Xiaomi banks on phone data for finance play in India

China’s Xiaomi is poised to launch a consumer lending business in  India in the coming weeks, making an ambitious tilt at the booming  financial services market where data privacy concerns and fierce  competition present formidable challenges.

The stakes are high for  the world’s fourth largest mobile phone vendor, whose business model  relies on low-margin hardware sales with services as a key long-term  profit centre. The company reported disappointing second-quarter  earnings on Tuesday and its shares are trading at slightly over half  their 2018 IPO price

Xiaomi is betting it can leverage its  number one position in India’s smartphone market to tap into the  country’s lucrative but crowded financial services sector. Yet, the  mounting public concern over data privacy, which has forced tech giants  like Google and Facebook to change the way they do business, could make  it a bumpy road for the Chinese firm.

Indeed, Xiaomi’s  approach to data collection and privacy has raised eyebrows among some  of those familiar with its international expansion plans. The company  remains a small player in financial services in its home country,  according to documents seen by Reuters.

Xiaomi faces  ferocious competition across Asia from banks, global tech giants,  fintech startups and others who are scrambling for position in the  region’s booming digital economy.

In Indonesia, another key  market, Xiaomi’s financial unit had to shut down in late 2018 due to a  disagreement with regulators over licensing.

A source  familiar with Xiaomi’s India efforts said the company was doing well  there with its first offering, a payment app called Mi Pay that launched  in March.

“They seem to be following the market leaders,  Apple and Google, where a smartphone eventually will become more than a  phone and more of a financial play,” the source told Reuters.

Xiaomi’s  new Mi Credit service in India, offering loans of up to 100,000 rupees  ($1,451) with interest rates starting at 1.8 percent, is scheduled to  debut in the coming weeks. The Xiaomi spokesman told Reuters that Mi  Credit was operating in “beta phase” but declined to share details.

India  is Xiaomi’s largest market outside China, and it boasts an installed  base of some 70 million phones there, according to market researcher  Counterpoint.

Xiaomi’s fintech revenues rose 62.7 percent  year-on-year to 112 million (RMB 792 million) for the second quarter,  the company reported Tuesday, with a focus on “consumer loans and supply  chain financing.”

Xiaomi uses data from phone activity to create  credit profiles based on a customer’s “identity, life stage, lifestyle,  social relationships, and brand loyalty,” according to documents seen by  Reuters.

The privacy issue has spooked at least one  potential bank partner in Indonesia, Xiaomi’s second-largest overseas  market after India, which backed away from a deal in part because of  concerns about invasive data collection, a senior executive at the bank  told Reuters.

Consumers who apply for the services in India  sign broad agreements consenting to share their personal data with  Xiaomi, including everything from “professional and educational  backgrounds” to “temporary messages history” and information related to  “use of certain apps and websites”.

The agreement also  includes a disclosure that Xiaomi may share “personal information from  time to time to Xiaomi affiliated companies...or third party service  providers.”

The banker in Indonesia told Reuters a presentation he  saw showed the company scans phone owners’ private data for mentions of  lifestyle changes, such as a divorce or a promotion, as part of its  approach to credit scoring.

Apar Gupta, executive director  at advocacy group Internet Freedom Foundation, said a lack of data  privacy laws and regulations in India left users vulnerable.

“The  risks include information collection which goes beyond the reasonable  contemplation of a user,” Gupta said. “If they do not have adequate  notice of what information is being gathered they have no meaningful way  of knowing what they are bartering away in order to get a loan.”

A  Xiaomi spokesman told Reuters “user privacy and data protection is of  utmost importance to us,” and the firm had a “strong data protection  agreement” in place with its lending partners in India.

Moreover,  privacy concerns may not be top of mind for Xiaomi phone owners, many  of whom are drawn by the relatively bargain prices of the hardware.

“Banks  usually ask for a lot of documents before giving out a loan. If Xiaomi  lends me money quickly, and without too many documents, I won’t mind  sharing my data with the company,” said 29-year Akshay Pawar, a Xiaomi  phone owner in Aurangabad in Western India. “100,000 rupees is a decent  amount, good enough to buy a new motorcycle.”

And the phone  data appears to be effective in analysing risk: Xiaomi’s non-performing  loan ratio is under 2 percent, according to documents seen by Reuters,  very low for consumer loans with the average ticket size of $1000  dollars.

In China, Xiaomi’s lending business boasted a loan book  of $8 billion, with $2 billion in outstanding balances, as of mid-2018,  according to documents seen by Reuters. Mi Pay, operated in partnership  with Chinese bank card provider UnionPay, has achieved an annual $12  billion in gross merchandise volume for China, with 20 million active  users, according to the documents.

That leaves it far behind Chinese rivals such as WeChat Wallet and Alipay.

The  China figures have not previously been reported. A spokesman for Xiaomi  said the figures were valid as of May 2018, but declined to give the  2019 figures.