How to serve 60 million underbanked with AI: A China story

• LexinFintech's AI driven risk management engine “Hawkeye” can analyse and predict the repayment behaviour of borrowers and handle 98% of loan applications automatically while maintaining a charge-off rate of under 2%
• It is positioned as financial technology platform, which connects consumers with financial institutions and serves both sides
• To better serve its customers, LexinFintech has also gone beyond consumer finance by introducing consumption-focused services

China’s consumer finance industry has been soaring in the past few years, with innovative companies emerging and taking the lead in serving hundreds of millions of underserved consumers. LexinFintech is one of them.

LexinFintech is a leading fintech company in China. Founded in 2013, it is the country’s first instalment e-commerce platform and one of the largest listed fintech companies by market capitalisation. It strategically focuses on serving the credit needs of educated young adults aged between 18 and 36 by offering convenient and innovative loan products through its online consumer finance platform Fenqile.

As of the third quarter of 2019, it had more than 62 million registered users, representing an increase of 92.2% year-on-year, and over 16 million users with an approved credit line. It originated RMB 37 billion ($5.23 billion) in loans, representing a 170% increase from the third quarter of 2018.

With only 28% of Chinese consumers having credit ratings of any kind, companies like LexinFintech try to meet the unattended credits needs with the use of technology. It uses artificial intelligence (AI) to automate, streamline and simplify the lending process, making it possible to complete a credit application within just a few minutes - a process which can otherwise take weeks in the traditional financial system.

Its AI driven risk management engine “Hawkeye” can analyse and predict the repayment behaviour of borrowers and handle 98% of loan applications automatically while maintaining a charge-off rate of under 2%.

The company’s IT cost for processing a loan application is 10% of that of traditional financial institutions. Listed on Nasdaq, it has the most “Buy” ratings from investment banks, such as Goldman Sachs, Bank of America Merrill Lynch, Credit Suisse, China Renaissance, and Nomura, among all Chinese fintech companies listed in the US.

Connecting young consumers and financial institutions

LexinFintech CEO, Jay Wenjie Xiao, started the company about six years ago in 2013. He worked at the country’s tech giant, Tencent, at that time and was in charge of the online payment business. He found that there was a low completion rate for online transactions and payments because of a lack of adequate purchasing power.

“One of the important reasons I founded LexinFintech was to help more young people in China to consume and live better,” he said.

From the first day it was clearly positioned as a fintech company. Although it provides financial services to many consumer credit customers, Xiao does not see it as a financial institution.

He explained: “We are positioned as financial technology platform, which connects consumers with financial institutions and serves both sides.”

It cooperates with financial institutions in the area of consumer credit evaluation, and has made progress in leveraging technology and data to make the asset more transparent, quantifiable and easier to evaluate. The final decision-making process is conducted by the banks themselves. It works with over 100 domestic financial institutions on loans for individuals.

The e-commerce and online lending business have an important feature in common: transactions made at a high speed and in high frequency, which matters in delivering real-time transactions and user experience.

The technology structure of traditional banks does not typically adapt well to the high level of requirement for speed and frequency. The banks and LexinFintech interact deeply in terms of user experience, system architecture and design, post-loan client operation and management.

Standing out in a crowded fintech space

In China’s crowded fintech sector, Xiao sees three distinct aspects that make it stand out. The core difference of LexinFintech is its unique user base – the educated young adults. They have high income potential, high educational background, high consumption needs, and a strong desire to build their credit profile. In the future they will be the mainstream consumers.

“Another advantage is our consumption scenarios. We started with instalment loans for mobile phones. Today, our instalment e-commerce platform provides a wide range of products and services, from a lipstick, a pair of sneakers, to an online drawing course,” Xiao remarked.

The third advantage is the good performance of its assets because of which it is favoured by many financial institutions. Its 90 day+ delinquency ratio was 1.4% as of 30 September 2019.

The final advantage is their unique risk management technologies. The company’s risk management engine “Hawkeye”, which is able to generate a credit assessment of each customer within seconds, has reduced the headcount of LexinFintech’s loan review team by 40% while the number of loan applications on its platform has surged 70 times in the past few years.

Serving the underserved

China has some of the biggest ecommerce platforms in the world, such as Alibaba and JD, and LexinFintech actively compete with these giants. It has found a niche in the market by targeting educated young consumers who are not well served.

“ When the customers start their credit history with us, we want to grow with them by catering to their specific needs and providing higher credit lines and lower interest rates,” Xiao elaborated.

To better serve its customers, LexinFintech has also gone beyond consumer finance by introducing consumption-focused services.

In particular, it launched the Le Card in 2019, an integrated membership reward system to better manage and attract its customers. It puts together a package of privileges that Chinese young people like, such as online movies and shopping discounts.

LexinFintech’s unique view of the market is core to its customer engagement and management strategy and is why it has been successful.

“Finance is a unique industry which cannot be over centralised and each company has its own particular focus and market position,” said Xiao. “The niche market of the educated young adults is big enough. We’re not really worried about competition, now or in the future,” he concluded.