China is still a country where people prefer to pay upfront — often with wads of cash. Taking out a loan to buy a car is still uncommon. Some people pay for a house with cases of cash.
But after paying for food and rent, not everyone has so much cash at hand.
Paymax, a Shanghai start-up, hopes to coax China's blue-collar and service industry workers into taking out loans for some smaller purchases — mainly mobile phones and tablets.
Although the people who use the service are strapped for cash, that doesn't mean they're not good credit risks.
"I wouldn't describe my customers as subprime — they just have no [credit] data," said Paymax founder and Chief Executive Dan Hu, a Stanford University alumnus.
The start-up's users, mostly across rural areas of China, have never defaulted before. That's partly because for some of them, the Paymax loan is their first loan.
Beyond mobile phones and tablets, Paymax recently expanded to buyers of the Apple Watch. It might add in laptops. That's all it covers.
Hu noted that someone who receives a loan is "not a borrower — they're a buyer of a mobile phone." That enables the service to avoid people who are desperate for cash, as well as people in trouble with loan sharks.
That's one of several ways that Hu's start-up stands out from other online loan offerings in China.
Potential lenders face many hurdles, including the country's inadequate credit rating system. Hu figures that the People's Bank of China covers only about 30% of the populace with its credit ratings. The coverage is even more sparse for blue-collar and service workers.
So Paymax effectively built its own credit rating system, using "nontraditional data" like a person's mobile phone number and chat access codes 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.
Another method employed by Paymax is more unorthodox: The company monitors the keystrokes of potential customers while they are using the Paymax website. Hu said that doing this weeds out people who immediately jump to the largest loan amount, or who copy and paste in their address, which might suggest someone applying at multiple loan sites.
To some that sounds creepy, but the Paymax team believes that small-loan seekers, who are informed about how the site works, won't mind the intrusion.
A typical loan for a Paymax customer is about $300 for a mobile phone or tablet. The loan usually lasts about 12 months, but 24 months is also an option. The rates aren't cheap: 3% a month plus a 1% fee.
Although it lends to smartphone buyers, Paymax eschews Internet retailers. The loan company teams up with small and medium-sized gadget retailers; store clerks then suggest Paymax as a payment option, and use the Paymax app to generate a QR code that sets off the loan application process, said to take about 15 minutes.
A successful loan triggers a cash reward for the salesclerk in the form of a "red envelope" that contains a random amount of cash; it could be from $1.60 to $32 for a single sign-up.
Paymax makes money from a service fee as well as the flat-rate interest on the loan.
"There's not enough data yet for variable rates," Hu said, but it's something that the company is working on so it can offer lower rates to safer loan applicants — and higher ones to riskier bets. It has issued 30,000 loans so far. Paymax said it's in 3,000 individual stores in China.
Paymax hasn't gotten into China's top electronics retailers, such as Gome or Suning, partly because its loans don't cover purchases of home appliances, and partly, Hu concedes, because those major companies would rather handle loans themselves.
Paymax is also trying to avoid going head-to-head with China's online giants such as Alibaba, Baidu and Tencent, which are already getting into finance and online banking.
"They have lots of data already," Hu said. He predicted that they'll go into the loan business, starting with white-collar workers and, eventually, the blue-collar market.
In the meantime, he'll focus on building market share among China's 200 million young blue-collar and service industry workers.
Steven Millward is chief editor for the online news service Tech in Asia.