A shopper goes to a shopping mall, ending up in a fashion boutique. She tries on some of the latest styles of the season. At the cashier, she discovers that the price of a dress she wants to buy exceeds her credit card limit. In no time at all, she types her name and the amount she wants to borrow into her cell phone, then texts the information to the lender. Seconds later, up pops a video call from a customer service representative, who asks a few questions. Within minutes, money is deposited in the customer's account. She then walks back to the cashier, settles the bill and walks out the shop with her purchase in hand and a smile on her face.

This may sound futuristic. But it isn't. Consumer loans should be as easy, accessible and convenient.

In the 1990s, Japanese financial companies like Orix were already providing ATM booths in department stores, specifically targeting the immediate need for cash by consumers on shopping sprees. Some Hong Kong financial firms have now set up concealed booths in business districts for customers to apply for a quick loan, completed within one hour through video conferencing. Borrowing has never been easier.

Different story

In China, it's a totally different story.

Unless you are loaded with properties, cars or tangible assets, applying for an unsecured loan is simply a horrendous task. Banks turn away from small- and medium-sized enterprises, micro-enterprises and individuals who don't have assets or a credit history. As a result, the only alternatives are to borrow through the personal loan market, which includes relatives and friends, or from syndicate lenders and loan sharks.

However, with the People's Bank of China's microfinance trial guidelines released five years ago, things have started to change. Microfinance is now one the latest booms to hit China's financial markets. New non-bank operators - like microcredit and guarantee companies, and more recently, consumer finance companies - have made their entry into this untamed territory, with a mission to cover the underserved lending market.

According to the McKinsey 2012 report on the China retail banking industry, the fastest growth areas in the 2010-20 decade are likely to be wealth management products and consumer finance. The projected compound annual growth rate of income in this decade: consumer finance, 16 percent; microenterprise loans, 25 percent; and wealth management, 15 percent.

Some banks have established separate entities to target different segments of clients. For example, from the US, we have Citigroup's CitiFinancial, and from the UK, HSBC's HSBC Financial. Hong Kong-based Dah Sing Bank has set up OK Finance, and Bank of East Asia has Credit Gain. Meanwhile, Standard Chartered Bank has acquired Prime Credit. All these subsidiaries provide flexibility in products, pricing and services that the parent banks don't offer.

In China, apart from a handful of banks that provide credit facilities for unsecured loans, most of the services now come from microcredit and guarantee companies.

The operators that stand out are the microcredit firms. Central bank data showed that by end September, there were more than 5,600 microcredit companies operating. They have shown 20 percent annual growth since 2006, with total outstanding loans of 533 billion yuan (US$84.6 billion), which represents nearly 1 percent of China's lending market.

Consumer finance

Most microcredit companies provide lending facilities to small- and medium-sized enterprises, with an average loan amount of half a million yuan. However, the business of consumer finance is also on the rise.

According to government sources, 90 percent of microcredit companies, with an average interest rate of 16 percent, are profitable. With capital of 100 million yuan, a firm may have only 20 clients, which is simple, and it is easy to explain why most microcredit firms manage on a small scale with limited staff and technology.

However, the landscape is changing. Instead of focusing on large-ticket loans, including short-term bridging loans that bear higher risks, consumer-loan products that help spread the risk over a large group of lenders over an extended period may become the kind of new products that can be offered by microcredit companies.

The microcredit companies have the advantages of flexibility and agility in terms of products and services. For example, application requirements are less strict than at banks. Microcredit companies allow borrowers to receive credit in as few as two or three days, compared with two or more weeks at banks.

For some microcredit firms that focus on consumer finance, with smaller size loans and larger volumes, the business requires a lot more sophistication in terms of the credit policy model and risk management. Instead of focusing only on client relationships, a more stringent framework is needed to lower unit costs, detect fraudulent loans, speed up approval cycles and cross sell. All of this allows a scalable operation that helps grow the business. This requires a long-term vision, investment, talent and technology.

Owing to the market prospective, more foreign investments have made some headway into the Middle Kingdom, setting up microfinance ventures or building their franchises.

To name but a few, UA Finance from Hong Kong has been in China's microfinance market since 2006, Home Credit from Europe first launched its consumer finance business in Guangzhou in 2007, and Singapore's Temasek Holdings debuted its microcredit business in Chongqing last year. Credit Gain has submitted its application to operate in Shenzhen. All of them bring product knowledge, best practices and technology.

Peer-to-peer (P2P) lending, another form of consumer finance, or microfinance, has also experienced exponential growth since 2006.

P2P occurs directly between individuals. There are more than 100 online operators that provide the matching platform for borrowers and investors. This industry is expanding with an annual 225 percent growth, with estimated outstanding loans of 18 billion yuan by the end of 2012. Many leading P2P lenders now operate in China, including CreditEase and PaiPai.

Further deregulated

The lending market for China will no doubt be further deregulated, with larger debt ratios that allow lower costs of funding for lending firms like microcredit companies. With a return on equity as low as 10 percent for some microcredit companies, it is clearly not sustainable.

In comparing with government incentives in the capital market which involves great tax breaks, it is only a sensible call for similar support and motivations for the microfinance trade. With the central bank's credit bureau gradually opening access to non-bank operators since last year, it also helps completing the credit information gap.

With the tremendous market force behind loan demand, continuous liberalization of the financial market and the government's effort to shift the economic focus to consumption growth, it is not hard to visualize the amplification of China's consumer finance market within the next decade.

This brings tremendous opportunity and investment to this arena. This is good news for consumers because new competition will drive the industry to provide better services. This huge market presents a wealth of opportunity, excitement and challenges. This is China's consumer finance market!


Gregory Au-Yeung is currently chief information officer at VantAsia Finance, a foreign-owned financial institution that specializes in consumer finance in China. He is part of the senior management committee in building and expanding VantAsia's retail footprint. Prior to joining VantAsia, Au-Yeung held senior positions at Morgan Stanley and State Street Bank in China and other Asian locations. Since 2009, he has been a visiting professor at Fudan University.