Fintech loans are experiencing a peak in proliferation in China. Of the 50 most popular apps in China, 33 offer lending services in two main categories: payday loans and consumer credit services, according to a survey by Aurora Mobile, a mobile big data company. Even platforms that have nothing to do with finance, such as Douyin, Toutiao news aggregator, Baidu Maps, self-describing WiFi Master Key, and Weibo microblogging platform, are introducing their own lending services.

The apps in question have either developed their own microcredit packages for fund financing (installment loans offered at the point of purchase), or partnered with financial institutions and platforms to leverage user traffic and behavioral data. to lend money. Some even do both. Take the example of Alibaba’s food delivery platform, Ele.me. It offers up to eight loan options backed by third party providers. Do we incur extra debt when ordering lunch?

Loan applications are quick and easy: simply register your national ID card and go through the facial recognition process using your phone’s front camera, and credit ranging from RMB 500 to 200,000 (USD 76 to 30,650) will be sent to you. The exact amount depends on the user’s creditworthiness and loyalty to the platform as a customer.

Easy credit is only minutes away for eligible applicants, and that’s by design. Many loan applications blur the true cost, pushing the fees beyond anyone who doesn’t stop watching. Common practices include advertising daily interest rates rather than annual rates and using the word “minimum” without mentioning the service charge up front. Most apps claim to charge the lowest annual interest rate of 7%, but factor in service charges and the actual rate is often between 24% and 36%. Some even go as far as 50% nosebleed.

The ubiquitous advertising campaigns extend the reach of predatory lenders. Many apps entice consumers to borrow money through pop-up ads or small discounts, “red packages” (free cash payouts in small amounts), or free subscriptions to video streaming services.

Last year, a video ad for JD Finance drew heavy criticism on social media. The clip featured a rural farmer and his mother on a flight who was unfamiliar with flying and airsick. Another passenger offered to help them by requesting a loan of 150,000 RMB yuan (23,000 USD) on his cell phone. The idea was to spend the money to get the mother’s ticket to first class on the spot.

As unrealistic and odd as the scenario is, the ad made its point: Phone loans are lightning fast. But what the public has taken away from this speed is how quickly someone can get into debt. The problem is especially serious considering the popularity of these apps and the fact that so many people in China use them every day.

JD.com launched its first credit payment service, Bai Tiao, in 2014, offering customers the option to “buy now, pay later”. Since then, online installment loans have mushroomed at a staggering rate. Their use has emerged in virtually every industry where an average consumer would spend their money – carpooling, dining out, domestic and foreign travel, education, healthcare, cosmetic surgery, etc.

This leads to a slippery slope, where borrowers can take out multiple loans and spend beyond their means. In the past two years, stories of young people drowning in debt and abusive loan collection practices have surfaced.

In 2019, an online discussion group named “Debtors CoalitionOn Douban, a social networking site, quickly swelled to over 40,000 members in less than a year. People who join the Coalition are often in their 20s or 30s and post about the debt they carry, negotiation tactics and repayment plans. The idea behind the group is to create a community helping space, where members support each other in dealing with what can feel like overwhelming debt and, hopefully, work their way through extremely unpleasant situations.

A recent Publish of March 23 showed how a single person owed over 1.2 million RMB ($ 183,000) to 13 creditors, including banks, web platforms and private sources.

Many members say they regularly receive calls or messages from collection officers involving yelling, threats and intimidation. Some even go further to contact friends, relatives and colleagues of debtors to shame them.

Nonetheless, online consumer credit continues to emerge at an unprecedented rate. Simply put, the demand is more than enough.

Ant Group, which has the largest share of the Chinese consumer credit market with 16%, revealed in its prospectus last year that its Huabei and Jiebei credit-based lending services had served more than $ 500 million. users in 12 months, or 35% of the country’s needs. total population.

Young adults who shop online most often use these services. A 2019 survey released by Rong360, an online financial services platform, found that China’s post-90s generation represents 49.31% of online borrowers, and nearly 58% of them use loan services to pay for their daily purchases. Chinese regulators are extremely concerned about the situation and are holding back online lenders.

Last year, China abruptly halted what was supposed to be Ant Group’s record double IPO, citing regulatory changes. New rules developed by the China Banking and Insurance Regulatory Commission will take effect on July 17, 2022. They will require microlenders to finance at least 30% of any credit they issue and reduce the maximum amount for individual loans. .

Meanwhile, China is speeding up the inclusion of the huge amounts of data generated by online lending in its national credit scoring system, which tracks the financial records of individuals and businesses to assess their creditworthiness. Huabei, Ant’s main consumer credit product, was integrated into the system in June last year, although not all customers are covered yet. This move is expected to slow down personal spending and over-indebtedness fueled by debt.

Industry analysts believe online lending no longer falls into a regulatory gray area. For now, companies that have invested resources in creating microcredit platforms need to rethink their pace to adapt to the new regulatory environment. Hong Nuoxin, founder of the online finance platform Xinfinance, said the threshold for entering the game is now higher. With the new unified rules, the days of big profits and rapid growth are probably over.

With its massive population, mobile consumers, and young market spenders, China is a land of fintech innovation, where various financial products are deployed and refined rapidly. But debt can grow quickly and become unmanageable, so a tempered way forward serves the greater good, just as the members of the Debtor Coalition have realized.