Question

In 2015, Ant Financial’s MYBank (an offshoot of Jack Ma’s Alibaba company) was looking to extend services to rural areas I China by providing small loans to farmers. Microloans have always been costly for financial institutions to offer to the unbanked (though important in development) but MYbank believed that innovations such as using the internet to communicate with loan applicants and judge their credit worthiness would make the program sustainable. Can MYbank operate the program? Would its big data and technical analysis provide an accurate measure of credit risk for loans to small customers? Could Mybank rely on its new credit scoring system and China’s Social Credit system to reduce operating costs to make the program sustainable?

Answer 1

In March 2014, Ant Financial received regulatory approval to create an online bank, MYbank. MYbank was among the first of five privately owned banks to be granted approval by the China Banking Regulatory Commission. MYbank was initially authorized to make loans, but not to accept deposits. Besides looking at models of private ownership, the regulators were evaluating the implications of online banking services. While cautious, the China Banking Regulatory Commission welcomed new banking models that could increase available capital for private entrepreneurs and encourage economic growth in a way that the state-owned banks were not set up to provide. Regulators were also eager to see if private banks could support economic growth in rural regions far from main cities.

There was much riding on the success of the Flourishing Farmers loan program. An effective program could convince regulators to allow online banking for all banking services. Better access to credit could not only reduce the cost of loans for individuals and small businesses but also expand the potential market for financial and internet services.

Bank officials had designed the Flourishing Farmer Loan program to use the internet to communicate with loan applicants in rural areas and judge their credit-worthiness. To make the program sustainable, MYbank faced a number of challenges. Could MYbank's big data and algorithmic approach identify good credit risks for small loans without incurring the expense of multiple loan officers and bricks and mortar branches?