There are over 11 million formal SMEs in China and 58% of them are financially constraint according to the MSME Finance Gap 2017. The size of the finance gap is 17% of GDP. Digital and mobile banking opened new opportunities for affordable finance for China’s entrepreneurs by decreasing transaction cost of making a loan. According to the Global Findex Database 2017, 57% of bank account owners in China are using mobile phones or the internet to make purchases or pay bills, double the 2014 number.

In 2015, Ant financial launched a digital bank to serve SME clients called MYBank. On May 29, 2018 the Ant Financial delegation, led by Ms. Quan Yu, General Manager of Risk, and her colleagues in charge of risk policy, credit-product design and IT systems visited IFC. They gave a presentation on “What’s Behind Ant Financial’s 3-1-0 Digital Lending?” The 3-1-0 lending enables borrowers to complete their online loan applications in 3 minutes, obtain approval in 1 second with 0 human touch.

MYBank’s CNY 900 billion portfolio includes 6 million SMEs, which is roughly half of all SMEs in China. Thanks to the use of digital and mobile technologies, which decreased the cost and time of approving loans, MYBank managed to offer competitive interest rates of 6-16%. Brick-and-mortar banks still charge 20-40% and informal lenders can charge as high as 100%. MYBank’s approval rate is 60%, but Ms. Quan Yu said they are aiming to increase that number to 80%. The default rate of 1% speaks to clever and effective risk assessment methods. For example, MyBank uses network analysis of transactions to evaluate if an entrepreneur separates personal funds from business funds, which is one of the basic success defining accounting principles rarely followed by small business owners.

MyBank uses big data on repayments from Alipay, which has over 600 million users, and other financial services of Alibaba to assess monthly sales of small businesses and their repayment patterns. A specially developed QR app for small shop vendors sends the data on daily sales right into MYBank’s database, allowing vendors to be automatically pre-approved for the loan amount, which equals the vendor’s sales. MYBank’s loans are unsecured, since as Ms. Quan Yu pointed out SME owners rarely have more than a car to use as collateral. The profit rate of MYBank is still in single digits, but it is expected to grow proportionally to the growth of the SMEs it serves.

Recently MyBank ventured out to develop a partnership with an established traditional bank to better serve small farmers. The partner bank already had established relationship with farmers, which MyBank could access. In addition, the partner bank shared relevant information on spending habits of farmers and could flag clients who gamble to MYBank.

Ant Financial is a member of the SME Finance Forum, whose 130+ members share a common commitment to expanding access to finance so that small and medium enterprises can flourish and grow. Ant’s digital-lending system and MYBank have become a game-changer in financial inclusion in China. Their tested methods could be replicated in other markets. The SME Finance Forum’s mission is to help share that innovative model widely through the global network of financial institutions, fintech companies, and development finance institutions.

By Marie-Sarah Chataing and Khrystyna Kushnir of SME Finance Forum