(Chinese Version)

Editor's Note:

On one hand, payment is the most crucial step in e-purchase and the payment capacity of college students is, unquestionably, low. On the other, nearly all banks have, by the end of 2014, called it quits to and stopped issuing new credit cards to college students due to the large amount of bad debts in their student credit card business. Nevertheless, this campus market should never be ignored, since college students are, undoubtedly, the major crowd of consumers on China’s online retailer websites. TMTpost has long been focusing on this market and carrying out up-to-date reports on newly-released campus-targeted financial products, such as qufenqi.com, fengqile.com, aixuedai.com, renrenfenqi.com, etc.(More details on: College Student Installment Market:The Abandoned Market of Banks but a Thriving Market for Startups) 

JD Lending steps into the college market following this trend. Despite the difficulty in managing risks, raising funds and providing installment services to college graduates, these online retailers aim to revitalize this abandoned market step by step. We have every confidence that a new round of battle is expected to ensue, and nobody can tell what the outcome would be.

Jiang Xin, majoring in finance & trade at the Central University of Finance and Economics, is one of the first batch of users of JD Campus Lending. To get a 5000 RMB student loan, all she needs to do is fill in the required information on JD’s website and have her ID card and herself photographed by JD’s courier guy with an iPad. The entire process takes no more than two minutes.

On March 23, right at lunchtime, a bunch of staff from JD Finance set up a stand beside the cafeteria in Beijing Jiaotong University in order to promote JD Campus Lending service. They also provided special gifts for students who activated JD Campus Debit Note services on the spot. Students who just finished their class and were going to have lunch in the cafeteria were quickly attracted by the promotion stand and the area soon got packed up with students.

Beijing's universities are among the first batch of pilots. In the coming ten days, JD will promote its new services in over 100 universities around China, which, combined with online discount activities, perfectly demonstrates JD’s keen efforts in penetrating this market.

By the end of 2014, nearly all banks have called it quits and stopped issuing new credit cards to college students due to the large amount of bad debts in their student credit card business. At the same time, however, startup companies such as qufenqi.com and online retailers such as JD step into this abandoned market on campus in a quite high-profile fashion. The question remains: could these companies succeed and revitalize this abandoned market?

Avoiding the Same Mistakes Made by Traditional Banks

On February 13, 2014, JD, the first one among major Chinese online retailers, launched its buy-first-pay-later service, JD Debit Note, the first consumer financial product of JD itself. People were shocked by the fact that JD would fund the debit business itself, instead of yielding the risk to banks, as We-chat and Alipay once did with their virtual credit card business, which was soon called off due to safety concerns.

Xu ling, incumbent JD’s consumer finance director, is the very person who sets up the consumer finance business of JD. Xu went to ICBC credit card center after graduation and has always devoted himself to consumer finance later on in several banks.

With his rich experience in traditional banks, Xu is well aware of a common dilemma of credit card business: all the banks are providing credit card services to those who don’t need credit cards at all, while those who really need micro loan fail to apply for a credit card, it is like a vicious cycle.

Generally speaking, two pieces of information need to be taken into consideration in order to manage risks before banks decide to provide loans: first, banks have to refer to the credit report, issued by the People’s Bank of China, of the individuals so as to make sure that their applicants are willing to repay the loan; secondly, banks have to refer to the applicants’ certificates of assets and pay rolls in order to evaluate their ability to repay the loan. Although college students and farmers are badly in need of money, they have neither income for the moment nor credit history in the past and thus find it difficult to apply for a credit card.

Internet, however, is changing the rules of the game. Ideally, as long as one has an account on JD’s website, JD will be able to track and evaluate his or her credit based on the purchase history, logistics data and payment history, etc., even though one has changed the address.

Once his/her credit record passes JD’s verification, one will be able to get a loan from JD. At present, more than 200 variables are included in JD’s “credit-verification and risk management model” for the purpose of making a fair and appropriate evaluation of the users' creidt and deciding the specific interest rates for each user. For the past year, the service charge of installment payment services is 0.5% while different people will get a loan from 5000RMB to 15000RMB based on their credit record. For college students who deliberately failed to repay the money, 0.03% of the product price will be charged as the default fine.

The interest rate for credit cards of five big state banks ranges from 0.55% to 0.75%. Once the loan is overdue, the default fine rate will be 0.05%. Comparatively speaking, JD provides a lower interest rate for white-collar users than banks. Moreover,since college students can’t afford to repay the loan and have no credit history, banks are unwilling to provide college students with their credit card services and thus the interest rate for them is much higher, making it impossible for college students to apply for a credit card.

For any credit card service provider, three kinds of cost must be taken into consideration: capital cost, risk cost and management cost. JD has similar capital and risk costs as banks but much lower management cost, because JD Debit Note already has a vast amount of potential users and can evaluate the credibility of its users directly based on their purchase history, saving huge evaluation cost compared to banks. With management cost saved, JD is able to provide loans with a lower interest rate, which will both benefit its users but also help JD compete with its rivals.

Xu Ling refused to tell Business Value the bad debt rate of JD Campus Lending services in 2014, but suggested that JD Debit Note’s popularity far outstripped his expectations and has already garnered tens of millions of users, millions of whom are active users.

Mr. Xu has always been ruminating on one question: who really needs JD Campus Lending services? After entering JD, Xu’s view on JD Debit Note services also shifts from time to time. For the time being, he believes that JD Debit Note is not merely a financial product, instead, it should also provide an opportunity to help JD improve its services.

Undeniably, payment is the most crucial step in e-purchase. The payment rate of JD Campus Lending services scores the highest compared to typical e-payment tools (70%) and gateway payment tools (60%). JD Campus Lending delays payment while encouraging users to buy first and pay later. Moreover, consumers are able to use the products first and decide later if he/she is going to buy them with the help of JD Campus Lending services.

Generally speaking, banks make profits out of their credit card business in two ways: charging interest rates, and receiving rebates from suppliers while helping them promote their products in turn.

JD is only more familiar with this win-win pattern as an online retailer. In fact, it has already cooperated with several companies and provided consumers with numerous installment payment products such as traveling, tickets, jewelry and other luxuries. Payment rate roars and more domestic appliance suppliers have already expressed their willingness to cooperate, some of whom even vow to help potential consumers use their products first and buy later.

JD chooses, out of all possible markets, campuses and countrysides as its major target markets. A new round of battle among online retailers is expected to ensue.

Starting from JD Campus Lending

Jiang Xin bought some gifts for her parents in Daoxiang Village, a well-known food retailer selling traditional snacks and desserts in Beijing, when she used JD Campus Lending services for the first time.

“I am on a tight budget near the end of the year, so I want to pay these gifts after I get my lucky money during the Spring Festival”, said Jiang Xin. Three out of five her roommates were also encouraged to use JD Campus Lending services and buy some cosmetics. On March 23, a day before JD was going to launch its large-scale promotion activities throughout China, Xu Ling went to Beijing Jiaotong University to have a look at the effect of the promotion activity, so that he would be able to improve the services and make subtle adjustments on the evening meeting.

Students who activate JD Campus Lending services on the spot will also receive a gift. During the promotion activity in Beijing Jiaotong University, a student activated his services with his ID card in no more than five minutes. He left the promotion stand with a storage box, a coupon and a bottle of beverage in hands.

Mr. Xu told Business Value,

“Students know better than anyone else how to better promote our services, so we hire a bunch of new graduates to carry out our promotion plans. We find that students are quite critical on gifts and that it is better to give handkerchiefs instead of beverage in universities located in Northern China.”

At present, JD Campus Lending is working closely with JD Logistics, a center in every university where students get to pick up their packages from JD, so that students who come to the JD Logistics in their university to pick up their packages will not be charged any shipping fees. Moreover, JD has recruited one Finance Specialist in each JD Logistics center in order to help it better promote the services in universities.

Although JD launched its JD Lending service last September, it didn’t promote this service until this January. “We want to make its user experience perfect before promoting it to a larger crowd”, Xu Ling told Business Value. That’s why retention rate and user experience instead of the number of new users are set up as indicators of KPI.

The reason why JD Campus Lending is launched this late is that it wants to simplify to the fullest the activation procedure. To use JD’s installment payment service, all one needs to do is fill in the necessary information, such as name, ID number, university, department and address on JD’s website and have one’s ID card and oneself photographed by JD’s Finance Specialist. The entire process takes no more than five minutes.

Nevertheless, undergraduate students who are in their senior year and post graduate students who are in their last year in school could not apply for the services, despite the fact that these students are, indeed, badly in need of money. Xu explained that JD needs to first link education system with work system before extending the services to new graduates. He said that it would only take a few more months.

Through directly comparing applicants’ information with his/her information on chsi.com, an authoritative institution directly under Chinese Ministry of Education, the applicant’s Debit Note services will be activated once the information matches, and vice versa. The entire process is carried out by computers and thus great efforts spared.

One might easily recognize that the most difficult part in this process is verifying applicants’ information on chsi.com and setting out specific interest rate and loan amount if the information matches.

Banks also recruited Campus Agents in order to promote their credit card business when they tried to enter this market, but many Campus Agents cheated by applying for the credit card using his/her roommate’s information, for their performance was solely examined based on the number of new applicants. Also, many students applied for credit cards but never used them for once because they applied the credit card only to get the gift. Furthermore, due to the fact that both the awareness and ability of college students is relatively low, a lot of those debts soured.

In order to avoid making the same mistakes as banks, campus-targeted installment payment service providers such as qufenqi.com choose to sell their products directly to customers, which lowers bad debt rate at the expense of user experience. JD learns both from banks’ and other competitors’ lessons and set up its own business model. But it remains unknown if its new model will function well in managing risks.

Jiang Xin told Business Value that she first chose JD Campus Lending because she believed products purchased on JD were authentic and that she were able to get the products repaired in the JD Logistics center in her university for free. A friend of her once bought a pair of earphones on JD Campus Lending, and when she tried to get them repaired after one year, she got a new pair instead. She seemed not to care about the interest rate because she usually repays the money within thirty days.

Besides campus, countryside is another potential market for JD Campus Lending. The other day, Xu Ling went to Suqian city and for the very first time came to realize the whole process of selling seeds, from major business agents, distributors and to peasants. In order to have a better understanding of the countryside and launch his business in this huge market, Xu would watch CCTV 7 (which features agriculture and rural China) every night for entertainment.

According to statistics from the People’s Bank of China, 85% of credit loans in China are used for business purposes, and only 15% for consumption purposes, among which long-term housing loan takes up 12% while short-term loans take up 3%, including auto loans. However, credit loans for consumption purposes usually account for 30% to 40% of the entire capital structure in other countries, which suggests that there could be a huge market for short-term loans serving consumption purposes.

Examples where a retailer transforms itself into a financial group are abundant. American Express China (AMEX) was once a tourism agency but transformed itself into a leading global financial group, providing traveling checks and credit card services for tourists. Both Walmart and Costco Coffee have credit card centers overseas to provide financial services for its consumers. Consumer finance is the very tipping stone of online retailers in transforming themselves into huge financial groups.

Liu Qiangdong, president of JD’s board of directors, predicted in an internal meeting in 2015 that when JD’s revenue exceeds a trillion RMB, the amount of loans provided by JD Campus Lending and JDpay might also exceeds a trillion.

Since JD itself pays for the debt, huge pressure will be put on JD’s capital chains once JD Campus Lending’s business roars. According to Yao Naisheng, deputy president of JD Finance, they are referring to relative regulations and laws and looking for opportunities to turn these credit debts into bonds so as to lower their capital cost.

In the future, JD is going to put online a new platform for equity-based crowdfunding. In the past, people mostly focused their attention on employment. With the success of several startups, entrepreneurship has become more and more valued. JD aims to further provide capital for eligible entrepreneurs with the help of its JD Campus Lending business. A new financial group is thriving, yet uncertainty persists.

（The article is published and edited with authorization from the author @Liu Hongjun, please note source and hyperlink when reproduce.)

Translated by Levin Feng (Senior Translator at ECHO), working for TMTpost.