As we step into 2024, the dynamics of consumer credit are shifting significantly in the Chinese financial landscapeRecent data reveals that the nation has entered a phase characterized by steady-state credit rather than aggressive growthThis evolution is largely marked by fluctuations in consumer loan volumes, as indicated by the central bank's records, which show a decline in residential consumption loan balances from approximately 58.31 trillion yuan at the end of January to 57.67 trillion yuan by the end of July, followed by a slight recovery to 58.49 trillion yuan in late November.

Interestingly, while traditional consumer credit indicators point to a stagnation of sorts, the lending scales of top internet platforms are on an upward trajectoryOne significant internet player, for instance, reported surpassing 500 billion yuan in lending volumes throughout 2024. Comparatively, the aggregate loan balance for the 31 nationwide consumer finance companies only reached around 1.153 trillion yuan by the end of 2023, showcasing the contrasting trajectories of established financial institutions and fintech platforms.

In this climate that has been termed an “asset scarcity,” a phrase that has gained traction among financial analysts, it underlines a rather telling shift: “whoever captures the traffic will capture the market.” This mantra holds particularly true as numerous small and medium-sized financial institutions that offer offline large credit products have reported a spike in risk exposure

Consequently, online channels that focus on micro-loans and diversified offerings have emerged as highly competitive battlegrounds.

However, it’s vital to note that not every institution possesses the capacity to develop its own online channelsThus, those platforms that control the flow of customer traffic inherently manage the distribution of online credit assetsIndustry insiders have even remarked on an emerging trend where, at times, small bank managers struggle to secure meetings with certain senior executives of large platforms.

In response to these dynamics, the advent of a multitude of internet platforms entering the financial sector signals their intent to stake a claim in this lucrative arenaNevertheless, as demand for accessible traffic increases, the costs associated with obtaining this traffic have reportedly surged

• Secrets of Elite Traders' Success
• A Review of Global Capital Markets in 2024
• Drivers of Global Financial Turmoil
• Economic Conditions Drive Exchange Rates
• US Inflation Rebound Fuels Rate Hike Fears

Currently, customer acquisition costs can range as high as a thousand yuan per individualConcurrently, some institutions have discovered that the supposed “target customer groups” promised by these internet platforms are not always reliable, leading to diminishing conversion rates for newly acquired clients.

Today, funding providers are recalibrating their strategiesThey increasingly recognize that the crux of successful customer acquisition may no longer lie solely in sheer traffic, but in context or the specific scenarios in which potential customers find themselvesSenior executives within various institutions have indicated a strategic pivot towards platforms that provide transactional scenarios, leveraging data analytics to evaluate customer quality, rather than relying purely on volume.

The Quest for Sustainable Traffic

For those internet platforms at the helm of traffic management, their businesses have become somewhat of a “surefire investment.” The revenue generated from traffic is typically derived from two primary sources: advertising fees charged to institutions and service fees associated with a light-asset profit-sharing model.

This profit-sharing model operates on the premise that technology platforms utilize their traffic advantage to conduct data analytics and subsequently direct suitable target customer groups to funding providers to help finalize loans, while the risk control processes remain under the purview of the financial institutions

The platforms retain a percentage of service fees from each loan transaction.

What is crucial to highlight is that these revenue streams do not require platforms to take on the risks associated with credit assetsHowever, financial institutions have been grappling with escalating front-end expensesThese direct costs encompass customer acquisition expenses and service fees incurred through the profit-sharing mechanism, both of which are compounding.

A credit card executive from a leading bank shared with us that the institution has experimented with collaborations with traffic platforms over the past yearHowever, recent deliberations whether to continue or terminate these joint efforts have surfacedHe expressed, “Through these platforms, our customer acquisition costs have soared to as high as 900 yuan per person

This encompasses payments to the traffic platform, partnership costs with advertising firms, and incentive costs associated with card sign-upsSuch expenses far exceed the costs incurred when my bank's employees extend services directly in offline territories like shopping malls or supermarkets.”

Furthermore, he shared that the conversion rates of customers directed from these platforms are alarmingly low, with only about 15% meeting credit card approval standards, compared to a conversion rate of 20-30% for direct offline efforts.

An executive from a consumer finance institution known for its online services highlighted that every time they disburse a loan of 20,000 yuan, they incur acquisition costs exceeding 1,000 yuan“Right now, it’s clear that our traffic investment isn’t producing profit

We’re aiming for long-term growth and the development of our core competencies,” he acknowledgedAdditionally, he revealed that service fees paid to major channels under the profit-sharing model often exceed 30%.

Another representative from a lending assistance platform indicated that although the company’s traffic expense for 2024 remains largely stable, there has been a near 20% dip in customer conversion rates under the same expenditureHe attributed this decline to heightened competition within the credit product supply side and an expanded footprint from banks and licensed institutions in traffic allocation, which further diminishes the market share of lending assistance platforms.

A Dilemma for Small Financial Institutions

The increasing front-end costs are exerting direct pressure on the profit margins of consumer credit organizations

When analyzing the cost structures of these institutions, several components emerge as primary factors: funding costs, operational costs, risk costs, and customer acquisition costsMany interviewees were in agreement on the premise that should they successfully tap quality customer segments to lower risk costs, they would be amenable to channeling more funds into customer acquisition

Yet, the reality depicts a disheartening situation for most small-to-medium-sized financial institutions that struggle with limited negotiating power on platformsWhile front-end costs escalate, customer quality remains unimproved.

As one executive from a small consumer finance institution articulated, “Our selection of clientele fundamentally dictates risk pricingWhether the annualized interest rate of a loan product is set at 24% or 18%, as long as we can secure an average return, we can lower prices

However, the predicament we face today is that risk costs remain fixed or have even risen, forcing the company to compress operational costs to adapt to escalated front-end expenses.”

According to the ‘2024 China Consumer Finance Company Development Report,’ by the end of 2023, 31 consumer finance institutions had ventured into online operations, with 10 institutions exclusively relying on online acquisition strategies and 25 institutions dedicating over 50% of their acquisition efforts to online platforms—a significant increase compared to 2022.

Numerous executives in the consumer finance sector expressed that profitability within the existing 24% pricing cap is increasingly elusive“Under the traffic model introduced by tech firms, the maximum yield offered to consumer finance companies hovers around 4.5%. After accounting for a 3% funding cost, the actual yield barely exceeds 1%, which isn’t even sufficient to cover operational expenses,” conveyed an insider from a prominent consumer finance institution

The silver lining, however, remains the reduction in funding costs over the past couple of years, which has alleviated some operational hardship.

This trend is equally applicable to smaller banking institutionsAlthough declining deposit rates have led to lowered funding costs, the expedited drop in loan rates offered by leading banks, which subsequently inflate their loan products’ scale at lower prices, underscores increased profit pressure on smaller banks.

For instance, a representative from a city commercial bank in Eastern China revealed that their pricing for online credit products directed at small and micro enterprises peaks at a 15% annualized interest rate, while major banks have already slashed theirs down to as low as 4%.

Nevertheless, small financial institutions find themselves caught in the web of reliance upon these vital online traffic platforms

“Customers have adapted to accessing financial services in the digital realmWith consumer credit demands shifting online, it is paramount that B-end suppliers similarly migrate online, showcasing the extent to which demand is steering supply,” shared a senior executive from a leading consumer finance company.

The absence of substantial shareholder backing has left some institutions incapable of deploying extensive offline teams to promote loan products or offering generous offline credit limitsIn a downward economic cycle, a reduction in the favorable “numerator” paired with an increase in the unfavorable “denominator” could further degrade overall asset quality, thus mandating the need for institutions to pivot towards online micro-loan operations

For funding providers, enhancing independent risk management capabilities has become a crucial strategy to regain some level of bargaining power at the front end.

According to a representative from a consumer finance institution with robust online capabilities, “Under the profit-sharing model, our earnings predominantly hinge on risk management

However, if the approval rates for our independent risk control measures remain excessively low, we could also face a decline in platform trafficThus, we must effectively balance approval rates with defaults.”

From Traffic Dominance to Scenario Depth

A growing faction of financial institutions has realized that solely depending on traffic distribution via internet platforms is not a sustainable long-term strategy.

As a leading figure in consumer finance candidly stated, interactions in a face-to-face capacity allow for a richer engagement, while digital connections can often feel superficial“Currently, we’re focusing collaborations exclusively on platforms that can facilitate data on transactional scenarios rather than engaging with pure social media platforms,” he elucidated

Social platforms tend only to answer the question of “who they are,” rather than providing insights into “how they are” and thereby lacking the ability to analyze repayment capabilities and creditworthiness.

Meanwhile, an individual from a credit card center shared that they were re-evaluating their partnerships with prominent traffic platforms in favor of strengthening ties with financial-oriented apps like UnionPay Cloud Flash PaymentsSuch adjustments are indicative of a shift towards environments where customers exhibit better financial literacy and engagement, with customer conversion rates surpassing 25%. Furthermore, UnionPay facilitates shared marketing efforts, effectively driving down acquisition costs.

In fact, numerous internet platforms have begun acquiring or merging financial licenses to establish closed-loop transactions within their platforms

By accumulating risk control insights while immersing themselves in financial operations, they are positioning themselves to offer more tailored services to financial institutions.

Presently, besides traditional financial giants like BATJ, platforms such as Douyin's “Assured Lending” and Meituan’s “Monthly Payments” are gradually solidifying their positions as significant contenders in the lending assistance market.

Concurrently, financial institutions proficient in technology and online channel development are also taking the plunge into the field, establishing themselves as own traffic platforms to enhance their commission-based revenue.

“The overall customer base and traffic volumes in this market are relatively stable; the greater the number of players, the more intense the competition