China’s online lender Lufax recalibrates business model as regulators clamp down on Big Tech lending

a person holding a sign: Lufax ADRs have had a bumpy ride since the fintech giant listed in October as investors digest fast-evolving fintech regulation in China. Photo: Reuters

Lufax ADRs have had a bumpy ride since the fintech giant listed in October as investors digest fast-evolving fintech regulation in China. Photo: Reuters

Lufax Holding is overhauling the way it digitally matches borrowers and lenders as China clamps down on Big Tech companies extending credit in the world’s second-largest economy amid fears the platforms could be a source of financial instability.

The Shanghai-based firm is lowering interest rates on loans; raising the capital contribution that it makes to loans; and has checked it does not bundle services for customers. Lufax is also widening the array of banks that it works with on lending and is verifying that its disclosure to borrowers is fully compliant with fast-evolving rules.

Lufax, backed by China’s biggest insurer Ping An Insurance (Group), is one of the first major financial-technology companies to lay out how it will adjust in the light of tighter and more complex regulation governing the provision of credit to individuals and small businesses. It is the largest publicly traded online lender in China, following a US$2.4 billion stock sale in October in New York.

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“As planned, we also continued to make progress in establishing a more sustainable risk-sharing business model with our funding partners,” said Lufax CEO Gregory Gibb during the company’s third-quarter earnings call on Wednesday.

a man wearing a suit and tie: Lufax CEO Greg Gibb sees more fintech guidance as soon as in the coming weeks. Photo: Handout

© Provided by South China Morning Post
Lufax CEO Greg Gibb sees more fintech guidance as soon as in the coming weeks. Photo: Handout

Alarmed by spiralling online consumer debt this year, China is clamping down on the fast-growing microlending industry, calling it a threat to social harmony and financial stability.

Beijing-based regulators published a set of draft rules on November 2 capping loans by the country’s 7,227 microlenders to individuals and small businesses. In a one-two punch, regulators followed up with anti-monopoly laws on November 10, targeting bundled sales by Big Tech platforms and excessive price discrimination.

“The real purpose here is for platforms that are cooperating with banks to have more skin in the game, bear more risk and have sufficient capital to back up that risk,” said Gibb. He added what the exact bearing the microfinance rules would have on Lufax’s business model remains unclear.

Gibb said he expects more guidance from regulators as soon as the next couple of weeks. He said there is likely to be more clarity on what prices banks can offer borrowers over digital platforms as well as what types of banks can continue to increase their deposits with online platforms with which they co-lend.

Should more regulatory changes be introduced, Lufax executives said they were ready to make sure the firm remained compliant.

“The market probably won’t grow as fast as it has in the past given these changes,” said Gibb, so Lufax is looking to widen its cooperation with more bank and asset management companies.

Lufax American depositary receipts (ADRs) have risen to US$16.80 on December 1 from their initial public offering (IPO) price of US$13.50 when the company listed in New York on October 30. Trading has been volatile as investors have digested the impact of evolving fintech regulation in China.

Lufax executives said that the firm would raise its “skin in the game” to 20 per cent of loans it digitally matches between banks and borrowers by the end of June. The firm is monitoring whether regulators will require Lufax to lift its credit exposure further to 30 per cent over time.

“We will continue to take on more risk on the platform as a key business focus for the remainder of 2020 and beyond,” said Gibb. If Lufax does have to lift its capital contribution to 30 per cent, the firm has adequate capital to cover the extra expenditure, even excluding its IPO proceeds.

There is clearly now on the platform no issue around the bundled-sales question

Greg Gibb

Lufax has also investigated whether it has sold any bundled products on its platform. Gibb noted that while there is no clear legal definition of bundled sales, nevertheless the firm has adjusted its processes so that clients have a clear choice between products.

“There is clearly now on the platform no issue around the bundled-sales question,” said Gibb.

Lufax has lowered its annual percentage rates (APRs) to keep the all-in costs for new borrowers below 24 per cent, in line with how it has interpreted guidelines from China’s Supreme People’s Court in August. As a result, Lufax’s retail credit facilitation revenue take rate declined from 10.4 per cent a year ago to 9.4 per cent for the third quarter of this year.

If the funding is coming from financial institutions, the acceptable rate for the loans is 24 per cent or below, backed up by court decisions in recent months, said Lufax executives.

Lufax plans to further reduce its highest APR down to 20 per cent within two years, said chief financial officer James Zheng.

chart, line chart, histogram: SCMP Graphics

© Provided by South China Morning Post
SCMP Graphics

Lufax chairman Guangheng Ji noted that the overall regulatory environment for financial technology companies has tightened since China’s Ant Group attempted the world’s largest IPO, only to be blocked by regulators. He also noted the pantheon of China’s regulators interested in the development of Big Tech credit, from the central bank to the banking, securities regulators to the State Council and the Supreme People’s Court.

Lufax and Ping An’s senior management have been locked in meetings with different regulators in Beijing to understand their intent over the past month.

“Despite not knowing exactly what the future rules may be, we are now reasonably clear of their intent,” said Ji.

The Trump administration threatened in August to delist Chinese companies from US bourses and urged American college and university endowments to sell their holdings of Chinese stocks.

Lufax expects a compromise will be found, which may be a co-auditing process comprising a US team and a China team working on companies’ financial accounts.

Lufax also announced its financial results for the third quarter and nine months that ended on Monday. Total income increased by 10.5 per cent to 13.07 billion yuan (US$1.92 billion) in the third quarter from 11.83 billion yuan in the same period of 2019.

Net profit dropped 36.8 per cent to 2.15 billion yuan in the third quarter from 3.41 billion yuan in the same period of 2019, mainly due to the impact of a non-recurring expense.

Lufax’s leading indicator for lending sentiment, the flow rate for unsecured loans becoming delinquent for one to 89 days was 0.5 per cent in September, down from 1 per cent during the peak of the coronavirus pandemic in China in February.

Lufax executives forecast that full-year income will be in the range of 51 billion yuan to 51.5 billion yuan and net profit, excluding extraordinary items, will be 13.2 billion yuan to 13.4 billion yuan.

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This article originally appeared on the South China Morning Post (, the leading news media reporting on China and Asia.

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