Chinese startup gets funding to help low-wage workers buy iPhones

Photo credit: SteveC.

A company based in Shanghai is taking an unusual approach to the burgeoning financial tech industry – or fintech, as it’s known. Rather than making an app and chasing the most moneyed users it can find, it works mostly offline, giving low-wage workers a way to buy mobile phones and laptops in installments.

They’re people who are strapped for cash, not desperate for cash.

Hu Dan, the founder and CEO of Paymax, is a Stanford alumnus and former VP of Sequoia Capital China who’s offering loans for purchases to the kinds of people in China who would not get credit through conventional channels – folks like construction workers, security guards, and store staff. For them, even Apple’s more affordable iPhone SE represents more than a month’s wage. His startup ties up with offline retailers to persuade shoppers to use its service to pay in chunks – with interest.

Although he’s handing out loans, Hu sees his users as shoppers, not borrowers. They’re people who are strapped for cash, not desperate for cash.

After starting up in early 2014, Paymax landed series A in October that year led by Sequoia Capital. By mid-2015, it had series B courtesy of Renren. Today, Hu is revealing a series C worth around US$50 million. The newest investment is co-led by Shunwei Capital – which is headed by Xiaomi founder Lei Jun – and JD finance, a subsidiary of Alibaba arch-rival JD. Morningside Ventures, Renren, and China Renaissance Partners also contributed to the newest round. Paymax has now raised a total of US$87 million.

The startup’s loan system is available at 20,000 offline retailers across 157 Chinese cities. It has 700,000 unique borrowers, Hu (pictured) tells Tech in Asia. They’ve borrowed about US$150 million so far. Some are repeat customers.

For loyal users, Paymax is now willing to loan cash – usually about US$450 to US$775. That’s available to customers already added to a safe list after paying back a previous loan they took out for one or more gadget purchases. Hu says this is a “relatively small part” of the business right now because the firm is only inviting some of its most solid users to take up cash loans.

“We are very positive that repeat customers will be our major source of profit in the future,” he adds. “Because we don’t have to pay the acquisition costs for repeat customers, we can offer them a slightly lower interest rate, which they like very much.” He concedes the interest rate is higher than borrowing from a bank, but a Chinese bank would be very unlikely to lend to a low-wage worker. The rate is lower than typically offered by China’s booming peer-to-peer lending startups, because those factor in a very high risk element.

Battling con men

“The number of defaults on the cash loans is lower than the gadget hire purchase because we pro-actively select those customers from our existing customer list. We observe his repayment behaviour, and we try to rank all those customers in our system, and we only add those on the top of the list to the whitelist,” explains Hu.

China’s blue-collar workers are twice as likely to default compared to their white-collared brethren, he says. That’s why the startup is still focusing on gadget purchases rather than cash. And that’s why Paymax had to build up a complex system to figure who to trust.

The fraudsters usually hire one or two actors to pretend to be someone’s dad or someone’s brother.

A rare profit