Technology vital over financial services' 'last mile'

Technology will play an indispensable role in covering the “last mile” of delivering financial services to the world’s unbanked populations, according to experts at this year’s Lujiazui Forum. 

Eric Jing, chairman and chief executive of Ant Financial, the financial affiliate of e-commerce giant Alibaba, told the audience his company had employed technology to lower the bar for small and medium-sized enterprises (SMEs) to obtain credit.

The exponential growth of e-commerce and mobile payment over the years has connected people in the remotest corners into a vast global network of commerce, Jing said. “Even an old lady making cloth shoes in rural China can now sell her products online,” he said.

Thanks to the increasing fusion of online and offline data, companies such as Ant Financial can now create a credit profile for each user, ranking them by creditworthiness. Such profiles have become the reference in banks' decision-making process.

One of the credit-rating programs adopted by Ant Financial — 310 — allows users to submit applications for loans in three seconds and approves them in one second, with zero human intervention throughout an AI-enabled process.

Bei Duoguang, co-chair and president of the Chinese Academy of Financial Inclusion at Renmin University of China, said services provided by companies such as Ant Financial have given an impetus to the development of inclusive finance in China.

“China has emerged from being a relative latecomer in this sector to a vanguard and even a world leader,” said Bei, adding that digital technology has made it possible for people to gain access to credit without collateral up front.

He said inclusive finance should become a multi-layered ecosystem, where all the players will develop different roles for themselves rather than compete against each other.

“Banks and non-banking institutions like fintech companies should have different positioning and work together to achieve synergies,” he said. “What matters is how banks will support or cooperate with these fintech firms.”

Some experts believe that banks will continue to be the main provider of financial products and services.

“Local banks and rural credit cooperatives are close to the clients they serve and will continue to take the lead in this endeavor,” said Li Junfeng, director-general of the financial inclusion department at the China Banking and Insurance Regulatory Commission.

Li’s words came amid widespread optimism following a raft of policies released last year aimed at encouraging banks to lend more to the private sector, especially SMEs.

Statistics show that Chinese banks to date have extended a credit line of 35 trillion yuan (US$5 trillion) to SMEs, which makes up 24 percent of total bank loans, said Li.

Other than the credit market, the capital market has increasingly become a vehicle for SMEs to raise capital to fuel growth.

One of the highlights of the 11th Lujiazui Forum is the launch of a long-anticipated Nasdaq-style tech board in Shanghai. Widely hailed as a milestone for China’s financial reform, the board is expected to serve as a financing vehicle for aspiring tech firms, many of which are SMEs.

According to Bei, compared with short-term, speculative capital, SMEs are more in need of long-term capital to support them as they grow. He suggested that SMEs consider securitizing their assets or using their intellectual property rights for equity investment.

Insurance also is critical to people such as smallholders who often live at the mercy of nature.

Although 80 to 95 percent of SMEs generate about 40 percent of global GDP, many of them are uninsured in a world of risk and uncertainty.

Denis Duverne, chairman of the AXA Group board, noted that insurance can help SMEs head off risks such as illness, fires, floods or other catastrophes that could plunge them into poverty.

The world’s largest business insurance company has, for example, provided cover to 50 million Indian farmers through a scheme subsidized by the Indian government.

But Duverne said it was often challenging to deliver insurance services to those at the bottom of the global economic order, because of critical challenges such as lack of awareness.

Richard Vegh, chief executive of the Budapest Stock Exchange, said Hungary’s experience indicated that many SMEs are not aware of the possibilities the capital market can offer them. That’s why Vegh, together with many policymakers, have decided to embark on a campaign of education to directly engage SMEs.

Through regular programs in partnership with the London Stock Exchange, he said he hopes to communicate more financing solutions such as asset securitization to these smaller players over the next two years.

As China’s tech giants go global, taking their data expertise and experience with them, they are poised to contribute to the development of inclusive finance in many underdeveloped areas. “Fintech will become a new business card for China in the world,” said Bei.

However, speakers agreed that participants in inclusive finance should avoid the pitfalls of achieving affordability at the expense of sustainability, meaning that banks should desist from offering loans below market rates.

“Banks have to factor in the risks in the interest rates they offer,” he said. “Inclusive finance is not tantamount to philanthropy.”

Jing said he noted a severe lack of tech talent and expertise on the part of many foreign financial institutions during trips overseas. This is set to change as a handful of Chinese fintech firms on track to globalizing their business are actively installing programs like 310 in these regions, to help less tech-savvy banks mine the value of their user data.

“In the future, we look to serve 30 million SMEs,” he said.