Source Code: Your daily look at what matters in tech.

chinachinaauthorZeyi YangNoneDavid Wertime and our data-obsessed China team analyze China tech for you. Every Wednesday, with alerts on key stories and research.9338dd5bb5
×

Get access to Protocol

Your information will be used in accordance with our Privacy Policy

I’m already a subscriber
Protocol | China

Chinese microlending is getting weird and dangerous

Every app now wants to lend you money. It's driving some users into debt and foreshadows a broader crackdown.

Chinese microlending is getting weird and dangerous

Close-up of Mao Zedong's portrait on 5 Yuan RMB,10 Yuan RMB,100 Yuan RMB (China Currency).

Image: hudiemm/Getty Images

Xu Hai got the promotional ad in a text message just when he was desperate for cash. It was summer 2020, and the 37-year-old Foxconn worker from the inland Chinese province of Hunan had been unemployed for months. Xu was no stranger to microloans: he had been taking them out since 2018, first from a few national banks and then from fintech platforms like Alipay and WeChat. The pandemic had made his financial situation even worse. He needed to borrow more.

The text urged Xu to borrow directly from Meituan, a tech company that has developed from a Yelp-like app to a mammoth corporation offering food delivery, bike-sharing, ride-hauling and more.

Xu accepted the offer because he needed to pay back the other loans he'd taken on. And Meituan was not the only place he turned. Now, Xu owes money to eight microlenders, five of which are household names in Chinese tech: Alipay, WeChat, Meituan, 360 and Xiaomi. These days, seemingly every Chinese app, whatever its original purpose, also pushes to lend users money. "Weibo tells me it can lend me money; the delivery app tells me it can lend me money; and now even the photo editing app tells me it can lend me money," wrote one Weibo user last month. "I have 32 apps on my phone. Probably 30 of them have turned into microlending apps."

Xu is now unable to climb out of debt and is battling depression.

Over the past year, non-fintech-turned-fintech apps have come under intense scrutiny by the Chinese public and the state. There's a growing concern they have tricked young people into overspending and pushed the overall amount of consumer debt to a dangerous level. The Chinese government proposed new rules in November to ramp up regulation over online microloans. Even though the rules are not official yet, their forecasted effects have already caused the suspension of Ant Group's blockbuster IPO. When they become official, they're almost certain to put a brake on tech companies' lending binge.

"China is the first large country where technology companies have turned into large financial intermediaries," Sampath Sharma Nariyanuri, a fintech analyst at S&P Global Market Intelligence, told Protocol.

A brief history of microlending

China's major tech players have been operating microlending services for years; it's one direct way to monetize a massive user base. For payment apps like Alipay and WeChat, it's a natural fit. In late 2014, Alibaba affiliate Alipay released Huabei, an online credit card-like service that allowed users to buy items on Alibaba's ecommerce platforms using credit. Ten months later, the company released another service, Jiebei, which offered unsecured microloans that could be used anywhere. The two products became popular almost instantly.

But it's gotten bewildering as other apps, many totally unrelated to fintech, have joined the game. Of the 20 most commonly used apps in China — ranging from photo editing to file sharing, from maps to streaming platforms — all have some kind of in-app loan services, according to Chinese tech site iFanr.

The growth of Chinese fintech platforms really turbocharged around 2015, said David Yin, vice president and senior analyst at Moody's financial institutions group. "Financial innovation was encouraged at that time, with very loose regulatory requirements," he told Protocol.

Things quickly got weird as a jumble of tech companies that didn't work in finance joined the party. Tencent and Baidu launched their microlending service in 2015; JD, the ecommerce platform, in 2016. In the years since, hardware manufacturers like Xiaomi and (non-fintech) software companies like Weibo, Meituan and ByteDance all rolled out their own microlending products. They had good commercial reasons for doing so: Offering microloans can attract new users, create a new stream of revenue and reduce fees to credit card issuers for transactions on the platform.

But it was the lack of traditional banking services that made it possible in the first place.

"The low penetration of traditional banking services provided an opportunity for the tech companies to step up and meet customers' credit needs," Sharma Nariyanuri said. For the generation that grew up with smartphones, going to an online credit service like Jiebei is more natural than applying for a credit card.

Caveat emptor

It's now easier to count the major tech players that don't offer microloans than to count those that do.

With so many options on the market, they have to compete for attention, with predictably annoying and dangerous effects.

Weibo users complain the app is constantly promoting its microlending service through mobile ads with only a tiny tag signifying they're advertisements. "Even if you are in urgent need of money, you shouldn't go to illegal lenders! Come to Sina's official lending services," reads one of the posts. That ad also boasts that the maximum loan is about $30,000, with daily interest rates as low as 0.03% — that sounds low, but isn't when compounded over the course of months or years. Many lenders, including Weibo and Meituan, have been accused of false advertising: Users complain they were tricked into starting a service with no knowledge of processing fees. After all fees, the real annual interest rate is often around or even higher than 36%, the maximum rate allowed by Chinese law. There are countless complaints on social media about debtors being bombarded with calls, texts and WeChat messages, some even sent to their colleagues and friends, pressing them to pay loans back.

Financial regulators have been slow to address these issues, partly because the Chinese state was previously preoccupied with systemic risk from (unregulated) peer-to-peer lending services.

But now microlending from big tech has their full attention. During a December press conference, the China Banking and Insurance Regulatory Commission laid out the risks posed by fintech platforms. "There exist problems like unsound corporate management, profiteering off data monopoly, encouraging over-borrowing and overleveraging," a spokesperson said. The regulator also said it would conduct more inspections of individual platforms.

It is not clear when new rules aimed at cutting microlending down to size will take effect, or how tech companies will respond. There could be workarounds, particularly for companies that can obtain licenses to operate "consumer finance" businesses, an area the new rules don't touch.

But it's clear the era of loose fintech regulations is over. Online lending "will be subject to a similar regulatory framework as that for traditional financial institutions," Yin said. When that day comes, some beloved Chinese apps may have to turn their attention away from pushing loans, and go back to whatever they do best.

Protocol | Workplace

The Activision Blizzard lawsuit has opened the floodgates

An employee walkout, a tumbling stock price and damning new reports of misconduct.

Activision Blizzard is being sued for widespread sexism, harassment and discrimination.

Photo: Bloomberg/Getty Images

Activision Blizzard is in crisis mode. The World of Warcraft publisher was the subject of a shocking lawsuit filed by California's Department of Fair Employment and Housing last week over claims of widespread sexism, harassment and discrimination against female employees. The resulting fallout has only intensified by the day, culminating in a 500-person walkout at the headquarters of Blizzard Entertainment in Irvine on Wednesday.

The company's stock price has tumbled nearly 10% this week, and CEO Bobby Kotick acknowledged in a message to employees Tuesday that Activision Blizzard's initial response was "tone deaf." Meanwhile, there has been a continuous stream of new reports unearthing horrendous misconduct as more and more former and current employees speak out about the working conditions and alleged rampant misogyny at one of the video game industry's largest and most powerful employers.

Keep Reading Show less
Nick Statt
Nick Statt is Protocol's video game reporter. Prior to joining Protocol, he was news editor at The Verge covering the gaming industry, mobile apps and antitrust out of San Francisco, in addition to managing coverage of Silicon Valley tech giants and startups. He now resides in Rochester, New York, home of the garbage plate and, completely coincidentally, the World Video Game Hall of Fame. He can be reached at nstatt@protocol.com.

Over the last year, financial institutions have experienced unprecedented demand from their customers for exposure to cryptocurrency, and we've seen an inflow of institutional dollars driving bitcoin and other cryptocurrencies to record prices. Some banks have already launched cryptocurrency programs, but many more are evaluating the market.

That's why we've created the Crypto Maturity Model: an iterative roadmap for cryptocurrency product rollout, enabling financial institutions to evaluate market opportunities while addressing compliance requirements.

Keep Reading Show less
Caitlin Barnett, Chainanalysis
Caitlin’s legal and compliance experience encompasses both cryptocurrency and traditional finance. As Director of Regulation and Compliance at Chainalysis, she helps leading financial institutions strategize and build compliance programs in order to adopt cryptocurrencies and offer new products to their customers. In addition, Caitlin helps facilitate dialogue with regulators and the industry on key policy issues within the cryptocurrency industry.
Protocol | Workplace

Founder sues the company that acquired her startup

Knoq founder Kendall Hope Tucker is suing the company that acquired her startup for discrimination, retaliation and fraud.

Kendall Hope Tucker, founder of Knoq, is suing Ad Practitioners, which acquired her company last year.

Photo: Kendall Hope Tucker

Kendall Hope Tucker felt excited when she sold her startup last December. Tucker, the founder of Knoq, was sad to "give up control of a company [she] had poured five years of [her] heart, soul and energy into building," she told Protocol, but ultimately felt hopeful that selling it to digital media company Ad Practitioners was the best financial outcome for her, her team and her investors. Now, seven months later, Tucker is suing Ad Practitioners alleging discrimination, retaliation and fraud.

Knoq found success selling its door-to-door sales and analytics services to companies such as Google Fiber, Inspire Energy, Fluent Home and others. Knoq representatives would walk around neighborhoods, knocking on doors to market its customers' products and services. The pandemic, however, threw a wrench in its business. Prior to the acquisition, Knoq says it raised $6.5 million from Initialized Capital, Haystack.vc, Techstars and others.

Keep Reading Show less
Megan Rose Dickey
Megan Rose Dickey is a senior reporter at Protocol covering labor and diversity in tech. Prior to joining Protocol, she was a senior reporter at TechCrunch and a reporter at Business Insider.
dei
Protocol | Workplace

What’s the purpose of a chief purpose officer?

Cisco's EVP and chief people, policy & purpose officer shares how the company is creating a more conscious and hybrid work culture.

Like many large organizations, the leaders at Cisco spent much of the past year working to ensure their employees had an inclusive and flexible workplace while everyone worked from home during the pandemic. In doing so, they brought a new role into the mix. In March 2021 Francine Katsoudas transitioned from EVP and chief people officer to chief people, policy & purpose Officer.

For many, the role of a purpose officer is new. Purpose officers hold their companies accountable to their mission and the people who work for them. In a conversation with Protocol, Katsoudas shared how she is thinking about the expanded role and the future of hybrid work at Cisco.

Keep Reading Show less
Amber Burton

Amber Burton (@amberbburton) is a reporter at Protocol. Previously, she covered personal finance and diversity in business at The Wall Street Journal. She earned an M.S. in Strategic Communications from Columbia University and B.A. in English and Journalism from Wake Forest University. She lives in North Carolina.

Protocol | Fintech

The digital dollar is coming. The payments industry is worried.

Jodie Kelley heads the Electronic Transactions Association. The trade group's members, who process $7 trillion a year in payments, want a say in the digital currency.

Jodie Kelley is CEO of the Electronic Transactions Association.

Photo: Electronic Transactions Association

The Electronic Transactions Association launched in 1990 just as new technologies, led by the World Wide Web, began upending the world of commerce and finance.

The disruption hasn't stopped.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Signal at (510)731-8429.

Latest Stories