FINANCE: Qufenqi Leads Rise In Online Debt Services
Bottom line: Products like Qufenqi.com that encourage buying on credit are leading a new wave of online financial products, but could lead to irresponsible borrowing and defaults without proper consumer education.
China’s recent financial services boom took a new twist last week, when a start-up e-commerce firm specializing in credit-based purchasing won big new funding and a lofty valuation to support its expansion. Kuaile Shidai’s rapid growth extends a wave of new financial products hitting the market, mostly backed by online companies that can quickly establish a national presence and aren’t subject to the same heavy restrictions as traditional firms.
But while most new firms so far have focused on investment services, Kuaile Shidai is attracting customers by selling goods like smartphones and cameras on credit, and then taking repayment in installments. Such a business model is quite common in the west, and lies at the foundation of the credit card system.
But such buying of everyday items on credit is much newer to China, where many people don’t even own credit cards and typically make most of their purchases with cash or debit cards. Past experience has shown that the rapid introduction of credit-based products often leads to huge pressures on consumers who spend beyond their means, resulting in so-called “credit crunches”.
To avoid a repeat of that phenomenon, which can lead to huge losses for lenders and damaging defaults by borrowers, China should embark on a campaign to educate consumers about the use of personal debt and how to manage it responsibly.
China’s roll out of privately-owned financial services dates back nearly a decade, with the launch of the earliest wave of electronic payment services led by industry giant Alipay, which has grown to rival state-run leader UnionPay. A second wave of new services began just 2 years ago, as China’s Internet reached a critical mass and the financial regulator indicated it would allow more participation in financial services by private companies.
Alibaba (NYSE: BABA) also led this second wave with Yu’ebao, a product that was similar to traditional savings accounts but offered higher interest rates because it wasn’t subject to the same tight restrictions as banks. That breakthrough product was followed by many similar new investment options, from more conservative choices like Yu’ebao to higher-risk products like peer-to-peer (P2P) lending services.
Now new signs are emerging that a third wave of new products could be coming based on credit lending. The latest signal came in reports of the rapid rise of Kuaile Shidai, which operates the Qufenqi.com website targeted at cash-poor students looking to buy smartphones, TVs and other consumer electronics often costing thousands of yuan.
According to the latest reports, Kuaile Shidai has just received its fourth round of venture financing that values it at $1 billion – an impressive amount for a company that just started doing business a year ago. (English article) The company hasn’t disclosed any revenue figures, but previously said its single-day sales broke the 10 million yuan ($1.6 million) mark last October, just a half year after its launch.
Credit-based products aren’t new to China, which also has a rapidly developing industry for traditional credit cards. The nation’s credit card debt stood at about $300 billion last year, up 62 percent from just a year earlier. But the figure is still relatively small compared to developed markets like the US, where credit card debt was nearly 3 times higher at $880 billion last year, translating to more than $7,000 per household.
The rise of sophisticated financial services has fueled the rapid spread of credit buying in many Asian economies where taking on debt was once frowned upon. But the rapid popularization of such products also brought growing pains, as both Taiwan and South Korea discovered in the 1990s and early 2000s when their credit card use exploded. At that time, many consumers took on large debt burdens that they couldn’t handle, placing huge stress on their finances and often ending in defaults.
The rise of sites like Qufenqi is particularly worrisome because it targets cash-poor students who have little experience handling personal finances and could easily end up taking on more debt than they can afford. While regulation is important to avoiding such an outcome, an even more critical step is simple consumer education that can come from more experienced parents at home, and also from public campaigns and strong disclosure.
Creation of a solid public education strategy is particularly important right now, as many consumers may increasingly turn to new and easy credit sources for their purchases due to stagnating wages and employment as China’s economic growth slows.
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