For China’s low-wage workers, this startup provides loans for iPhones

China is still a country where people prefer to pay up-front – often with wads of cash. Taking out a loan to buy a car is still uncommon and some people avoid a mortgage and pay for a house in cases full of cash.

But not everyone has so much cash at hand.

One Shanghai-based startup is hoping to bring China’s blue-collar and service industry workers – people like construction workers, security guards, and store staff – around to the idea of taking out loans for some smaller purchases. Although the people who use the service are strapped for cash, this isn’t the kind of US subprime mortgage lending that precipitated the 2008 financial crisis or that’s causing the new bubble that’s emerging in America in subprime car loans.

“I wouldn’t describe my customers as subprime – they just have no [credit] data,” says Paymax founder and CEO Hu Dan, who’s a Stanford alumnus. The startup’s users, mostly across rural areas of China, have not defaulted before – and usually this is their first loan.

Paymax focuses on people buying mobile phones and tablets, and it recently expanded to cover buyers of the Apple Watch as well. It might add in laptops. That’s all it covers. Hu stresses that someone who receives a loan is “not a borrower – they’re a buyer of a mobile phone.” That allows the service to avoid people who are desperate for cash, as well as people in trouble with loan sharks.

And that’s one of several ways that Hu’s startup stands out from other online loan offerings in the country.

China’s credit rating problem

The biggest challenge for the startup is that it’s battling the issue of China’s inadequate credit rating system. Hu reckons that the People’s Bank of China (PBOC) only covers about 30 percent of the populace with its credit ratings – but the coverage is even more sparse when it comes to blue-collar and service workers, who are the demographic that Paymax is focusing on.

So Paymax effectively built its own ratings system. Hu explains that it uses “non-traditional data” like a person’s mobile phone number and QQ account number in order to root out “credit card junkies” who are just looking for a new system to scam or who have applied for loans on the growing number of Chinese peer-to-peer loan sites.

A construction worker in China. (Photo credit: Robert Scoble)

One other method of checking on potential loan recipients is much more unorthodox – the company monitors the keystrokes of potential customers while using the Paymax website. That allows the startup to weed out people, he explains, who immediately jump to the largest loan amount, or who copy-paste in their address, which might suggest someone who’s applying at multiple loan sites. While that sounds creepy, the startup team reckons that Chinese consumers (who are informed about how the site works) in search of this kind of small loan won’t mind such an intrusion.

A typical loan for a Paymax customer is about US$300 for a specific mobile phone or tablet. The loan usually lasts about 12 months, but 24 months is also an option.

No to ecommerce

Another unusual thing about this loans startup is that it mostly works offline, eschewing ecommerce. Offline gadget retailers are “lagging behind in technology,” Hu says. “They want to compete with online, so they need credit payment options.”

Cashing in