Fintech highlights the good, bad and ugly of lending

The controversy about some Chinese online small consumer credit providers allegedly overcharging their clients should not invite a blanket ban. Instead, it calls for a swift and smart regulatory response that, while allowing more entrepreneurial efforts to tap into the huge potential of fintech in the age of the internet, soundly protects consumers from predatory loans in whatever guise.

The successful initial public offering on Nasdaq by the domestic online lender Qudian, the largest in the United States by a Chinese company this year, and the ensuing nosedive from the share's 48-percent jump on their trading debut to below the IPO price in just a few days highlighted both investor enthusiasm about the promise of fintech startups in the world's second-largest economy and their concerns about tighter regulations over irresponsible online lending.

Reported strong profitability and business growth as well as a growing young user population are good reasons for investors to show confidence in online consumer credit providers.

And support from China's e-giants means that these fintech startups are well positioned to profit from and further propel the surge of online consumption by allowing more Chinese consumers to spend tomorrow's money. Qudian, for instance, is backed by Ant Financial, an affiliate of China's top e-business Alibaba Group. Its domestic rivals that have filed for US listings are also backed by other Chinese e-business leaders.

In theory, thanks to these e-giants' collection of enormous amounts of online data, internet finance can identify and satisfy the funding needs of online consumers, and lower their financing costs by improving efficiency through effective applications of new technology. Due to their lack of or poor credit histories, a fairly large number of low-income consumers in this country can still not enjoy access to conventional credit services. Now, by rendering their online consumption data into a basis for credit analysis, these fintech companies have gained a technological edge over conventional banks in providing appropriate and effective financial services for people with financing needs at affordable costs.

If such internet finance can grow rapidly to benefit low-income consumers and other people at a disadvantage, Chinese policymakers who are eager to rebalance the economy away from investment to consumption spending will certainly be glad to see the success of this new business model.

However, it is one thing, in the spirit of inclusive finance, to provide cash loans and consumer installment loans for borrowers left out in the cold by traditional financial services. It is another to take advantage of the vulnerability of low-income consumers to engage in irresponsible lending practices online.

Chinese regulators banned predatory lending to students last year following a series of scandals including the use of nude photos as collateral. The latest IPO of Qudian has elicited skepticism that the company, which began by lending to students after its launch in 2014, may still have students among its clients although it has ostensibly shifted to young white-collar workers.

Is the remarkable performance of fintech startups such as Qudian the result of innovation of business model that make best use of such factors as economies of scale, relatively high quality of borrowers, relatively high interest rates and service charges and effective management of marketing expenses? Or is it an outcome of irresponsible lending that takes advantage of those who spend more than they earn and struggle to make ends meet?

A sweeping data-based regulatory investigation is thus urgently needed to put an immediate end to irresponsible lending that not only infringes on the rights of consumers but also jeopardizes the development prospects of internet finance.

The author is a senior writer with China Daily.