FinTech HK : Janos Barberis
In 1988, Jack Ma would have been unbankable
Would the future Mr. or Mrs. Ma be unbankable today? The short answer is ‘yes’. Thankfully, FinTech is changing all of that.
When Jack Ma graduated in 1988, he was earning $20 dollars per month or less than $1 dollar a day. For banks, this meant that offering him a personal current account was unprofitable. They would then either not bank him or try to charge peripheral fees (e.g. overdrafts) or cross-sell other products (e.g. credit card, insurance, etc.) to make up for Ma’s “unbankability”.
Twenty six years later, Alibaba has managed to float on NASDAQ, raising $21.8B. It has officially become one of the most capitalized internet companies, surpassing eBay and Amazon and trailing Microsoft, Google, and Apple.
This has made Jack Ma by any standards one of Asia’s most bankable clients and China’s richest man. However, today he would expect to be banked in a digital way.
This classic rag to riches story has a particular echo in a country like China. Would the future Mr. or Mrs. Ma be unbankable today? The short answer is ‘yes’.
The challenges of banking in China
Compared to 97.5% of the UK that is formally banked, only 64% of the Chinese population is. This means that there are some 432M people that are non-banked, part of which is due to the fact they are not sufficiently profitable for traditional banks.
Another issue is that Chinese banks are not sufficiently rewarding for customers, pushing them to put their money in alternative non-bank deposits which yield a higher return. Because these alternatives operate outside of the formal sector, they are part of the growing area known as shadow banking.
How FinTech has made the lives of low-income individuals around the world better
Things may change as a result of FinTech’s impact on the financial lives of low-income populations. Indeed, FinTech has brought innovation that has not only decreased the operational cost of financial products such as basic current accounts and personal loans, it has also provided banks the ability to verify whether a customer is bankable, even if the customer was never banked before.
The second point is perhaps less obvious for someone living in the West who has been banked since an early age. However, it represents a common problem for a lot of individuals who, without a previous financial history, cannot access financial products without incurring a premium charge for their lack of traceability.
The issue here revolves around the fact that being formally banked doesn’t just bring immediate benefits, but also builds over time a profile of an individual, which we more commonly call a credit score. Again, here FinTech offers opportunities to capture non-financial data (e.g. social network activity, online shopping patterns, etc.) to create a digital identity of a person and access their credit worthiness. In other words, financial evaluation can increasingly be made with precision without using classic credit bureau data sources (e.g Experian).
Indeed, Alibaba has proved the ability to create financial products based on non-traditional data. Their SME loans, which are fully unsecured but leverage over 1,000 alternative data sets, eventually helped the company maintain a default rate that was much lower than 0.5 percent.
So here we have it: Tomorrow’s FinTech can provide the future “Mr. Ma” not only banking facilities, but also do so in a profitable way and cross-sell lending products without necessarily charging a risk premium due to lack of financial traceability.
For Mr. Ma, FinTech allows him to manage his wealth from the convenience of his smart phone, as well as cash in on his numerous ventures, some of which still have to IPO because they were segregated from the Alibaba group for regulatory reasons:
- Alipay — Payment processing handling over 1 million transaction per day
- Yue’Bao — Close substitute to current accounts that attracted more than $94B of deposits
- AliFinance — SME Loans with over 409,000 borrowers receiving between $3k to $5k.
What emerges from this story is a unique moment in time where FinTech is both the only economically viable way to bank the poor, and the most demand-led way to bank the affluent.
Mr. Ma’s example reflects how in less then 30 years, the use of technology in finance has meant that FinTech can service the poor and rich alike. This is great news because companies will start to look at innovative ways to focus on a market that has for too long been forgotten and represents 2.5 billion people without bank accounts, 1.2 billion of whom are in Asia.
Let’s finally remove the “un” in “unbankable” and Mr Ma if you are reading this lets help us to make it happen, let’s FinTech.
Founder of FinTechHK
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