Moody's Investor Services has opined that the credit quality of Internet companies could be weakened by Chinese technology companies pushing their way into orthodox businesses like finance and banking. The former will leverage high smartphone ownership and the convenience of mobile Internet to offer anything from asset management, peer to peer lending and cashless retail payments via the Internet. Such operations could lower the credit qualities of Internet companies. This premise holds especially true if the latter's finances are found to be consolidated in the accounts of technology companies.
Borrowers and core weaknesses
The reason for this could be attributed to the Internet companies' present inability to generate sufficient profits from their business operations. They also do not have a record of holding the borrowers accountable for payments not made on time to repay their loans. Lina Choi, senior credit officer, and the vice-president of Moody's said that Internet companies can suffer from potential capital calls and contingent liabilities as a result of loans made to merchants and consumers. The scenario is also affected by wealth management distribution. Incidentally, these are the two main services offered by these online companies. She continued on to say that such risks will remain even if the finance operations get de-consolidated. Wealth management and the loan-related services will continue to be provided with the brand names of Internet companies. The strategic relationship between finance operations and the core operations of the companies will continue to be the same as before.
Synergy and attracting customers
These warnings by Moody's are particularly important as the Chinese Internet companies have actively begun to disintermediate the standard brick and mortar businesses. In 2016, a number of banking licenses have been snatched by a number of large Chinese technology companies. Although such licenses offer technology companies to import innovation practices in finance, leading to the development of fintech or financial technology, a practical synergy also gets created. Moody's has observed a synergy between the online financing businesses and online retailers. This attracts a greater number of customers to the core business.
As per Choi, companies like VIPshop and Alibaba, by offering loans to merchants and consumers who transact on the company platforms, could drive better transaction volumes, cash flows, and revenue. Data related to merchants and consumers gathered by these companies assist their finance operations to decide regarding whom to lend to and the amount of money to lend.