Article / 02 October 2015 at 4:33 GMT

Tencent puts student loans to the test

China Watcher / Shanghai
  • Fenqile is a student-focused micro-credit company
  • A funding round from Tencent could put its worth at $1 billion
  • Such a move has Tencent following in Alibaba's footsteps
  • However, a concern is that these micro-loan firms target financially naive students 

By Neil Flynn

One of China’s largest student micro-loan companies – Fenqile – has announced that it is in talks with tech giant Tencent to gain further investment in its latest funding round, which could potentially take the value of the loan firm up to $1 billion. 

Fenqile is one of a new breed of student-focused micro-credit companies that allow university students to pay for items such as iPhones and MacBooks via payment plans. It capitalises on Chinese consumers’ insatiable demand for brand-name goods and the financial naivety of students. It also represents an aspect of the growing liberalisation of China’s financial system, which has been much needed for decades. 

 Fenqile allows students to pay for items such as iPhones via payment plans. Photo: iStock

Consumer credit is a common element of Western financial systems, but in China it is a relatively new concept. The big state-owned banks are notoriously rigid in terms of their lending capacity, in the sense that they will often only lend to state-owned and large private entities, which typically need liquidity the least. 

The launch of the new private banking structures by the likes of Alibaba and Tencent has seen this change, with consumers being the main beneficiaries. For example, when shopping on one of Alibaba’s platforms, users can choose to use the Huabei service, which is essentially Alibaba’s own credit service that can only be used on its own platforms. 

This allows users to pay for products under the condition that it is paid back within 30 days. In terms of risk management, it is simply the best in China. Alibaba uses data from its Alipay platform, which has been the most popular payment platform in China for over a decade, and can calculate individual credit scores on its Sesame Credit platform, giving the most accurate credit rating scores in China. 

Stricter regulation is surely just a matter of time 

The Fenqile deal with Tencent mirrors a similar deal between rival start up Qufenqi and Alibaba’s finance subsidiary Ant Financial. Micro-loans are an attractive business for China’s tech giants because it allows them to expand their presence over China’s growing private financial sector. 

Both Tencent and Alibaba have set up their own online private banks, and have a range of financial services such as online payments, consumer credit and money management. However, I expect that their reluctance to launch their own student-focused platform is due to potential regulation. 

It is also a business that China’s former social media leader Renren (a Facebook clone in every sense other than success) has jumped into in order to exploit its student user base. The social media site is still used by students, and the firm has been integrating its services with universities, in order to capitalise on the growth of online education. 

Earlier this year, I discussed how the firm was simply a holding company for cash, but has since leveraged its user base by offering credit and payment plans to students. 

I continue to hold concerns over the industry as a whole, because making credit easily available to financially naïve students seems to me to be a recipe for disaster. One look on the lender’s website shows that students can sign up to payment plans for a wide range of consumer electronics and fashionable accessories, such as iPhones, iPads and Tissot watches. 

However, a recent trend is that O2O food takeaway apps now accept Fenqile as a payment format, and in fact offer greater discounts if the payment is made using the lender instead of the standard WePay and Alipay platforms. 

Making consumer credit available to students is a slippery slope, and given the speed at which financial regulators typically react to new technology and business lines, the earliest that we can expect stricter limitations on lending would be after Chinese New Year in February. In the meantime, firms such as Fenqile will continue to attract students into two or four-year payment plans in order to get the latest iPhone. 

Fengqile Offers Payment Plans On Electronic Goods
Source: Fenqile 

There is certainly a lot of potential for companies that are able to offer much greater consumer credit liquidity in China. However, for the firms that deliberately target financially naïve demographics, I expect that strict regulation will be forthcoming, which will force a change of the current business model.  

– Edited by Gayle Bryant

Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.
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