A $7 Credit Limit: Jack Ma’s Ant Lures Hundreds of Millions of Borrowers

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Morningstar | Stella Yifan Xie | Dec 8, 2019

microcredit - A $7 Credit Limit: Jack Ma's Ant Lures Hundreds of Millions of BorrowersBy offering as little as a few bucks at a time to new borrowers, a microlending business of Chinese technology giant Ant Financial Services Group has quietly swelled into one of China's largest providers of personal credit lines.

The microlender is called Huabei, which means "just spend." It was originally created four years ago as a way for users of Ant's payments network Alipay to fund purchases on shopping websites run by Ant's affiliate, Alibaba Group Holding Ltd.

These days, Ant's credit lines are used by hundreds of millions of Chinese citizens to pay for groceries, restaurant checks, clothes and new iPhones from physical and online stores. More than half of Alipay's 900 million users in China have opened Huabei accounts, according to a former employee and estimates from two of Ant's shareholders. A company spokesman disputed the estimates, saying they are "far off from the actual number," and cited competitive reasons for not disclosing the figures.

Many Huabei users don't have traditional credit cards and some don't qualify for bank-issued credit cards. Only about a fifth of China's population, roughly 278 million people, held credit cards in 2017, according to World Bank data. There were 711 million credit cards in circulation as of June 2019, according to the People's Bank of China, in part because some individuals have multiple cards.

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Ant is controlled by Chinese billionaire Jack Ma and is the world's most valuable private technology startup. It has leveraged its giant user base--spanning about two-thirds of China's population--to cross-sell products and services. Besides facilitating payments, Ant sells mutual funds, makes short-term loans to individuals and small businesses, offers insurance-like products and has a proprietary credit-scoring system. In September, Chief Executive Eric Jing said eight out of every 10 Ant customers use at least three of its five service categories.

Nearly half of Huabei's users are under the age of 30, a group that is more free spending and comfortable with debt than older generations in China. Most don't have long credit histories and carry little cash around, preferring to use their mobile phones to make payments for everything from taxi fares to utility bills.

Ant doesn't disclose how much it has collectively lent consumers via Huabei, which is embedded within Alipay's app and functions as a revolving credit line that individuals can draw down repeatedly after repaying what they borrowed. Borrowers don't incur any interest unless they miss payment deadlines or sign up for installment plans.

The company has leaned on domestic banks and China's asset-backed securities market to help fund Huabei's lending. As of June this year, an Ant unit had issued more than 392 billion yuan ($55.7 billion) in bonds backed by Huabei loans, according to Wind, a data provider.

Most Huabei users borrow relatively small amounts of money, which has helped keep default rates low. The average outstanding balance on Huabei's credit lines was less than 1,000 yuan ($142.10) as of early December, according to a person familiar with the matter. Most users have credit limits below 6,000 yuan, according to a prospectus for one of Huabei's asset-backed securities.

To draw new users, from college students to retirees, and to encourage frequent use of its credit lines, Huabei has offered rebates and discounts on small-ticket purchases. At a wet market in Shanghai recently, some fresh-produce vendors were only accepting Huabei as a payment mechanism for Alipay users.

Huabei has also offered temporary credit-line boosts for purchases of big-ticket items or on big shopping days, such as Alibaba's Singles Day in November, which is similar to the annual Black Friday shopping event.

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In the U.S., banks and credit-card companies typically assess the creditworthiness of individuals--often by analyzing reports from national credit bureaus such as Experian and Equifax--before giving them credit cards or unsecured loans. But most Chinese consumers don't have credit scores that are based on their payment histories and outstanding borrowings across multiple lenders and debtors.

Ant and other Chinese online lenders have their own proprietary methods of assessing an individual borrower's risk. Huabei, in some cases, has lent very small amounts to new borrowers initially, then increased their credit limits after they repeatedly repaid borrowings on time.

Delinquency rates on Huabei's loans are largely in line with those of credit cards in China. As of June, 1.6% of Huabei's outstanding loans were more than 30 days past due, while 1.2% were more than 90 days overdue, according to a document for bond investors. That same month, about 1.17% of credit-card loans in China were more than 60 days past due, according to China's central bank.

Louise Zhou, 27, who sells imported wines on Alibaba's eBay-like marketplace Taobao, said she returned to China in September after living in France for eight years. After opening a new Alipay account, she said she was offered a 50 yuan ($7.10) credit line on Huabei via the Alipay app on her phone. In previous years, the initial amount first-time borrowers could get from Huabei was 500 yuan, according to users.

"Fifty yuan credit is so little that it's almost meaningless," said Ms. Zhou, who works in Changsha, a central Chinese city. Still, she has used the credit line to order takeout food and buy groceries. She usually repays what she has borrowed the next month ahead of the payment deadline.

Ms. Zhou has set Huabei as her default payment option, meaning purchases she makes are first made with credit before funds are debited from her Alipay account.

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