Xiaomi (XI) (OTCPK:XIACF) (OTCPK:XIACY) is gradually scaling its fintech business by leveraging its smartphone network effect and geographic footprint. Although fintech remains a relatively small portion of Xiaomi's overall revenue stream, we believe that it could potentially become a bigger revenue contributor driven by the growing need to seek a new source of revenue driver and supportive regulatory measures in China that could allow Xiaomi to scale its fintech offerings over time.
Xiaomi markets itself as an internet company rather than a smartphone maker and if you are an internet company in China it is very difficult to forgo financial services as part of the revenue equation. In Q3, Xiaomi reported other internet VAS revenue of RMB1.6b (+78% y/y) driven by fintech and its Youpin ecommerce platform. Given the maturing smartphone market, a declining smartphone sales trajectory and limited margin upside, expanding Xiaomi's current fintech business could potentially address some of these near-term weaknesses, in our view.
Worth noting, not all fintech business is suitable to Xiaomi given the current competitive dynamics. Fintech consists of lending, payment, wealth management, brokerage, and insurance. Of these segments, lending presents the most attractive opportunity followed by payment which could become a revenue driver as China's payment landscape becomes more accommodative to new entrants. Online brokerage is another interesting area given Xiaomi's current investment in Tiger Brokers (TIGR). Wealth management and insurance may not become a material driver but could add incremental revenue streams as Xiaomi acts as a broker for wealth management and insurance distribution given its large install base globally.
Xiaomi's fintech was created back in mid-2015 and this business segment includes lending, third-party payment, wealth management, insurance, supply chain financing, and virtual bank.
Main business lines include:
Xiaomi Wallet acts similar to Apple Wallet in that it is part of Xiaomi's mobile OS and allows the users to conduct an offline transaction, utility and bill payment, public transit payment and digital door locks. As part of the Xiaomi Wallet, Mi Pay utilizes NFC for offline payment and is compatible with UnionPay's QuickPass POS machine that is gaining ubiquity across China.
Xiaomi Lending is a consumer finance product similar to the cash loan and installment loan that Lexin (LX), Qudian (QD) and 360 Finance (QFIN) provides to its customers. Xiaomi leverages its user data (mostly device data) to assess the risk of the borrower. Questionable app usage and download could suggest higher risk user while a user that do not use shady apps is perceived to be of higher creditworthiness.
Xiaomi Wealth covers mostly savings account, wealth management product, and fund management products. This is similar to a wealth management product provided by Ant Financial and Tencent's (OTCPK:TCEHY) LiCaiTong.
Xiaomi Insurance covers most Xiaomi-centric insurance products such as mobile phone screen insurance, health insurance and casualty insurance.
Supply chain financing provides financing solutions to cover the entire raw material sourcing to the sales distribution process.
A virtual bank is a relatively new business segment as it only received the virtual bank license in Hong Kong in May 2019. Although on the surface, Xiaomi's virtual bank is designed to disrupt Hong Kong's banking market, we suspect that it could potentially become an issuing bank for the globalized version of China's digital currency, the DCEP (see: Tencent: Losing The Crypto Battle)
China's PBoC is currently remaking the payment landscape by inviting new entrants into the space to disrupt the current Tencent-Ant duopoly. The solution is the introduction of the unified QR code that allows any wallet provider, such as Mi Pay, to be accepted by the merchants and used by the consumers (see: Regulatory Headwinds Pressuring China's Payment Giants).
This is significant given that the unified QR code effectively opens the opportunity for Xiaomi to finally monetize its wallet and carve its niche within its install base. Many believe that Xiaomi does not have a chance to gain consumer adoption as the habit of using WeChat Pay and Alipay (BABA) is largely engrained within Chinese consumers.
We argue otherwise in that Xiaomi could potentially use innovative ways to entice consumer adoption such as discounts on Xiaomi phones and hardware, or lower interest on Xiaomi installment payments. Although we acknowledge that it is still unclear on how much upside Xiaomi can achieve in payment, one thing for certain is that it will not be insignificant.
Xiaomi is surprisingly successful in India, where it is leveraging its success to offer credit products to the Indian millennials. We note that Xiaomi recently launched Mi Credit, a marketplace for digital lending that offers users Rs5,000 to Rs100,000 at a relatively low-interest rate. Xiaomi also partnered with ZestMoney, CreditVidya, Money View, Aditya Birla Finance and EarlySalary to determine credit and financing options. As part of the risk management process, Xiaomi uses the users' text messages, call logs and other device information to gauge creditworthiness.
India is facing a financial inclusion challenge in that credit card penetration in the country is only 3% vs. 70% in the US. Lack of credit history prevents many from accessing credit, and Xiaomi can utilize the users' smartphone usage and habit to create a new credit score system. Although it is still in its early days, we believe there is good potential as Xiaomi's brand could attract sufficient borrowers to scale its assets while attracting financial partners to scale its funding base.
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