Shanghai equates innovation with progress in its campaign to build itself into an international financial center. So every year, the city bestows awards honoring innovation to financial institutions it deems demonstrate the spirit of reform and transformation.

The awards showcase firms that are committed to improving the financial environment and enhancing the competitive edge of the burgeoning financial hub.

Shanghai Daily sat down with executives from some of the most recent winners to explore how their strategies benefit their firms and the city.

Winner No.1: Jiading Jishiyu Micro-credit Co

Helping small businesses thrive

Jiading Jishiyu Micro-Credit Co won third prize from the Shanghai government for devising a system to become the personal accountant for sole proprietors taking out loans.

“Most of our customers run businesses of their own,” company Chairman Song Mei told Shanghai Daily. “They may be owners of tea shops, fishmongers or butchers. They like to keep money in their drawers, not cash registers. The bank notes normally were greasy and crumpled. Our onsite inspectors now count the money and create records for them.”

The company was founded in March last year by a group of alumni from the China Europe International Business School, one of the leading MBA schools in Shanghai.

“We tuned ourselves to our customers,” Song said. “Not many people want to do that for small borrowers. It’s very time-consuming and risky, especially when you don’t have the right information.”

Song and her university associates operate what is known as “grassroots finance.” Small loans from commercial banks typically start at 20 million yuan (US$3.3 million). Jishiyu clients last year borrowed, on average, 15,000 yuan.

“We are serving the real grassroots here,” she said. “We get to know our customers personally. Sometimes they are late with payments because they have an awful lot of things to do running a solo business. So our system has automatic text messages reminding borrowers of payment dates three days in advance. That has cut the incidence of late payments.”

The Shanghai financial innovation award cited Jishiyu for its efforts in assisting cash-strapped small businesses and in advancing information management systems.

Song said the tolerance for bad loans among small credit companies is around 10 percent. However, Jishiyu has slashed that ratio to under 3 percent.

“We take that 3 percent as our operational cost, not risk,” she said. “Anything beyond that level is considered risk to us.”

The biggest challenge Song and her peers is the lack of access to the credit rating system run by the People’s Bank of China, which provides financial institutions with personal credit history.

The system was opened to all commercial banks in 2005 but has yet to be extended to firms doing small business or personal loans.

Song said the central bank began a trial project last year, which reviewed the business records of 10 selected small loan companies, including hers. She is hoping that is a sign that access to credit histories will soon be expanded, cutting down the time it now takes to process a loan application.

Nonetheless, Jishiyu has been successful.

It plans to double its capital to 200 million yuan this year and has secured a 50 million yuan loan from the Shanghai Branch of China Development Bank.

Winner No.2: China UnionPay Merchant Services

‘Everyone pays’ in an eye-blink

Shanghai-based China UnionPay Merchant Services (UMS), the biggest operator of its kind for bank card transactions in the country, won an innovation prize for its one-stop platform that makes bill payments easier for consumers.

UMS is a subsidiary of UnionPay, Chinese mainland’s only interbank network operator.

The platform — called Quan Min Fu, which means “everyone pays” — allows consumers to pay utility bills, credit card debts, mobile phone top-ups and online purchases with no extra charge.

There are similar service providers in the market, such as Alibaba Group’s Alipay platform. However UMS has extended the system’s access point beyond computers and cellphones to offline channels. It has more than one million terminals across the country, including point-of-sale machines, automatic teller machines and Quan Min Fu self-service machines. It offers the one-stop service to consumers who don’t have Internet access, such as the elderly and people live in remote regions. The platform handled 13 million transactions a month last year, totaling more than 30 billion yuan (US$4.9 billion).

Zhu Guang, senior manager of product innovation department at UMS, told Shanghai Daily that the company is working on other innovative products and is hoping to win more innovation prizes in the future.

UMS recently partnered with China CITIC Bank to provide unsecured loans to its 2.7 million merchant customers. Loan underwriting is based on a merchant’s daily point-of-sale transactions.

Loan approvals are done in the blink of an eye. The merchant normally receives the money on the same day the loan application is filed. A loan of up to 500,000 yuan is available.

UMS said it has extended 2.3 billion yuan to over 3,600 merchant in the past three months — growth it describes as “swift.”

Winner No.3: Standard Chartered Bank

Pioneering expanded use of the yuan globally

China views foreign banks as important players in transforming the yuan into an international currency. The Shanghai government honored Standard Chartered for its efforts in boosting use of the yuan among multinational companies.

The British lender was the only foreign bank so honored. It received second prize last year for launching a cross-border lending structure for the yuan to encourage more companies to use the Chinese currency in trade settlement.

“We know that liquidity is the lifeblood of every business,” said Loh Long Hsiang, general manager of the bank’s Shanghai branch.

“So we have designed flexible repayment schedules for yuan-denominated cross-border loans, giving our clients greater flexibility in capital deployment from a global perspective,” Loh said.

Loh said the bank plans more new products along the same line, such as multi-currency notional pooling and regional yuan pooling facilities.

Notional pooling is a treasury management tool used by multinationals to concentrate virtual cash balances from subsidiaries to reflect an aggregate account balance but avoid physical inter-company money transfers and loans.A number of foreign banks on China’s mainland started to provide cross-border lending in yuan after the People’s Bank of China last year expanded pilot projects for cross-border yuan transactions in trade and investment.

Standard Chartered was the first foreign bank on the mainland to assist a multinational company in cross-border yuan lending. In late 2012, it obtained a loan quota of 3.3 billion yuan (US$541 million) from the central bank for an American company, allowing the client’s headquarters in China to lend surplus yuan to overseas branches.

Since then, Standard Chartered China has supported 19 companies in yuan cross-border lending totaling 39 billion yuan.

The service was extended after the central bank announced in late February that cross-border cash pooling in yuan would no longer be limited by quotas or administrative approvals. It was a bid to help businesses in the Shanghai pilot free trade zone to improve their capital management.

Following the latest relaxation of the rules, Standard Chartered set up a yuan-denominated, two-way sweeping transaction for Baoxin Auto Group, the biggest BMW dealer on China’s mainland, to assist the Hong Kong-listed company’s cross-border fund transfers and trade settlement.

Other foreign banks have also embraced the new measures and launched similar sweeping services for clients.

HSBC China said it has launched a centralized yuan cross-border transaction management solution for Saint-Gobain’s subsidiary in the Shanghai free trade zone. Saint-Gobain is a Paris-based designer and manufacturer of building materials.

Citi China announced the launch of a yuan cross-border pool for the European pharmaceutical giant Roche in the pilot zone.

Winner No.4: China Pacific Insurance

Insurer pares risk of defects in buildings

China Pacific Insurance Group took top honors in the financial innovation awards, cited as a pioneer in providing coverage for damage resulting from physical defects in buildings.

The Shanghai-based insurer is the city’s second-biggest property insurer and the third-biggest life insurer on China’s mainland.

Shao Jian, vice general manager at the firm’s Shanghai branch, said China Pacific was the first to offer what is called “inherent defects” insurance in the mainland. The new policy is still in a trial run and available only in Shanghai.

The policy protects owners from property damage caused by defective design, materials or workmanship. It also reduces the risk for developers who carry legal responsibility for buildings up to 10 years after their completion.

Shao said she and her colleagues were motivated by several high-profile incidents in Shanghai.

In 2010, fire destroyed a 28-story apartment building in downtown Jingan District, killing at least 58 people and injuring over 70. The cause of the fire was traced to unlicensed welders whose sparking ignited scaffolding erected for repair work.

Six months earlier, a new 13-story apartment building in suburban Minhang District collapsed because of shoddy construction. No one was injured because the building hadn’t been opened yet to residents.

Third-party supervisor

“Under our policy, the insurer becomes a third-party supervisor that manages the risks along with the developer during the entire construction process,” Shao said.

That gives the insurer the right to advise the builder to halt the construction process if inspections reveal defects. The policy also offers lower costs for property developers.

In Shanghai, developers are required to set aside 3 percent of the total construction cost with the local housing authority for 10 years to cover any future repairs.

The developer is required to replenish the reserves after payouts during that period.

Under the China Pacific policy, they need to set aside only 1.5 percent to 1.7 percent of the construction cost, according to Shao.

“The policy is still on a three-year trial,” she said. “We need more data from damage claims to improve the product. Our underwriters are taking a prudent stance on this policy, which covers the buyers for 10 years.”

Premium income from the trial policy has reached 23 million yuan (US$3.8 million) so far, and Shao said the company sees even bigger potential, given that Shanghai builds 2,000 hectares of commercial and residential buildings each year.

Risk is mitigated by having the new policy co-insured by four companies. China Pacific assumes 47 percent of the premium as well as the claims.