For China's blue-collar workers, this startup offers loans for iPhones
IMAGE: XIXINXING/CORBIS
for Tech in Asia
China is still a country where people prefer to pay up-front — often with wads of cash. Taking out a loan to buy a car is still uncommon and some people avoid a mortgage and pay for a housein cases full of cash.
But not everyone has so much cash at hand.
One Shanghai-based startup is hoping to bring China's blue-collar and service industry workers — people like construction workers, security guards, and store staff — around to the idea of taking out loans for some smaller purchases. Although the people who use the service are strapped for cash, this isn't the kind of US subprime mortgage lending that precipitated the 2008 financial crisis or that's causing the new bubble that's emerging in America in subprime car loans.
"I wouldn't describe my customers as subprime — they just have no [credit] data," says Paymaxfounder and CEO Hu Dan, who's a Stanford alumnus. The startup's users, mostly across rural areas of China, have not defaulted before — and usually this is their first loan.
Paymax focuses on people buying mobile phones and tablets, and it recently expanded to cover buyers of the Apple Watch as well. It might add in laptops. That's all it covers. Hu stresses that
someone who receives a loan is "not a borrower — they're a buyer of a mobile phone."
someone who receives a loan is "not a borrower — they're a buyer of a mobile phone." That allows the service to avoid people who are desperate for cash, as well as people in trouble with loan sharks.
And that's one of several ways that Hu's startup stands out from other online loan offerings in the country.
China's credit rating problem
The biggest challenge for the startup is that it's battling the issue of China's inadequate credit rating system. Hu reckons that the People's Bank of China (PBOC) only covers about 30% of the populace with its credit ratings — but the coverage is even more sparse when it comes to blue-collar and service workers, who are the demographic that Paymax is focusing on.
So Paymax effectively built its own ratings system. Hu explains that it uses "non-traditional data" like a person's mobile phone number and QQ account number in order to root out "credit card junkies" who are just looking for a new system to scam or who have applied for loans on the growing number of Chinese peer-to-peer loan sites.
One other method of checking on potential loan recipients is much more unorthodox — the company monitors the keystrokes of potential customers while using the Paymax website. That allows the startup to weed out people, he explains, who immediately jump to the largest loan amount, or who copy-paste in their address, which might suggest someone who's applying at multiple loan sites. While that sounds creepy, the startup team reckons that Chinese consumers (who are informed about how the site works) in search of this kind of small loan won't mind such an intrusion.
A typical loan for a Paymax customer is about US$300 for a specific mobile phone or tablet. The loan usually lasts about 12 months, but 24 months is also an option.
No to e-commerce
Another unusual thing about this loans startup is that it mostly works offline, eschewing e-commerce. Offline gadget retailers are "lagging behind in technology," Hu says. "They want to compete with online, so they need credit payment options."
To do this, Paymax teams up with small and medium-sized gadget retailers so that the staff will suggest Paymax as a payment option to shoppers in the store. This covers 3,000 individual stores in China at present. The sales person, once he or she has persuaded a buyer to pay in this way, uses the app to generate a QR code that the shopper scans. This starts the loan application process — and triggers a cash reward for the shop assistant in the form of a WeChat "red envelope" that contains a random amount of cash; it could be anywhere from US$1.60 to US$32 for a single sign-up.
At this point, Hu explains to Tech in Asia, it takes about five to seven minutes for the startup's cloud-based credit rating engine to whirr into life and crunch through all that unusual data it has just been fed. A staffer might even make a call to one or two of the applicant's contacts in order to confirm a few details. Factoring in some extra checks, a decision is made within 15 minutes and the loan amount is instantly wired to the shopper's bank card so it can be used to buy that gadget.
The startup makes money from a service fee as well as the flat-rate interest on the loan. "There's not enough data yet for variable rates," Hu says, but it's something they're working on so as to offer lower rates to safer loan applicants — and higher ones to riskier bets.
Paymax doesn't cooperate with China's top electronics retailers, such as Gome or Suning, partly because the startup doesn't cover purchases of home appliances, and partly, Hu concedes, because those major companies will probably get into loans in the future.
there's no room for startups in China's e-commerce industry
there's no room for startups in China's e-commerce industry, dominated as it is by sites like JD and Alibaba's Taobao and Tmall. Plus, those tech titans might soon get into the loans space, which would be no surprise as Alibaba, Baidu, and Tencent are already getting into finance and online banking. "They have lots of data already," Hu says — and he believes they'll first target white-collar workers with loans and then a few years later open up to blue-collar workers as well.
Until then, he sees China's 200 million young blue-collar and service industry workers with no credit cards as a potential user base that will stay the same size despite China's growing middle class.
Cashing in
China is seeing an explosion of online loan and micro-loan startups, but they're all very different to Paymax. P2P loan startups are now flooding the market, keen to give ordinary people a way to lend money to individuals and small businesses. Notable startups in the P2P space include Dianrong, Renrendai, and Xiaomi-backed Jimubox.
Closer rivals to Paymax are self-contained estores like 99fenqi and Qufenqi ("fen qi" means "installment" in Chinese), which are mixing online commerce with loans.
All those have secured significant VC funding — as has Paymax, which secured US$15 million series A led by Sequoia Capital last year, and which will soon announce series B from Sequoia along with some new investors.
Hu is a former VP of Sequoia Capital China. After four years in the role, he left last July to pursue an idea he had back at Stanford years before — one that morphed into Paymax and parent company Omni Prime. That idea was inspired by a class taught by Richard Fairbank, the co-founder of Capital One bank. "It was all about subprime and prime loans — and I thought it was very brilliant," says Hu.
He also felt the time was right — in terms of both consumer demand and the infrastructure being in place for a big data startup.
Aside from getting more stores to offer Paymax as an option, the team is looking at expanding into small cash loans. Based on a survey of current customers, the startup found that many were interested in microloans like US$200 for just a few weeks. "Like bridge loans to the monthly pay check," Hu says.
If they offer that service, it will only be to existing customers by creating a whitelist of good loan recipients.
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