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Online lenders may beat banks at their own game

By Lu Zhengwei (Global Times)

08:25, February 28, 2013

Alibaba Group announced in a recent internal e-mail that it plans to soon spin its lending operations off its online payment subsidiary, Alipay, a move that some say underscores the e-commerce juggernaut's determination to dive into the domestic credit industry, an area which has long been the exclusive stomping grounds of the country's major commercial lenders.

Since first testing the waters of China's lending market in 2010, Alipay has become a vital source of funding for many small- and medium-sized enterprises (SMEs). So far, this venture seems to also be paying off for the company - which can leverage the mountain of trade and financial data it gleans from Alipay members and vendors using its parent's online sales platform to assess credit risk and set interest rates - and its success is shaping up to leave a major impression on China's financial sector.

Indeed, through the first half of 2012, Alipay extended over 13 billion yuan ($2.09 billion) in credit to small businesses and was making an average of 10,000 loans per day, making it much more efficient than many banks.

As mentioned above, this has widened access to borrowing for countless smaller companies, since banks in the country are typically unwilling to lend to any but the largest enterprises. Much of this reluctance to lend can be traced back to the banking sector's lack of a well-established national credit system, which Alipay has overcome with its parent's extensive data pool.

At the same time though, Alipay's success in the loan industry has been helped by the fact that it isn't a bank and thus isn't subject to the same restrictions and regulations that apply to traditional commercial lending operations.

For instance, Alipay isn't compelled to keep a certain amount of capital in reserve to cover its bad loan risks, while such restrictions have long forced traditional lenders to scale back on the loans they extend.

Of course, other factors have also contributed to the putative success of Alipay's lending business as well - including, for example, its partnership with over 100 financial institutions worldwide, such as Visa and Mastercard; as well as its experience creating convenient and user-friendly environments for borrowers.

While Alibaba-affiliated outfits are likely to continue as leaders in the online lending industry for the foreseeable future, that doesn't mean that there isn't room for competition.

As banks keep a tight grip on their loans, there is still a huge unmet need for credit in the market.

The demand is becoming even more acute as businesses look for cash to expand as macro economic conditions both at home and abroad show signs of improving.

Now is the time for tech firms in China to consider what they can do to leverage their strengths and their experience to keep SMEs topped off with the cash they need to grow.

The author is Lu Zhengwei, chief economist from Industrial Bank. [email protected]

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