The year 2024 marked a turning point in China's consumer credit landscape, showcasing a complex evolution as the industry transitions into what many are calling the “stock era.” This change has been spurred by various economic indicators and shifting consumer behaviors, drastically affecting both the supply and demand dynamics of the financial services sector.

Early in the year, data released by the central bank revealed a notable fluctuation in household consumption loansAt the start of 2024, the total outstanding consumer loans amounted to approximately 58.31 trillion yuan, only to decline to 57.67 trillion yuan by the end of JulyHowever, a gradual recovery was observed, with numbers slightly rising to 58.49 trillion yuan by NovemberConcurrently, the number of credit cards in circulation faced a slowdown, dropping from 767 million at the end of 2023 to 749 million by June 2024, reflecting a decrease of about 1.53%.

In stark contrast, major internet platforms have reported a continuous growth in their lending scales, indicating a bifurcation in the market

A report from the China Banking Association indicated that by the end of 2023, the total loan balance among 31 consumer finance companies had surpassed one trillion yuan, reaching 1.153 trillion yuanThese statistics reveal a growing dichotomy in consumer credit accessibility, where traditional banks struggle while tech-driven lenders thrive.

As financial institutions grapple with what has been termed an "asset scarcity," a mantra has emerged: “whoever controls the flow, controls the market.” This adage resonates strongly, particularly for smaller financial institutions that have faced heightened risks associated with large offline lending productsIn this context, smaller online platforms that offer fragmented, smaller credits have become essential battlegrounds for customer acquisition.

However, not every institution possesses the capability to build proprietary online channels

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This limitation has led to a scenario where platforms that can attract significant web traffic have become gatekeepers of online credit distributionInsiders have noted an instance where a small bank's president couldn't even secure a meeting with a vice president from a major platform, highlighting the disparity in power dynamics within the market.

The push towards greater online accessibility has been met with some resistance as many financial organizations realize that having access to traffic alone isn’t sufficient; the context in which this traffic is acquired – often referred to as "scenarios" – is increasingly pivotalExecutives from several institutions have disclosed that their firms have shifted their strategies to focus on platforms that not only provide traffic but also offer transactional scenarios supported by robust customer data analytics.

It is important to clarify how internet platforms have monetized their traffic streams

Their revenue primarily stems from two avenues: first, advertising fees charged to institutions for traffic placement; second, service fees garnered through a revenue-sharing model wherein technology platforms leverage their data prowess to connect lenders with ideal customer segmentsRemarkably, these platforms pass on no credit asset risk, yet financial institutions find themselves burdened with rising costs, specifically front-end costs.

One credit card executive shared insights into this dilemma, indicating that the customer acquisition cost via traffic platforms can soar as high as 900 yuan per individualThis figure includes various associated expenses, such as payments made to the traffic platform, cooperative fees with marketing entities, and promotional costs for client onboardingThis situation starkly contrasts with the effectiveness of traditional marketing methods, which appear to yield higher conversion rates.

Furthermore, a senior executive from a notable consumer finance company revealed that their organization incurs over 1,000 yuan in acquisition costs for every 20,000 yuan loan dispensed

This emphasizes the unsustainable nature of the current model, leading many in the industry to acknowledge that focusing solely on traffic generation is not a viable long-term strategy.

As smaller financial institutions continue to navigate rising front-end costs, these pressures are compressing their profit margins furtherA comprehensive cost structure analysis from consumer finance firms delineates four critical components: capital costs, operational costs, risk costs, and acquisition costsSeveral stakeholders have expressed a willingness to allocate more resources toward customer acquisition if they could secure higher-quality client segments capable of reducing risk costs.

Nevertheless, a persistent issue persists: many smaller institutions struggle for bargaining power in negotiations with larger platforms, resulting in escalating acquisition costs without any corresponding increase in customer quality

One executive articulated that regardless of whether a loan product commands a 24% or an 18% annualized interest rate, the fundamental challenge lies in the escalating risk costs that remain fixed or continue to climb.

At the end of 2023, all 31 consumer finance companies had embarked on online operations, with ten adopting a fully online customer acquisition strategy, and 25 institutions relying on online third-party platforms for over 50% of their referral streams – a clear shift toward digitalization compared to the previous year.

All these developments indicate that under the constraints of a 24% interest rate ceiling, profitability is elusive for most industry playersTraditional tech firms have also ramped up competition by leveraging their expansive reach, exacerbating existing pressures on consumer finance firmsBanking institutions, primarily smaller ones, find themselves in a particularly precarious situation as decreasing deposit rates are not translating into lowered borrowing costs.

Despite these challenges, smaller financial institutions cannot overlook the crucial role of traffic platforms

The essential nature of online engagement cannot be underestimated, as both consumer demand for digital solutions and institutional supply have aligned in the digital sphereA senior executive from a notable consumer finance firm noted, "Our clients have embedded the internet into their lives, so supply must migrate online to match the demand.”

In this increasingly competitive landscape, financial firms with wired governance structures must strengthen and refine their risk assessment capabilities to regain some negotiating powerWith many players in the market beginning to adopt diversified strategies that lean toward integrating online traffic with risk management analytics, the focus has shifted from merely harnessing flow to developing robust user engagement platforms.

The growing realization is that digital customer acquisition is not a stand-alone solutionFinancial executives have been keen to collaborate with platforms that have integrated financial functionalities into their ecosystems rather than relying exclusively on social platforms which often do not provide the full spectrum of customer insight necessary for risk assessment.

Currently, platforms like Alipay and WeChat Pay are becoming integral players in this new market landscape, allowing financial services to commerce seamlessly

Coupled with innovative firms ramping up technological capabilities, there is a palpable shift towards creating a holistic ecosystem where customer data and risk assessment converge.

As this segment of the industry evolves, the future appears to be rooted in collaborative frameworks that allow for shared benefits among all parties involvedBy channeling the inherent strengths of established internet platforms and synergizing them with traditional banking systems, the financial services landscape might fuse into a more coherent and efficient model that maximizes consumer accessibility while minimizing risk.

In conclusion, the consumer finance sector in China is at a crossroads, navigating through the complexities of an evolving landscape where traditional metrics of success are being questionedMoving forward, it remains crucial for institutions to develop niche strategies that leverage their strengths and the unique advantages provided by digital platforms while ensuring a sustainable growth trajectory in an increasingly competitive environment.