Banks are the major players in the consumer finance field in China for now

Written by Felix Yang || 21 Sep 2016

The Bank of Harbin was granted a license to set up its consumer finance company, Hayin, on September 19th. The bank owns 59% shares of Hayin’s equity with paid-in capital RMB295 million ($44 million). It is another consumer finance license which is issued by the China Banking Regulatory Commission (CBRC) to a company that has a banking background. 

In a narrow sense, Consumer Finance refers to institutions which provide loans to customers in order to satisfy their consumption needs, while car and property purchasing is not included. The loans are typically small, easy to apply for, and more flexible. Also, the borrowing period is short. Middle to lower income consumers are the targeted groups and the purpose of borrowing includes travel, weddings, education, beauty, etc..

From the time the market started to get popular in 2015 until now, there were 16 consumer finance companies in China. The consumer finance industry attracts capital from Banks, e-commerce companies, and various other industries. The involved parties all noticed the change of consumption habits of the Millennials, those who are born in the 1980s or 1990s. Their consumption needs are expected to keep growing as the new generation.

So far, among all the approved 16 companies, 12 of them are backed by banks. There are two reasons for the popularity of banks in this industry:

First of all, there are regulatory hurdles for new entries: the license applicant must be a financial institution and its revenue of most recent year must be over RMB30 billion ($4.48 billion). Banks have an advantage compared to most privately operated companies considering the size and qualification.

The second one is related to banks own benefits. They are looking for new growth point since profits from traditional loan business are decreasing. For banks’ credit card business, because 80% of customers repay their bills on time, the profits for banks are limited. Only 20% of credit card users let their balances carry over from month to month. So aiming at those customers who don't pay on time, the consumer finance companies may generate more return if they can build an efficient risk control system.

In the future, banks may not be the major players in the consumer finance fields. With the popularity of online shopping, many e-commerce companies have developed similar credit products to encourage more consumption on their platforms. For example, Hua’bei (spend it) from Ant finance and Bai’tiao (blank note) from JD finance are supported by Alibaba and Jingdong. However, the government has not released the restriction for these platforms yet. But for how long? 

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