Lu lindi became an avid online shopper during chinas coronavirus lockdown earlier this year, using the alipay app on his smartphone to pay for everything from milk powder to chinese medicine.
But the 54-year-old did not realise for weeks that instead of debiting his account, alipay was actually funding his shopping spree by issuing him credit.
Mr lu was not alone. alipays credit business is so huge that it now issues about one-tenth of all of chinas non-mortgage consumer loans. and a number of other customers told the financial times they felt the app is designed so that people take out loans, sometimes unwittingly.
As alipays owner, ant group, approaches a $30bn ipo in hong kong and shanghai, the rapid growth of its credit business has been a key selling point to investors.
In its listing documents, ant revealed that revenues from its credittech unit, which largely consist of the fees that partner banks pay to ant for arranging the loans, had grown by 59 per cent in the six months to the end of june and now make up 39 per cent of its total sales.
Kevin kwek, an analyst at bernstein, estimated that ant receives a fee of about 2.5 per cent for each loan it sets up.
The credit arm, which also lends to small businesses, has transformed ant, which originally amassed its base of more than 700m monthly users by being an easy mobile payments app. but with chinese regulators circling consumer lending, analysts are unsure whether such rapid growth can continue.
Ants consumer lending business is made up of two products: huabei, which is similar to a traditional credit card, and jiebei, which are small unsecured loans made through the alipay app.
Users say they are funnelled towards these two products with discounts and offers, and sometimes alipay uses huabei to pay by default, even if they do not intend to use credit.
It induces you to use huabei all the time, said 38-year-old vincent cheng. as soon as your default payment method is not huabei, the app will continually push discounts and promotions at checkout to get you to pay with huabei.
Once youve accidentally paid with huabei, it becomes set as the default, said mr cheng.
About 500m users borrowed from huabei and jiebei in the year to june 30; the average huabei outstanding balance was about rmb2,000 ($295) at june 30.
Janine wong said she so frequently ended up paying with huabei that she set a rmb500 credit limit to minimise using it by mistake. but it did not solve the problem.
They would temporarily raise my credit limit automatically, so sometimes even if my credit balance was not supposed to be enough to pay for something, it still got paid with huabei if i didnt pay attention, she said.
Ant said if users have any questions, the companys customer service is there to help. in its ipo prospectus, the company said it will automatically deduct funds from users alipay accounts or connected debit cards, so that if consumers pay with huabei unintentionally they do not pay interest as long as they have enough money in their accounts at the end of the interest-free period.
Mr kwek said he did not expect the growth of the loans business to continue at the pace of the past two years, but noted that chinas overall loan growth is 12 to 14 per cent per year and that alipay has some powerful techniques to keep people borrowing. with the link to payments you have a unique basis for growth, he said.
Meanwhile, beijing has continuously tightened its regulation of online lending in recent years, putting 99 per cent of peer-to-peer lenders out of business but entrenching the positions of ant, tencent and a number of other major apps.
Ant has disbursed more loans as a result and had issued a total of rmb1.7tn of outstanding consumer credit as of june 30, larger than the retail loan book of any chinese bank.
But regulation has also forced it to partner with banks. of ants outstanding consumer loan balance, 88 per cent was lent directly by banking partners including its mybank affiliate, 10 per cent was securitised and sold into the market, and two percent was held on its own balance sheet as of june 30.
In august, chinas supreme court ruled that the maximum interest rate on loans should be capped at four times the loan prime rate, or 15.4 per cent annually, which could affect the small portion of loans ant makes directly or securitises.
Ant said the majority of its borrowers already pay about this rate or less and a person familiar with the matter said the court ruling will be immaterial.
But zhao xijun, a finance professor at renmin university in beijing, said its banking partners may face even stricter interest rate caps in the future.
It is a general trend for china to control and lower interest rates on loans...licensed institutions are under a lot of supervision and their risk premium is lower, so they are likely to be given a maximum rate thats even lower than four times the lpr, said mr zhao.
Still, in recent years ants business has faced numerous regulatory hurdles and managed to grow new business to offset curtailed areas. innovations happen when you have lots of challenges, said one person close to the company.