ABS consumer finance brief introduction and distinction in China

Part 2

BLOG GROUP McAleese

Asset Backed Securitization is abbreviated as ABS. ABS financing is a project financing approach that involves issuing bonds on the capital market to raise funding. It is a securitization financing strategy that is backed by the project's assets, i.e., it is based on the project's assets and guaranteed by the projected earnings of the project's assets (Davis, H.A., 2005).

Because the early repayment rate of basic assets is high and the number of basic assets is huge, there is a concern that loosening loan entry will have an adverse impact on the credit quality of reinvested assets. Market issuance as a whole must be tightly tied to regulatory policy (Nelson, B., et al., 2015).

Consumer finance ABS is an important field of ABS.

In China, several types of consumer finance are most used, here our group discussed three models.

Classification of consumer finance

1. Licensed consumer finance businesses, commercial banks (credit cards, consumer loans), Internet small loans, installment platforms, e-commerce, and other Internet platforms are the different types of market participants (Liu, K., 2020).

2. It can be separated into two types based on how consumers are acquired: online lending and offline lending. The former, such as JINGdong Baitiao, Ant Huabei, Pai Pai Dai, and so on; the latter, such as JINGdong Baitiao, Ant Huabei, Pai Pai Dai, and so on; Microloans and credit cards are examples of the latter (McDonald, T. and Dan, L., 2021).

3. Cash loans and commodity loans are distinguished by whether they are based on specific consumption scenarios: the former, such as Ant Borrow and Jingdong gold bar; the latter, such as Ant Borrow and Jingdong gold bar. Ant Bai, JINGdong Baitiao are examples of the latter (Hsu, S. and Li, J.,2020).

4. Direct lending and aided lending can be classified based on whether or not the loans are made with the borrower's finances. Small lending companies and consumer finance companies, for example, make loans with their own funds. As a loan aid agency, the latter is merely a client and initial risk control, lending cash to a third party(Xing, W., Yanxi, L. and Chun, J., 2015).

The following is the classification table of credit cards, Ant Huabai and microfinance loans

According to the form, Credit cards are issued by banks and target customer requirements, such as fixed workers and can on-time payment of personal credit reporting good people and Huabei target customer does not need good credit can apply for an overdraft, suitable for young people, especially students enjoy consumption in advance, so customers are much smaller than Huabei with the customer. Small loans are better for businesses and individuals who need working money but don't want to risk their customers' credit. While the three have some similarities, the application conditions are vastly different.

Credit cards are primarily based on interest, installment fees, commissions, and other factors, according to the income model of credit cards, bai, and microfinance; through the network application, Huabei has rapidly developed into win-win cooperation with today's merchants, and developed some preferential policies based on the profit model of common interests. To achieve advantages, small loans are primarily based on interest costs. The profit model for credit cards and modest loans is stable, as can be observed.

In terms of risk, credit card applications necessitate the evaluation of personal credit and consumption capabilities, therefore the risk level is lower than for Huabei and small loans. Small loans and Huabei are directly tied to the soundness of social supervision and appropriate rules and regulations, whereas credit cards are mostly borne by the cardholder and the issuing bank. Because tiny loans and bai do not require users to check their credit investigation ability, it is easy to develop negative habits and fall into opportunistic consumption traps. Users must carefully evaluate and have some discrimination capacity.

-Yang Song

17, October, 2021

Reference list:

Davis, H.A., 2005. The Definition of Structured Finance: Results from a Survey.

Nelson, B., Pinter, G. and Theodoridis, K., 2015. Do contractionary monetary policy shocks expand shadow banking?.

Liu, K., 2020. Chinese consumer finance: a primer. Frontiers of Business Research in China, 14(1), pp.1-22.

McDonald, T. and Dan, L., 2021. Alipay’s ‘Ant Credit Pay’ meets China’s factory workers: the depersonalization and re-personalisation of online lending. Journal of Cultural Economy, 14(1), pp.87-100.

Hsu, S. and Li, J., 2020. 4. Online Consumer Credit, Online Supply Chain Finance, and Internet Banks. In China's Fintech Explosion (pp. 106-131). Columbia University Press.

Xing, W., Yanxi, L. and Chun, J., 2015. Regional economy, customer characteristics and the credit card profitability. Contemporary Economic Management, 11, pp.88-97.