Challenges

As China's service sector grows, smaller electronic appliance retailers and cell phone shop owners are also embracing service offerings – especially when margins of services can be up to four times higher than those of devices and hardware.

Merchants offer package deals with the sale of printers, such as providing ink and cartridges subscription services. Cell phone stores offer consumers free handsets for the purchase of two-year service contracts. Despite this potentially driving sales, improving customer satisfaction, and building longer-term relationships with clients, some SMEs have been reluctant to adopt this model because it has a downside – exposure to sporadic cash flow issues.

Telecom agents, for example, often need to wait for commissions to be paid out over the customer's contract duration. How much they receive also depends on the monthly bill payments that consumers make, so they can suffer from cash flow consequences as a result of late payments.

Factoring – a form of financing for companies to receive cash upfront against their accounts receivable – can address this problem for these SMEs. However, small businesses lack access to formal credit and have been underserved by traditional factoring solution providers. MYbank is looking to fill this financing gap.

Primary target

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Description of Innovation

Powered by digital technology, this solution has made it easy for SMEs, and not just larger companies, to access factoring. Small business owners can use MYbank to set up their accounts, apply and get funds on the same day – all on their phones. The digital bank also partnered with China's leading telecom operators to streamline the process for their smaller distributors to make use of the service.

It supports up to 36 months of outstanding invoices, unlike traditional factoring companies which typically cover just 3-6 months. Using digital technology to accelerate the traditional, manual underwriting process, SMEs can receive funds on the same day of applying, rather than the 1-2 weeks it would previously take.

What sets MYbank's solution apart is also its rigorous risk management technology, which can help the bank virtually evaluate SMEs' credit risk and payback ability within minutes, based on transaction records and other digital footprints authorized by the merchants. This makes it possible to complete large volumes of credit assessments in a short amount of time, as well as to detect suspicious activity and fraud attempts in real-time.
Advanced technologies upgrade factoring for the digital age, helping SMEs to strengthen cash flow

Results

The solution has helped small electronics resellers and telecom agents to free up their cash flow and boost profit margins, appliance brands and telecom carriers attract and retain clients, and consumers receive better deals and perks.

It has created shared value for all stakeholders. More than 200,000 MSMEs have reported average revenue growth of over 20% since tapping the service, while an estimated 1 million sales representatives saw an increase in their sales bonuses and income.

In a virtuous cycle of innovation, telecom operators and agents have also become more willing to increase discounts and perks for consumers. The solution has allowed close to 40 million consumers to access more attractive deals on products and services, as well as more flexible payment options supported by Alipay, Ant Group's digital wallet.

Lessons Learnt

If this model is to be replicated, it is important to develop the analytics-driven risk control capabilities needed to scale up accessible factoring services for SMEs. Given their sheer volume, digital technology helps to streamline credit assessments at scale and mitigate transaction risks.

MYbank's risk management system also ensures that credit lines are dynamically reviewed and can detect transaction risks and suspicious activities in real-time. The ability to effectively control risk via technology has been critical to the business model's viability and success.

Multi-party collaboration has also been essential. The collaboration and support of China's major telecommunications operators, for example, have played an important role in the success of MYbank's rollout of the service for telecom SMEs.

The success of the model also depends on a policy and regulatory environment supportive of financial innovation and inclusion. In particular, policies that support the use of risk management technologies to expand factoring services to SMEs.

Additionally, the coronavirus pandemic has dealt a blow to small and micro business owners, especially those operating physical retail stores. Policies and regulatory measures that can help SMEs recover growth are important as they weather the pandemic’s impact.