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Technology Innovation Makes Microfinance Scalable in China


[Editor’s note: This is a guest post from GUO Zhenzhou, Founder & CEO of Quark Finance. Quark Finance is a Bronze Sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. At LendIt, GUO Zhenzhou will be speaking on the panel: Establishing Investor Trust and Confidence in Chinese P2P.]

Recalling the global economic situations in the past few decades, we can easily realize that the growth is largely driven by financial services development (other than technology development of course). Especially since the 1970s, currency capacity has been expanding rapidly, changing the worldwide trading structure and economic pattern.

With the currency increasing issuance, the overall global assets are growing, too, which requires more advanced technical means from asset management organizations and financing institutions to effectively manage those.

Swelling Global Risks

From the risk management perspective, the scale expansion has caused a growing risk in the system. The global capital market shows an increasingly volatility. With the economy moving forward, the systemic risk is on the rise as well. All economic crises in recent years have confirmed this, such as the Subprime Lending Crisis in 2008, Asian Financial Storms in 1997, and so on.

As the scale of global financial assets grows, large or small periodic crises have come along, each of them resulting in losses for investors. During the “subprime lending crisis” in 2008, American families suffered, in general, from declining household assets, where the most typical representation is the decrease in real estate values.

Financial Services are, in the nature, about risk management. As risks increase, innovative technology is the only means to effectively control financial risks. That’s why we say technological development is the cornerstone of modern financial industry. More and more quantitative methods and global cooperation will help reduce the risks in the world economy.

Technology, the key answer

At present, reforms in the Chinese financial services sector come at the right time, in the right place and with the right people. In the new norm economy, China will enlarge its service sectors. Therefore, the financial resources will be more allocated to support SME and micro enterprises. Microfinance will play a more significant role going forward.

However, such microfinance is facing several challenges, including a weak credit information system and insufficient data collection. Also, lending practices serving small and micro enterprises tend to be fragmented, with limited professional skills, and in very small scales. By the end of 2015, there were 8910 small loan companies in China with outstanding loans of 941.2 billion yuan, which manifests a huge gap with the nearly one hundred trillion asset balance of the Chinese banks. Besides, small loan companies are only serving local customers, each doing things in its own way, thus hindering scale development and very weak to sustain any market volatility.

The only way to scale up the microfinance business is through technology advancement and system development.

Quark Finance combined advanced technology and risk management experiences to establish a centralized loan decision-making system, “Credit Factory”. Big data and advanced data mining technology are employed to quantify risks and dedicated to serve the microfinance customers.

We collect data from both online and offline channels, including third-party data and multi-dimensional data manually collected from different places, to enrich customers’ profiling.

Chinese consumers are doing everything on the internet. The usage of internet has topped the world. The data collected from online can be an important supplement to the credit bureau data. By September 2015, the third-party Internet payment market had reached nearly 12 trillion yuan, with a growth rate of 33%. As for mobile payments, the issuance of mobile payment license in 2013 triggered an explosive growth. By September 2015, the third-party mobile payment market reached nearly 10 trillion yuan, with a growth rate of 59%.

Of course, the online data alone cannot solve all operational difficulties in microfinance business. The offline data collected from the applicants by face-to-face meetings are also important.

We feed data collected from a variety sources to our proprietary decision engine, which is the brain of the whole loan decisioning process. More and more the decision engine will provide final judgement on credit assessment and loan approval. The credit model minimizes the irrational errors possibly incurred by human judgement and serve customers with advanced technology in a more efficient manner. Our credit models and the credit operation are improving overtime with more accumulated data and operational experiences.

While the world economy is getting more complex, China finds itself in a crucial point of financial reform. Quark Finance, a pioneer financial technology company specializing the underserved segment, will closely link its own growth with the overall progress in the new financial services sector, try its best to address the challenges microfinance facing with innovative data technology.

The host of this blog, LendIt, is the largest conference series dedicated to connecting the global online lending community. Our conferences bring together the leading lending platforms, investors, and service providers in our industry for unparalleled educational, networking, and business development opportunities. LendIt hosts three conferences annually: our flagship conference LendIt USA as well as LendIt Europe in London and LendIt China in Shanghai. Visit our home page to register for the next event and to subscribe to our newsletter.