Alibaba Makes Peace With Banks In Lending Tie-Up

Alibaba in new alliance with banks

A year after it shook up China’s stodgy banking sector with the launch of its Yu’ebao savings product, e-commerce leader Alibaba looks set to give the market another shot of needed innovation in a new tie-up with 7 major banks. This time the aim is to promote lending to small and medium-sized enterprises (SMEs), with a focus on manufacturers and especially exporters. Such companies often have difficulty getting loans from traditional banks for reasons I’ll explain shortly. Thus this new partnership aims to use Alibaba’s mountains of financial data on these smaller companies to help the banks better understand underserved SMEs that are a critical player in China’s economy.

From a more political perspective, this new tie-up also looks like an attempt by Alibaba to make peace with the big banks, which have complained loudly about unfair competition ever since the launch of Yu’ebao last year. That looks like a shrewd move by Alibaba as it tries to aggressively expand into financial services, since it’s much more prudent to win over these well-connected state-run giants as allies rather than face them as enemies.

Alibaba was unusually low-profile in the announcement of its latest tie-up, whose new banking partners will include national giants Bank of China (HKEx: 3988; Shanghai: 601398) and China Construction Bank (HKEx: 939; Shanghai: 601939), as well as regional powerhouses like China Merchants Bank (HKEx: 3968; Shanghai: 600036) and Bank of Shanghai. (Chinese article) The low-profile nature of the announcement is probably because Alibaba is in a quiet period as it prepares for New York listing that could be the biggest technology IPO of all time.

But that doesn’t change the fact that this new partnership looks quite revolutionary. Under the arrangement, Alibaba will provide its expertise at dealing with SMEs, together with its extensive data on their business activities, to help banks better evaluate the risk of lending to such companies. China’s big state-run lenders are more used to lending to other big state-run companies, which have many assets that can act as collateral and also have an implicit guarantee that the government won’t allow them to fail.

By comparison, many of these SMEs are private and lack major collateral, most often real estate, that banks often require before granting loans. Under the new arrangement, Alibaba and its lending partners will provide loans of up to 10 million yuan ($1.6 million) to qualified customers. Alibaba will rely on the huge amount of data it has about those customers, including their previous online transactions and customer ratings, to try to accurately gauge their creditworthiness.

This kind of partnership looks like a smart one, since Alibaba isn’t officially allowed to engage in banking services but has a huge amount of data that could help it to understand the credit needs and qualifications of its users. At the same time, big state-run banks are under government pressure to lend more to these privately owned SMEs, which are becoming an increasingly important part of the Chinese economy.

Alibaba’s launch of Yu’ebao a year ago looked like a similarly revolutionary product, providing a strong alternative to traditional savings accounts. In that instance Alibaba teamed up with a fund management company to offer the product, which was pegged to money markets that offered better returns than strictly regulated bank savings accounts. But banks complained that Alibaba and a host of imitators were creating a big risk for depositors, since Yu’ebao accounts weren’t subject to the same strict regulatory requirements that banks must follow.

This new alliance looks equally innovative to Yu’ebao, and has the added advantage of bringing in the banks as allies rather than foes. Accordingly, this could become an important and less controversial new business for Alibaba, and we could also see some of the nation’s other top e-commerce players like (Nasdaq: JD) follow soon with their own copycat products.

Bottom line: Alibaba’s new lending partnership with major banks looks like a well conceived project with good chances for success, combining its SME ties with the banks’ financial background.

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