Alibaba-backed online lender MYbank owes cost-savings to home-made tech

HANGZHOU, China - 1 February 2018: It has no physical branches or expensive foreign software, and uses cloud technology to cut back on the hardware it needs to serve borrowers.

MYbank, a Chinese online lender that is an offshoot of Alibaba Group Holding Ltd, has built its business on doing things cheaply.

The bank says it can deliver loans to borrowers across China at lightning speeds for up to 1,000 times less than it would cost brick-and-mortar banks to do so.

MYbank expects double-digit increases in all growth measures in 2017 due to lower costs enabled by technology, the bank’s president, Huang Hao, said in an interview at his office in Hangzhou, in the eastern province of Zhejiang.

He called the results “very satisfying”, but declined to elaborate.

Established in 2015, the privately held MYbank employs about 300 people, half of whom are technicians. It promises to approve loans in under three minutes without any human involvement, thanks to the bank’s in-house technology.

As a result, the cost of approving a small business loan can be as little as 2 yuan, compared to at least 2,000 yuan ($317.97) at a traditional bank, according to data provided by the bank. MYbank has built its technological infrastructure with Chinese-made technology, avoiding more expensive products from companies like IBM Corp, Oracle Corp and Dell EMC, which form the network backbone for much of China’s finance sector, Huang said.

“My costs would have been unbearably high,” Huang said, referring to using systems from the U.S. companies. “In the future we will have a tremendous amount of users and high volume of demand. So I need scalable, inexpensive systems.” Dell said China was its second largest market outside the United States. “We have many successful customer cases in China’s banking sector,” the company said in a statement.

Oracle declined to comment. IBM did not immediately comment.

MYbank is 30 percent owned by Ant Financial Services Group, an Alibaba affiliate. Alibaba and Ant Financial have provided MYbank with cloud-computing expertise and helped MYbank with developing big data, artificial intelligence and facial recognition to facilitate lending, Huang said.

BETTING ON FARMERS

MYbank is one of a handful of Chinese lenders - along with Tencent Holdings Ltd’s WeBank - that are founded completely with private investment. Since mid-2015, MYbank has served more than 7 million small business owners, Huang said. The bank is seeking to expand its network to include China’s 70 million to 100 million small businesses under-served by traditional financial institutions.

Funding for those borrowers has traditionally been scarce, as they have little to no collateral.

But for MYbank, such unsecured lending has been profitable. The bank’s net interest margin - around 3 to 5 percent - is higher than those for China’s major banks, which target large state companies, Huang said.

“Interest margins for small business lending has always been higher than loans to large corporates,” Huang said. That’s due to the higher risks associated with lending to small businesses.

MYbank’s non-performing loan ratio, at around 1 percent, is also well below those of conventional lenders when it comes to lending to small businesses, thanks to risk assessment models based on big data, Huang said.

Beijing’s intensifying deleveraging campaign to reduce risks in China’s financial system is unlikely to hurt MYbank’s lending business, Huang said, as the government is not targeting small businesses and the rural sector. MYbank had offered 441.3 billion yuan in loans by end-October, with an average loan size of 8,000 yuan, according to data provided by the bank.

‘DUTY OF INNOVATION’

One challenge the company faces is that, without a physical branch to take client deposits, MYbank has relied heavily on borrowed funds from other lenders through China’s interbank market. Those loans tend to be a much more expensive source of funds compared with normal deposits. Interbank funding comprises 60 percent of its total liabilities, while the remaining 40 percent consists of deposits, Huang said.

At the moment, MYbank’s cost of funding is around 5-6 percent, similar to mid-tier banks, Huang said.

Commercial lenders are required by regulators to cap their interbank funding under one-third of their total liabilities.

So far, MYbank hasn’t received any regulatory order to modify its liability structure, Huang said.

“Online banks and private banks are still new things in China. Compared with traditional financial institutions, they carry the duty of innovation in certain areas, so regulators apply special guidance.”