGR of 11%. The firm estimates that 75% of Chinese adults did not own credit cards in 2019, while the ratio of consumer credit to cash and deposit balances was 14%, versus 33% in the US.

Online consumer credit was RMB6tn in 2019; Oliver Wyman expects this to rise to RMB19bn in 2025 (20% CAGR), driven by improved technology adoption.

China consumer credit balance

Small and medium-sized businesses (SMB) credit

Oliver Wyman has estimated that small businesses contributed 60% of China’s GDP in 2019, but received only 32% of all corporate lending. Smaller businesses, in particular, tend to be financially underserved. SMB loans under RMB500k totalled RMB6bn in 2019 and are expected by Oliver Wyman to rise to RMB26bn in 2025 (ie 27% CAGR). Similarly-sized online loans are expected by the firm to rise from RMB2tn in 2019 to RMB16tn in 2025 (41% CAGR).

China SMB credit balance

Lending industry success factors

As per our survey of 31 lending fintechs in seven emerging markets, first-mover advantage, reaching financially-excluded customers and funding access have been the key success factors for this industry segment. Ant Group also appears to be tapping in to these areas given its strong focus on previously underserved customers; during the 12 months to June 2020, 500mn users and 20mn businesses borrowed through Ant’s CreditTech services Huabei and Jiebei (see below). Funding access has also been strong with the firm executing multiple capital-raising rounds in the past, which has enabled Ant to grow its product portfolio. The firm has also been able to leverage the balance sheets of its financial partners, as well as being able to package and sell-off its loans via securitisation; these initiatives help to limit the firm’s funding requirements.

Lending fintechs' success factors

Consumer credit

Ant Group partners with financial institutions to provide fast and convenient credit products to Chinese consumers. The company focuses on product design, intelligent decision-making (whom to market and sell credit products to, and the size and pricing of such products) as well as monitoring, servicing and collection; while partner institutions play a key role in underwriting and disbursement. Although Ant Group takes the lead on credit risk management, it is increasingly looking to work more closely with partner institutions in this area.

Product Design

Ant Group focuses on simple, convenient and easy-to-use products that provide users with instant credit access. Its Huabei and Jiebei products are the most widely used consumer credit products in China; in the twelve months to June around 500mn users took out CreditTech loans.

Huabei was one of the first digital unsecured revolving credit products in China; this credit line can be used at the point of sale and is based on Ant Group’s proprietary customer insights and credit assessment models. A typical Huabei customer is young and internet-savvy, but does not have access to a credit card. As customers build their credit history, the size limits for their credit lines increase. Huabei loans typically have a 40-day interest-free period, with terms ranging from 3 to 12 months. Customers can pay in monthly installments, or at the end of the interest-free period. As at June 2020, the average outstanding Huabei balance was RMB2k (versus a minimum credit line of RMB20), and the typical daily interest rate was 0.04%.

Jiebei is a short-term digital unsecured loan, typically for larger transactions (the minimum credit line is RMB1,000), and is typically available for customers that have already built up a credit history with Ant Group. Borrowers can pay back the loan at any time without penalty. The typical daily interest rate is 0.04%.

Due to the seamless integration of partner banks into Ant Group’s lending platform, customers can experience close to instantaneous underwriting and receipt of funds. For both products there is also an automated repayment process, which typically takes the repayment amounts from consumers’ accounts in the following order: Alipay account balance; debit card linked to Alipay account; Yu’ebao balance (Yu’ebao is Ant Group’s market-leading money market mutual fund).

Although most loan volume sits on partner bank balance sheets, a small portion of the balances are held by Ant Group’s loan companies, Ant Shangcheng and Ant Small and Micro Loans. Even here, however, the bulk of this exposure is ultimately off-loaded through the sale of asset-backed securities.

As at June 2020, the total consumer credit balance enabled through Ant Group’s CreditTech platform was RMB1,732bn. 98% of this volume was underwritten by partner institutions or securitised.

Real-time decision-making

Ant Group uses proprietary algorithms to analyse in real time a customer’s creditworthiness, to determine the appropriate size of credit lines and product pricing, to assess the likelihood of a customer accepting a credit product and to identify the best ways of marketing products.

Credit risk management

Ant Group categorises all Alipay users into different risk buckets based on customer occupation, spending (including inputs from Alibaba), financial position etc. These categories determine the size and price of credit lines that are offered. The firm utilises around over 100 different credit assessment models for this purpose. Looking ahead, Ant Group intends to work more closely with its partner banks to develop more advanced joint risk models, which should facilitate more accurate risk profiling, but also deepen their relationship with the partner bank.

In recent years Ant group has demonstrated a strong credit quality track record, with the delinquency rate by balance typically within a 1-2% range, and the delinquency rate by vintage coming in at less than 0.5%.

The Covid-19 pandemic and the economic disruption caused by lockdowns has generated a stress-test for the firm’s credit risk management; so far the results have been favourable. The delinquency rate by balance has remained in the 2-3% range, while the delinquency rate by vintage has remained below 0.7%, with results improving after February 2020.

Consumer loan delinquency rate

The company also has over ten years of experience defending against hacking and fraud.

Credit to small and medium-sized businesses

Ant Group has been providing credit to Chinese small businesses and their owners since 2010. The firm develops insights on these entities through their online and offline payments transactions as well as business cashflows and other sources of information. Typical loan product features include their small size, instant availability, up to one-year tenor, no prepayment penalties and daily interest rates of 0.03% or less. In the year to June 2020, over 20 million small businesses took advantage of Ant Group’s CreditTech products.

MYbank

Ant Group has a 30% stake in its associate, MYbank, which is the firm’s most important partner for lending to small businesses. Ant Group provides MYbank with customer reach and insights, as well as technology, which allows MYbank to perform its own credit risk assessment.

Ant Group also collaborates with third-party financial institutions, providing them with technology and information to enable them to perform their own independent risk assessment.

Credit risk management

In common with the consumer loan book, the delinquency rate for the small business loan book has averaged around 2% of the outstanding loan balance in recent years. The delinquency rate by vintage has been less than 0.7%.

This year, due to the impact of Covid-19, delinquency rates by outstanding balance have increased, but only by around 0.5ppts. Delinquency rates by vintage have so far remained below 0.4%.

SMB loan delinquency rate

The road ahead

As per our EM fintechs survey, entering new customer segments and expanding into new countries are the top priorities for lending fintechs. Ant Group also appears to be focused on these areas given its goal of growing its user base by targeting unserved and underserved customers, and we have also seen Ant Group expanding internationally in the recent years.

Lending fintechs' future strategies

Risk factors

Regulatory environment is in flux. Ant Group’s CreditTech services typically meet the needs of unserved and underserved consumers and small businesses in China, an area where financial regulation is not well-established. In providing services to such customers Ant Group partners with various other organisations, which are typically also subject to regulation. Potential regulatory changes that could negatively affect Ant Group’s CreditTech activities include higher risk weightings, stricter credit limits and price caps. For example, loan rates are currently capped at 4x the one-year loan prime rate for unlicensed financial institutions.

Interest rates. The current low interest rate environment could negatively impact margins, whereas a higher interest rate environment could negatively impact credit demand and/or credit quality.

Funding access. Ant Group relies on partner financial institutions to provide the funding for its credit products. Any disruption in the provision of such funding could limit Ant Group’s ability to extend credit to its customers. Also, Ant Group and its partners look to sell a proportion of originated loans as asset-backed securities. Any closure of the ABS market could negatively affect the growth of the CreditTech business.

Competitive dynamics. The fee Ant Group charges its partner institutions is dependent on the level of competition in the marketplace. Some partner institutions may also seek to develop their own credit products independently.

Credit quality. This is dependent on the health of the economy, and may be affected by issues relating to the global Covid-19 pandemic. Because Ant Group targets borrowers with limited credit history and financial resources, they may be more vulnerable to economic downturns. The company’s credit systems have also not yet been tested during an economic downturn.

Collection efforts could be compromised. Ant Group provides automated digital collection services for its partner financial institutions (such as in-app notifications, text and voice messages). For long-overdue loans, collection efforts are outsourced to third parties. If these collection efforts prove less effective than expected, this could have negative financial implications for Ant Group.

Related reading

Ant Group is transforming mass-market investment access, 29 October 2020

Ant Group: How Alipay is driving China’s digital payments revolution, 28 October 2020

Ant Group and Alibaba: China’s digital dream team, 26 October 2020

Ant Group: Profiling the world’s most valuable fintech firm, 23 October 2020