Basker Rangachari, formerly Chief Marketing Officer, Home Credit Consumer Finance 捷信消费金融, China, offers a personal "foreigner's" view of the consumer credit war in China, having worked at a leading consumer finance company in the country.
Here is the transcript:
Hello, my name is Basker Rangachari and I'm the Chief Marketing Officer (CMO) of a leading consumer finance company in China. In China, the eligible banking population is estimated to be about 800 million people out of a population of 1.4 billion.
This market is served by banks, by microloan companies, by large fintech players, and by consumer finance companies. The total market loan size is estimated to be RMB 50 trillion. Remember, that's a huge number. About 68% of that is in mortgages, about 16% in credit cards, and another 16% is in unsecured consumer loans. The top players in this space for consumer loans in the fintech companies are people like Ant, 360 Finance and Lexin. And the top players in the consumer finance companies are people like Home Credit, Mashang and Merchant Union (MU).
Our company has been in the consumer finance industry for over 10 years. We have served over 80 million customers in this period. And we are partnered with over 140,000 retail merchants who are spread across all the city tiers in China right from tier-one cities like Beijing, Shanghai, all the way to tier two, tier three, four and five.
In my role as chief marketing officer, I oversee products, I oversee the fee business and marketing. Most specifically, I am responsible for product development, product operations, digital, social and retail marketing, brand, research, and business intelligence. In addition, I also have end-to-end profit and loss (P&L) responsibility for fee businesses, which helped us to generate additional revenue, by serving the customers lifestyle needs more holistically. Prior to this role in China, I’ve been in financial services for more than two decades across multiple markets, Singapore, Hong Kong, Dubai, Thailand, Vietnam, and also covering markets like Korea, Taiwan, Japan.
To me, China has been this fascinating last frontier. Just imagine 40 years ago, it was a nation made up mostly of villages and just starting to develop. But today if you travel to any Chinese metro city, you will notice the Chinese people are enjoying a high lifestyle similar to any first-world city and living a high-tech digital life. It’s far more digitalised than any other country I’ve lived in. With all of this experience, I think I can safely say I have been there, done that.
How did consumer finance industry grow in China? What is unique about it?
The consumer finance industry in China actually grew rapidly, mostly in the last five years. The aggressive entry by strong e-commerce fintech players, like JD and Lexin into the consumer finance industry pushed digitalisation to great new highs. All of them brought their integrated digital ecosystem comprising of various lifestyle services and financing capability to the market and thus dramatically changed the landscape of the consumer finance industry.
The entry into the consumer finance industry by all these aggressive fintech players prompted many other consumer finance companies (CFCs) and banks to also digitalise rapidly. Overall, what this led to was consumers being able to get a wide variety of lifestyle services. On top of that, what made these players different, and the Chinese fintech players different from any other country is their extensive use of data in a multi-dimensional manner in order to reach the customer and serve their needs in a very, very intelligent, personalised and customised way.
Personally, I witnessed and saw how data is being used by these players in multi-dimensional ways. And frankly, it’s like watching a science fiction movie. In short, I’d say that the key team in the last few years for consumer finance has been digitalisation, led by the fintechs, but also fast followed by many other consumer finance companies, especially post-COVID. The level of digitalisation has been so rapid that it’s led to a resurgence and explosive growth in consumer loans. So, the consumer finance industry grew rapidly right up to early 2020 when COVID hit. Now
COVID, of course, brought the Chinese economy to a halt. But by July, August of 2020, the economy started booming again on the back of retail consumption, and consumer finance started growing again. Now, this was led all the way up to quarter (Q) 4 2020 when we saw some big changes happen in the regulatory landscape and the market and I’ll tell you a little bit more.
What has changed since then that led to the halt of Ant Financial’s listing?
The first big change was consumer behaviour. Consumers who used to traditionally buy things in offline shops, for example, meat, vegetables, all started moving online. In fact, today in China, there are apps for you to grow, buy vegetables and meat and have it delivered to your home. So, consumer behaviour shifted, and almost permanently to go online for many things. That was the first, the second, the industry saw the final nail in the coffin on peer-to-peer (P2P) players who were shut down from about three years ago. But finally the last of the P2P was closed. But thirdly, this significant expansion of credit in the online space, and particularly by the fintech players, who were regulated under microloan licence attracted the attention of the regulatory authorities. And this particularly became visible at the time when Ant Financial was going for a listing. And the data became public on the volume of loans that they had on their book. It was as much as RMB 1.7 trillion of loans that they had generated and had been booked on multiple banks’ and industry players’ portfolios. This definitely attracted the attention of the regulatory authorities and they brought in place a raft of new changes.
Since the abrupt and highly visible halt took place to the listing of Ant Financial, the CFCs and the consumer credit industry have been facing raft of regulatory changes and headwinds, let me outline a few. First, there was a significant public emphasis on rational consumption and avoiding excessive borrowing, all the way from the Central Committee down to all the regulators, emphasising that every player must encourage customers to undertake rational consumption. This was the starting theme. Secondly, several restrictions were put on banks that were working with the fintechs to take on the loans which were originated by the fintechs. One, the banks could no longer take on 100% of the loans on joint lending. The microloan and fintech players had to self-finance 30% of the loan. That’s not a small impact on the balance sheet. The second, banks were told they could not take exposure to any single fintech or microloan player which exceeded 25% of their tier one capital. Thirdly, no single bank could have more than 50% of its total loan portfolio through this type of external origination by fintech and microloan players. Fourth, regional commercial banks were also given a lot of restrictions on the geography in which they can operate unless they can show that they have nationwide presence.
This meant that a bank from a specific province could pretty much only operate within their province unless they could show that they had countrywide presence to go nationwide. In addition, trusts which is a big source of financing for the consumer finance industry were also extensively discouraged from taking on too much exposure. So overall, on the supply side of funding, the regulators tightened quite a number of aspects to make sure that banks and trusts who provide institutional financing to the industry, had to exercise a lot of caution.
How are players responding to the new regulatory push?
And so how is the industry and the leading players responding to these regulatory headwinds? Well, all is not lost. It’s not the end of the industry. You could see the deep-pocketed players and leading players like Ant or some of the other microloan players are restructuring themselves. They are forming financial holding companies, they are separating out their financial businesses into different entities, they are taking on CFC licences, they have increased their share capital. So, they are doing all the right things that the regulators are asking them to do to streamline their business and make it independent. In addition, many of them who have been relying on traditional types of funding sources or simple bank, institutional funding are innovating. So, companies like Lexin are innovating new forms of funding, by working in profit sharing mode with the banks instead of the traditional guarantee model or a loan. So what is happening is technology is now being used to innovate new forms of funding, which will still be compliant with regulation will enable all the dual underwriting that needs to be done and still create a profitable business model.
And it is also interesting to see that new entrants, large players, like DiDi are entering the consumer finance industry through strategic investments. Even existing players are forming more complex strategic partnership with complementary businesses so that they can leverage each other’s ecosystem, leverage each other’s acquisition channel, drive cost efficiency, and improve their services to each other’s customer base. Overall, I think this is actually good for the economy in the long run, as it moves, what could have been a disorganised growth in consumer finance into much more organised, manageable and stable growth.
What have I seen and learnt in the past 18 months about China consumer finance market?
Marketing has always been talked about as an art and a science. Historically, however, it was more art. It was the artistic type of people who became marketing directors. But with the advent of digital technology, digital marketing capabilities, digital ways to communicate, new digital media, and the ubiquitous mobile phone, digital marketing has taken on a much bigger role in the world of CMOs, and therefore it’s injected much more science to the art of marketing. But let’s be clear. To be successful in digital marketing. One has to be able to attract customers, acquire customers and engage customers. There are a number of secrets of how one can be successful in digital marketing in financial services. And that’s what I’m hoping to share with you based on my years of experience.
One of the key secrets in being successful in digital marketing is understanding how customers behave. One needs to really understand what drives your segment of customers, what are their emotional motivators? What are the platforms and channels that they like to watch? Who are their influencers? What media do they consume, which will convince them to make a decision towards a brand or to make a purchase? This is the first big secret, understanding customers. And in order to do this one has to know how to combine research, hard data, and behavioural information that we can gather. This will be one of the key things that I would share.