Photographer: STR/AFP/Getty Images

China’s Murky World Where E-Commerce Meets Student Lending

  • Borrowing to buy phones is leading to high personal debt
  • Applicants don’t need credit history or parental approval

Across college campuses in China, a small army of marketers is recruiting students to borrow money at interest rates many times that charged by the nation’s banks.

Those without a credit history or parental approval can borrow money to buy a smartphone, pay for holidays, or get the latest sneakers through a raft of apps such as Fenqile. The market leader, whose name literally means Happy Installment Payments, has 50,000 part-time marketers across more than 3,000 universities and proudly touts the slogan “Wait no more; love what I love.”

Welcome to the regulatory gray area where peer-to-peer lending meets e-commerce in China.

In the last three years, tens of millions of students have taken out micro-loans with the tap of a button to buy things. Once just the realm of startups, the sector has attracted heavy hitters in China’s online industry, including Alibaba Group Holding Ltd.’s finance affiliate and Inc., which are pouring hundreds of millions of dollars into the lending model. In a nation with 37 million college students, the market is expected to reach $15 billion, according to the Beijing-based market research firm Analysys.

QuickTake Peer-to-Peer Lending

While traditional banks, the biggest of which are state-owned, have long been regulated, such peer-to-peer lenders have not, though Fenqile at least says it welcomes more oversight.

Repackaged Loans

The apps sell everything from cameras to concert tickets sourced from third-parties, charging students annualized interest rates typically above 10 percent. The loans are then packaged and sold to wealthy individuals, who find the expected return of as much as 10 percent much more attractive than the central bank’s benchmark savings rate of 1.75 percent.

“The so-called innovative financial products spring up one after another, so it’s hard for regulators to discern what’s innovation and what’s rule-breaking behavior,” said He Zhisong, a Shanghai-based partner at Zhong Lun Law Firm who specializes in internet finance. “Everyone is crossing the river by feeling the stones.”

That includes students with little-to-no experience with credit, like 22-year-old Chon Chen.

Other Apps

Unable to afford the $450 smartphone he had been eyeing, the college sophomore from the southern province of Fujian turned to Fenqile, which allowed him to pay $42 per month for a year at an annualized interest rate of 12 percent. By the end of his junior year, he was also borrowing from six other similar apps and accumulated debt of more than $7,500, the equivalent of 10 years of tuition.

“That I have debts to pay off before I even start my first job is such a scary thing," said Chen, adding that he hadn’t told his parents about his financial situation. "I deeply regret spending so recklessly. The lending platforms captured my vanity and impulsive-buying habits."

While many online lenders say they are operating legally under the peer-to-peer framework set out by the China Banking Regulatory Commission, the oversight still falls short of that imposed on banks. In April, after state media reported suicides linked to excessive online borrowing, China’s Ministry of Education issued a joint statement with the banking regulator, calling for closer scrutiny of some lending apps’ advertising campaigns and credit evaluation process.

Tougher Rules

Last week, the banking regulator issued what state media called the country’s "toughest P2P regulations yet," and in a separate interview with state media, director of the regulator’s Inclusive Finance Department Li Junfeng highlighted the student lending market as an area of concern although that segment was not specifically mentioned in the new rules.

"If unregulated, online student lending will misguide college students’ consumption habits," he said.

Another official, Xu Xiaozheng, director of the CBRC inclusive finance department’s online lending division, elaborated at a media conference that the new regulations are general guidelines that don’t mention specific issues but apply to student-lending apps.

‘Tempting Students’

"A lot of online student lending is excessive promotions and false advertising, tempting students to spend excessively. We specifically forbid excessive advertising in the new regulations," he said, without elaborating on what conditions were considered excessive.

Xiao Wenjie, chief executive officer of Fenqile, said in an interview that the industry was not regulated in the past two years, leading to "disorder" that caused officials to impose recent regulations.

"We very much welcome more regulation, as it is good for everyone in the long run," Xiao said.

The ministry and the banking regulator didn’t respond to requests for comment.

Consumer Demand

Fenqile, founded in 2013 by Xiao, a former executive at Tencent Holdings Ltd., says it has a 60 percent market share. It counts and Yuri Milner’s Digital Sky Technologies among backers who have invested tens of millions of dollars each. Fenqile raised another $235 million from investors in June.

Qudian, a Beijing-based competitor founded in 2014, raised $452 million this July, with Alibaba’s affiliate Ant Financial leading a previous round of $200 million for the company.

Representatives from and Ant Financial declined to comment.

While American P2P lending companies such as SoFi focus on refinancing student loans, their Chinese counterparts capitalize on the consumerism of the country’s young adults. That includes taking their pitch straight to students through part-time marketers and advertising, including posters in campus bathrooms.

Campus Marketing

The student-targeted marketing has proven highly effective. Fenqile had $1.6 billion in loan volume in the first half of 2016 and projects $4.5 billion for the year, while Qudian crossed the 10 million-user threshold in June, according to the companies.

Lending to students sprung up after authorities tightened rules on credit card use in 2009, such as requiring co-signers for student accounts that had been promoted by banks.

Now apps like Fenqile are filling the gap, connecting investors hungry for returns with students who are eager to spend without asking their parents to co-sign for their debts. Fenqile verifies an applicant’s identity in person and gets a phone number of a family member or friend before a three-way contract is signed between the student, the platform, and the lender.

In Chen’s case, he said the seven apps that lent him money never contacted his parents.

Big Data

So far that hasn’t resulted in deteriorating credit for the lenders, according to the companies. Fenqile’s bad-loan ratio was 0.67 percent as of July, Xiao said. The comparable figure at China’s commercial banks was 1.81 percent in the second quarter, according to China’s banking authority. The lending apps, however, aren’t required to report bad loans to regulators.

“We use big data to manage credit risk because we have all of our users’ purchase history and location data,” Xiao said.

Fenqile’s practice of not requiring parental co-signers may have to change. Li, the director of the banking regulator’s Inclusive Finance Department, told state media that online lending platforms should "strictly" vet college students’ credit worthiness and require a guardian to co-sign.

"If the platforms want to continue lending to students, they must have parents as co-signers," Li said. Fenqile said it is studying the regulations and couldn’t comment.

As online student lending grows past its infant stage, major players say they will work more closely with traditional financial institutions.

Aixuedai, a lending app founded in 2014 by former Alibaba employees, raised $45 million in December from a fund jointly established by Bank of China and the state-owned Zhejiang Railway Investment Group. Fenqile has started selling securitized student loans to Chinese banks and other investors and will gradually link all of its user profiles to the central bank’s credit system as it seeks to serve the hundreds of millions of people who don’t have credit cards, Xiao said.

William Zhao, senior investment manager at Beijing-based Bertelsmann Asia Investment Fund, which has invested in Fenqile, said the apps were aligned with the government’s campaign to increase domestic consumption.

"The parents’ generation in China is relatively conservative," he said. "Stimulating their children to spend is much more efficient."

— With assistance by Yiqin Fu

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