The recent Central Economic Work Conference has set a clear trajectory for consumer finance in China, emphasizing the need to significantly boost consumption and enhance investment efficiency to broaden domestic demandThis strategic focus heralds an opportunity for consumer finance institutions to refine their operations in the coming year.

Throughout 2023, consumer finance companies have demonstrated resilience against the backdrop of economic headwinds, actively working not only to rekindle consumer intent but also to stimulate demand by increasing benefits and incentivesHowever, the sector still grapples with persistent issues such as high customer acquisition costs and restricted capital sourcingThe pressing question now is how these financial entities can address shortcomings in their operations to effectively contribute to national consumption growth.

Taking advantage of differentiated competitive strengths is key

Licensed by financial regulators, consumer finance companies have emerged as pivotal players in China's financial landscapeUnlike traditional lending mechanisms, they offer smaller credit lines with rapid turnaround times, effectively bridging the gaps left by conventional banks and catering to the everyday financing needs of residents seeking small loans.

Over the past decade, consumer finance has evolved significantly, consistently driving domestic demand since the first pilot programs launched in 2009. Today, there are 31 active consumer finance firms, which have capitalized on their specialized, smaller-scale operations to facilitate consumption recoveryNotably, both total asset volume and loan balances have climbed to remarkable heights, exceeding CNY 10 trillion (approximately USD 1.5 trillion). This acceleration—marked by a year-on-year growth of 36.7% and 38.2% respectively—surpasses the overall economic recovery pace and plays an essential role in stabilizing the national economy.

"To appreciate how consumer finance can invigorate consumption, we must first understand its essence," explains Ouyang Rihui, Vice President of the Internet Economy Research Institute at Central University of Finance and Economics

He points out that consumer finance specifically pertains to unsecured, non-business loans for individualsIn this context, the overall market presence of consumer finance firms has steadily expanded in both absolute and relative terms.

Further defining the identity of consumer finance institutions through clear nomenclature—making “consumer finance” a part of their official title—will assist in carving out a unique niche in the larger financial ecosystemExperts argue that this clarification supports the development of differentiated advantages in stimulating consumption.

Importantly, consumer finance firms are beginning to target consumer bases previously overlooked by traditional banking servicesIncreased focus on third and fourth-tier cities has drawn attention to a demographic shift: more than 75% of customers in many consumer finance companies now hail from these regions, contrasting sharply with the previous dominant clientele in major urban centers.

In response to insufficient domestic demand and to foster improved consumer optimism, the government has rolled out a series of supportive financial policies, presenting unique opportunities for the consumer finance sector to enhance their service offerings

The industry is poised to appropriately augment consumer credit in the years to come, with regulatory bodies slated to introduce measures aimed at amplifying consumer financing capabilities leading into 2024.

Experts like Ye Yindan from the Bank of China Research Institute underscore the importance of consumer finance firms focusing on key spending categories through strategic lending practicesBy lowering barriers to access—through mechanisms such as low-interest rates and installment payment options—these firms can alleviate financial burdens on consumers, particularly in vital sectors such as home improvement and eco-friendly appliances.

To strengthen their financial footing, consumer finance companies are leveraging multifaceted funding channelsRecent enhancements in risk pricing mechanisms and management have resulted in a downward trend for overall market interest rates

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Transparency in fee structures has also improved, effectively displacing illegal lending practices and significantly reducing costs for consumers, thereby facilitating an upgrade in consumption.

As primary agents in stimulating consumption, it's imperative for licensed consumer finance institutions to find ways to optimize their fundingWithout accepting public deposits, these firms must secure low-cost funding to transfer financial benefits to consumers through decreased loan rates.

Ouyang Rihui emphasizes the widening avenues for financing that have developed under the guidance of financial regulators, as consumer finance firms access an array of services including interbank lending, online borrowings, syndicated loans, asset securitization, and more to strengthen their sustainability.

This year, efforts have accelerated to broaden financing channels, enabling consumer finance institutions to provide more low-cost support for consumption

Notably, one prominent company has successfully issued CNY 10 billion (approximately USD 1.5 billion) in three-year financial bonds this year, aiming to optimize its funding structure while keeping costs manageable.

There has emerged a disparity among consumer finance companies, as leading establishments benefit from robust branding and diverse funding optionsConversely, newer entrants often face stricter limitations in public financing channels and rely on shareholder backing.

Regulatory measures have also increased the minimum shareholding of primary stakeholders in consumer finance institutions and raised the registration capital requirements, thereby enhancing risk resilienceFinancial institutions are encouraged to bolster their credibility through guarantees and to explore various funding routes, including issuance of ABS and financial bonds, which can offer long-term, low-cost capital intended to fortify their financial base.

Moreover, regulatory bodies are committed to broadening the means through which consumer finance firms can secure capital, encouraging these entities to consider domestic and international market entries for bolstering their capital capabilities while concurrently enhancing the level of financial services provided to consumers.

Digital transformation has also taken center stage in this evolution

In the wake of last year’s financial initiatives, digital finance has emerged as a transformative force within consumer financial service landscapesBy prioritizing digitization, consumer finance companies have accelerated the development of user-friendly scenarios tailored to enhance the overall consumer experience, thereby marking significant progress in expanding the reach of consumer loans.

The integration of diverse applications within the consultative frameworks of consumer finance institutions demonstrates their commitment to consumer engagement, as evidenced by the development of the Central Plains Consumer Finance app, which features an extensive, all-encompassing service system that recognizes user behaviors and needs through innovative offerings like installment shopping and reward programs.

Furthermore, leading consumer finance institutions are leveraging digital yuan technologies to facilitate smoother financial transactions

By embedding digital currency payment functions within their loan offerings, they're streamlining processes for both disbursement and repayment, aligning with governmental initiatives aimed at establishing the digital currency.

As the consumer finance industry continues to evolve under the influence of digitalization, the engagement with various consumer scenarios has substantially improved, allowing firms to create more personalized experiencesOuyang Rihui emphasizes the future importance of capitalizing on technologies such as artificial intelligence and big data to analyze data generated within the sector, opening pathways into multiple consumer categories ranging from housing to education and travel.

Through enhanced real-time sharing and interaction with e-commerce platforms and social media channels, consumer finance companies can usher in a new era where “scene + finance” coalesce to generate fresh momentum for economic growth.