Several weeks ago, Wharton FinTech attended the 2016 Continuum SF Innovation and Credit Conference in San Francisco. The conference focused on emerging fintech trends in China and the US, with a special focus on lending. It was an excellent opportunity to compare and contrast how fintech is shaping the financial services industry in two of the largest markets globally. We took note of three major themes:
- credit scoring in China
- P2P lending regulation in China
- the unbundling of banks in the US.
Credit scoring in China
During one particularly interesting panel, the moderator asked American and Chinese CEOs the same questions to reveal how two companies with similar business models, and operating in the same industry, can have very different approaches to product development, business development, and marketing. Differences between US and Chinese approaches to credit scoring drive a large part of this gap. Here are three points that stood out for us.Penetration of traditional credit scores. One presenter cited a study that compared FICO’s 70% coverage for credit customers in the US with an estimated 30% coverage across many smaller players in China. These statistics suggest that the number of consumers in China without credit scores dwarfs the corresponding population in the US. They also suggest that there’s a huge opportunity for Chinese companies to develop alternative scoring models without competing against a dominant incumbent. Point of access. Online shopping platforms such as Alibaba and Tencent use their expansive consumer spending data to participate actively in the credit scoring process, often with support from the government. Chinese ecommerce players are expanding into related financial services with not only a unique data set of consumer behavior, but also direct access to consumers through mobile apps. With an ecosystem of customer information captured on mobile phones, consumers can obtain loans for purchases directly through ecommerce mobile applications. Regulation. US lenders face heightened scrutiny to prevent potential discrimination during the lending process, specifically regarding characteristics such as race, religion, gender, and age. Some proposed regulations notwithstanding, no such restrictions exist in China, where lenders and credit providers regularly use all available data as inputs into their models.
P2P lending regulation in China
Let’s delve deeper into regulation, a theme that appeared frequently throughout the Continuum SF conference. Traditional financial institutions are heavily regulated in China, but the P2P lending space has operated with effectively no formal regulation for nearly a decade.
In December 2015, the China Banking Regulatory Commission (CBRC) – China’s financial services regulatory body – released the first draft rules regulating the country’s P2P lending industry. In addition to introducing new transparency and registration requirements for the nation’s ~3,600 active P2P lenders, the proposed rules state that P2P lending platforms can only be intermediaries linking borrowers and investors. Platforms can’t guarantee returns, take deposits, or pool investors’ money. Additionally, they can’t offer wealth management and insurance products, denying P2P platforms an opportunity to diversify their revenue streams. This could spell trouble for many of China’s larger P2P lending platforms (such as CreditEase and Yirendai, to name just two), that currently offer wealth management products.
On day two of the conference, Martin Chorzempa, a former Luce Scholar at The Asia Foundation, weighed in with his thoughts on the draft rules. Martin believes there will be a sharp increase in Chinese P2P platform failures as regulations cull rule breakers, poor performers, and others from the roughly ~1,000 P2P lenders deemed ‘problematic’ by the CBRC. He also believes the new regulations will improve transparency and force many poorly run P2P lenders to disclose the health of their portfolios and register with local financial regulatory authorities. The public comment period for the draft rules has since closed, and the industry is anxiously awaiting the CBRC’s response.
‘Unbundling’ banks in the US
Another key theme at Continuum SF was the unbundling of banks in the US. Keynote speakers and panelists painted a stark picture of fintech companies disintermediating major banks on all fronts: payments, personal financial management, and lending. Here are two points that stood out for us.Product focus. Fintech startups are focused on specific verticals, which allows them to build deeper, more comprehensive, and more tailored product suites. This gives the disrupters a distinct advantage over banks, as the latter tend to be hamstrung by competing product initiatives and internal prioritization battles. Changing consumer behavior. Smartphones are on the rise, and so is mobile banking: nearly 75% of American adults bank on their phones. And banks find it increasingly difficult to retain their young clients: 18% of millennials switched banks in the past year alone.
You can’t ignore fintech
How should banks respond? Wharton’s Phin Upham (MBA ’05), a principal at Thiel Capital, shared two important insights during his keynote address.Partnerships. Banks have realized that they can’t ignore fintech anymore, and they’ve started to partner with startups. For example, JP Morgan recently announced a new partnership with OnDeck, a small business lender. JP Morgan will use OnDeck’s underwriting capability to lend more efficiently to its four million small business customers. Companies such as Lenddo are using nontraditional data sources to help banks underwrite more effectively, and banks continue to partner with payments companies; the top five issuing banks all partnered with Apple to enable their credit cards on the Apple Pay app. Competition. Banks haven’t indiscriminately adopted partnerships with the disrupters. Some have also tried to compete. Chase has already released Chase Pay, its own mobile wallet, to compete with Apple Pay and other mobile wallet payment options. And at one point, JP Morgan and Wells Fargo blocked certain personal financial management platforms such as Mint from accessing consumer data. Why? Perhaps due to concerns over potential hacks, or perhaps due to fear of losing another touchpoint with consumers.
– This post about Continuum SF includes contributions from Matthew Applegate, Min Fang, Nikhil Srivastava, and Uday Seth, and is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image: alexmillos, Shutterstock