Author/Wang Huiying

Editor/Midnight

Looking back at China's consumer market in the first half of the year, the biggest keyword is growth.

On July 15, the National Bureau of Statistics released data on total retail sales of consumer goods in the first half of the year. The data showed that from January to June, total retail sales of consumer goods reached 23.6 trillion yuan, up 3.7% year-on-year; excluding price factors, total retail sales of consumer goods actually increased by 3.9%.

As an important tool for promoting high-quality development of new consumption, fintech has played a vital role in boosting consumption and confidence, aligning with economic recovery and consumption growth. The fintech industry has also sent positive signals to the market in the first half of this year.

Taking Lufax Holding as an example, as of June 30 this year, Lufax Holding's loan balance was 235.2 billion yuan, serving a cumulative total of 23.2 million customers, an increase of 17.4% year-on-year, with 45.2 billion yuan in new loans added in the second quarter.

Despite macroeconomic uncertainties and challenges in the industry cycle, the positive performance of leading players has undoubtedly boosted confidence in the industry.

In the capital market, fintech companies are also bolstering investor confidence. Lufax Holding and LexinFintech have distributed dividends or cash bonuses, while Qifutech, Yirendai, and Yiren Digital have announced increased repurchase efforts.

Notably, with the surge of large language models in 2023, fintech companies embarked on a path of cost reduction and efficiency enhancement powered by large models, and large model products in the direction of "AI+Finance" have quickly materialized.

From the advent of the internet fintech wave in 2013, through rapid expansion, industry transformation, and the pursuit of transformation, the fintech industry has traversed a decade.

In the coming decade, only by withstanding market tests, serving finance with technology, and finding new growth points can fintech companies transcend cycles and embrace long-termism.

1. Ongoing Transformation: Where Are the Opportunities and Challenges?

The fintech industry has long been closely intertwined with fluctuations in the consumer market. Currently, boosting consumption and expanding domestic demand have emerged as crucial measures to stimulate the economy, with fintech playing a pivotal role.

Over the past few years, the consumption structure of the entire market has transitioned from a downturn to an adjustment period. To adapt to the complex and ever-changing external environment, the transformation of the fintech industry has been ongoing.

The more transformative the period, the more it tests a company's ability to navigate cycles. With the recovery of consumption, we can glimpse the development trends of the fintech industry through the performance and movements of some leading companies.

Among U.S.-listed fintech enterprises, each has its unique business focus, but overall, there is steady growth.

Take Lufax Holding, an institution that empowers small and micro-enterprises with financial services, as an example. In the second quarter of this year, it achieved revenue of 5.976 billion yuan.

During the reporting period, Lufax Holding's credit asset quality improved, with reduced delinquency rates in both small and micro-financing services and consumer finance businesses. The C-M3, a forward-looking indicator of asset quality trends for small and micro-financing services, improved from 1.0 at the end of the first quarter to 0.9.

Concurrently, Qifutech reported net revenue of 4.16 billion yuan, up 6.3% year-on-year; Yirendai generated revenue of 3.168 billion yuan and net profit of 551 million yuan; and OneConnect Financial Technology reported revenue of approximately 692 million yuan, gross profit of approximately 253 million yuan, and profit attributable to the company's shareholders of approximately 243 million yuan, turning a profit from a loss year-on-year.

A notable trend is that as the macroeconomy enters an adjustment period, prudent operation has become a keyword for all players, who are adopting strategic contraction strategies.

Reflecting on loan balances, except for Jayin Technology, which did not disclose relevant data in its first-quarter financial report, the loan balances of the other five listed fintech companies declined quarter-on-quarter in the first quarter.

Lufax Holding disclosed to Lianxian Insight that amid the complex macro and market environments, it has adopted a prudent business strategy, focusing on enhancing the quality of new assets rather than expanding scale.

In contrast to the contraction of lending businesses, several major institutions are increasing their guarantee ratios to drive structural changes in revenue. Strategic contraction while seeking transformation has become a consensus among fintech companies.

Lufax Holding was among the first to act. As early as 2023, Lufax Holding transitioned to a 100% guarantee model. By the first quarter of 2024, all new loans were either issued by its consumer finance subsidiary or empowered by guarantee companies under the 100% guarantee model.

Financial statements showed that the risk-bearing ratio in Lufax Holding's loan balance at the end of the second quarter increased to 56.7%. In the first half of the year, Ping An Guarantee served a total of 125,000 small and micro-enterprise owners.

Under this model, Lufax Holding's new business monetization capabilities have been enhanced. During the second-quarter earnings call in 2024, Lufax Holding CFO Zhu Peiqing stated that under the 100% guarantee model, the company's new business take rate (revenue rate) rose to 9.3%, with the potential for further increases as the proportion of 100% guaranteed loans in Lufax Holding's loan balance grows.

Meanwhile, Yirendai's guarantee income grew robustly in the second quarter of this year. Financial statements revealed that Yirendai's guarantee income in the second quarter of 2024 was 1.2989 billion yuan, up 21% from 1.0729 billion yuan in the same period last year.

In recent years, reducing the operational pressure on small and micro-enterprises and improving their credit quality have taken center stage. In November 2023, the People's Bank of China and eight other departments jointly issued the "Notice on Strengthening Financial Support Measures to Promote the Development and Growth of the Private Economy," which mentioned small and micro-enterprises 11 times, requiring increased credit support through risk-sharing and other measures to reduce financing costs for small and micro-enterprises.

Post-transformation, fintech companies like Lufax Holding and Qifutech, with their risk-sharing capabilities, serve as bridges connecting banks and enterprises.

For fintech companies, transitioning to a guarantee model can not only increase their business autonomy but also balance revenue and costs, enhancing long-term profitability.

In short, by increasing the proportion of risk-bearing loans, fintech companies are seeking transformation and growth in credit businesses.

With the positive business transformation, the fintech industry also faces some objective challenges.

Lufax Holding told Lianxian Insight that while the macroeconomy has generally improved over the past year, with market demand gradually recovering, the vitality of small and micro-enterprises remains to be strengthened.

According to data released by the China Association of Small and Medium-sized Enterprises, the average development index of China's small and medium-sized enterprises was 89.6 in 2021, 88.4 in 2022, and 89.2 in 2023. In January and February 2024, it was 89.2 and 89.1, respectively, failing to recover to the 2019 average of 92.9.

Today, with information transparency and industry sink , market competition has visibly intensified. The logic of "growth through investment" no longer holds, and competition has shifted back to providing customers with a reasonable and secure credit cycle and consumption experience.

2. The Financial Industry's "Hundred Models War"

Entering a new development cycle, the financial technology industry faces a common challenge of slower revenue growth due to industry adjustments and declining interest rates.

As one of the most digitized industries, finance boasts abundant high-quality data. Utilizing large models to analyze and process this data is crucial for improving business efficiency. Achieving cost reduction and efficiency enhancement through technological innovation has become a consensus in the industry.

More importantly, in 2023, "large model reshaping" emerged as a keyword across industries, with many sectors embracing large models for reinvention. Amid the continuous development of financial companies' main businesses, technological content has become a focal point of competition.

An IDC survey revealed that over half of financial institutions plan to invest in generative AI technologies in 2023, with only 10% indicating no plans for experimentation. Furthermore, IDC predicts that by 2026, 25% of financial institutions will use generative AI to deeply integrate financial services across various links in the industrial chain, including production, manufacturing, circulation, and consumption.

With financial institutions actively embracing large models, the "Hundred Models War" in the financial industry has commenced.

Soon after the large model trend emerged in the second quarter of 2023, the financial industry took the lead in laying out its strategy. For instance, LexinFintech introduced its self-developed financial vertical large model LexinGPT, Qifutech launched "QifuGPT," Baidu Finance released "XuanYuan," and MaxBorrow unveiled its first retail finance large model "Tianjing"...

As large models entered their application phase this year, the financial industry focused on implementation.

Lufax Holding introduced its first domain-specific AI large language model "Wushi" for risk control and the comprehensive AI-powered loan solution "Xingyun" for business processes. Qifutech has successively launched applications such as Qifutech AI - Copilot System and Yuzhi AI. Meanwhile, based on predictive models, LexinFintech developed the Turing Decision Simulation System to aid enterprise decision-making.

Why has the financial industry been at the forefront of large model adoption?

Essentially, it's data-driven.

As is well known, fintech companies' businesses encompass various aspects, including financial transactions, customer information, market analysis, risk control, etc., all of which require massive amounts of data.

On the one hand, fintech companies have a solid data foundation; on the other hand, accurately completing business tasks and delivering high-quality service experiences to customers test each institution's data processing speed and completion rate.

The emergence of large models can help the financial industry enhance data processing speed, while the industry's data foundation provides raw materials for training large models, accelerating their intelligent emergence capabilities, forming a positive cycle.

Reflecting on performance, cost reduction and efficiency enhancement are the main themes in the financial industry during the large model race.

Lufax Holding's second-quarter 2024 financial report revealed that through the development of AI-powered loan solutions like "Xingyun," business loan processes became more convenient and efficient, with 50% fewer process breakpoints. Ninety percent of loan applications were approved within 1.5 hours, marking a 31% increase in efficiency. As of June 30, "Xingyun" had served a cumulative total of 1.009 million customers, who had collectively obtained approximately 229 billion yuan in loans.

Previously, in the customer service domain, Lufax Holding introduced the Smart Form Filling System Model, an intelligent direct service for customers. According to Lufax Holding's introduction to Lianxian Insight, since its launch in early June, the model's smart form filling accuracy has reached 84%, with a cumulative usage of 13,989 cases, improving customer service order placement efficiency by 26%.

Similarly, in the area of customer service efficiency enhancement, Qifutech has also made notable improvements. Qifutech's second-quarter 2024 financial report showed that since the launch of AI-Copilot, human efficiency increased by 4.1%, user conversion rates on the agent side climbed 5.6%, management efficiency soared by 50%, and business processing accuracy improved by 1.2% compared to pre-implementation levels.

As the financial industry accelerates toward large model application, issues of security, privacy, and compliance must be addressed amidst cost reduction and efficiency enhancement.

To better integrate large models with businesses, players typically adopt one of three approaches:

One approach, exemplified by MaxBorrow and Kingsun, involves a combination of large and small models.

Another approach, represented by Qifutech, integrates large model parameters with structured, explicit, and reliable financial knowledge graphs to enhance the reliability of large model operations.

The third approach, exemplified by Baidu Finance, combines open and closed question answering, enabling large models to retrieve information within their domain of expertise upon receiving requests, significantly improving accuracy.

Large models have become a must-compete territory for the financial industry, and the changes they bring to fintech companies are evident. However, the competition in the "last mile" of large model implementation in the financial industry remains uncertain, necessitating continued investment and exploration for fintech companies to stand out in this new race.

3. How Can Fintech Companies Seek New Growth in the Future?

Unlike many emerging industries, the fintech industry did not emerge solely due to technological advancements but is embedded within the historically rooted traditional financial sector. As consumption patterns evolve and internet technology advances, the innovation journey for fintech companies, from digital+finance to AI+finance, has just begun.

This journey is bound to be bumpy. To mitigate risks associated with economic cycles, major fintech companies are seeking new growth points while consolidating their existing business strengths.

Some companies are focusing on diversified business strategies.

Taking Lufax Holding as an example, for a long time, in addition to developing small and micro-loan businesses, it has pragmatically pursued a diversified development strategy to align with the trend of boosting consumption and expanding domestic demand, vigorously developing consumer finance businesses through its subsidiary Ping An Consumer Finance Company.

Currently, Lufax Holding has formed a dual-engine synergy of "consumer finance + small and micro-financing." Lufax Holding's second-quarter 2024 financial report showed that new consumer finance loans totaled 22.1 billion yuan, up 23.6% year-on-year, accounting for 49% of total new loans.

As of June 30, 2024, Ping An Consumer Finance's loan balance stood at 42 billion yuan, up 27.9% year-on-year, serving nearly 2,500 counties across 31 provinces in China. It offers interest-free coupons for new residents, interest deduction coupons for existing customers, and consumption rebate coupons for all customers.

On the other hand, partnerships with external platforms have become a path for fintech companies to expand their scale. Qifutech has collaborated with Douyin to expand diversified customer acquisition channels. In the second quarter of this year, Qifutech had a cumulative total of 53.6 million users with approved credit lines, up 13% year-on-year.

Beyond diversification, seeking growth in broader markets is a consensus among various industries in China, and the fintech industry is no exception.

In April this year, Lufax Holding completed its acquisition of Ping An OneConnect Bank. Following the acquisition, Lufax Holding can leverage its virtual banking license to create innovative digital banking services, support inclusive finance in Hong Kong with financial technology, and serve the economic development of the Guangdong-Hong Kong-Macao Greater Bay Area. This move is seen as an important step for Lufax Holding to expand into international markets.

In terms of exploring new markets, Yirendai has laid a deeper and earlier foundation. As early as 2018, Yirendai began its overseas expansion, entering markets such as Indonesia and the Philippines.

As of June 30, 2024, the cumulative number of borrowers in the international market of CreditEase Technology Group reached 5.6 million, an increase of 40.0% year-on-year; the number of new borrowers was 470,000, up 51.6% year-on-year. During the reporting period, CreditEase Technology Group's international business revenue was 562.9 million yuan, an increase of 12.0% year-on-year, accounting for 17.8% of total revenue in the second quarter of 2024. Among them, the performance of the business brand in the Philippines exceeded expectations, with a year-on-year surge of 140% in transaction volume during the quarter.

Of course, delving into overseas markets is bound to face risk factors such as legal supervision and social environment. For companies, it is both about seeking potential opportunities in new markets and completing localized layouts locally, where challenges and opportunities coexist.

If the past decade was characterized by rapid expansion and development in fintech, the entire industry has now entered a stage of normalized and high-quality development, where the ability to navigate through economic cycles becomes the key differentiator among companies.

From a broader perspective, the fintech industry plays a pivotal role in expanding domestic demand and boosting consumption. It is a long-term endeavor to serve customers, especially small and micro-enterprises, through technology and innovative services.