Across The Border | Finance businesses may jeopardise credit quality of internet companies, Moody’s says

China’s technology companies had been muscling their way into the traditional business of banking and finance, using the convenience and ubiquity of the smartphone-enabled mobile internet to provide everything from online cashless retail payments, to peer-to-peer lending, to asset management.

These operations could weaken the internet companies’ credit quality, especially if their finances are consolidated on the technology companies’ accounts, Moody’s Investors Service said.

That’s because most internet companies don’t generate enough profits from operating these businesses, and they lack a track record of holding borrowers accountable for timely payments on their loans, Moody’s said.

“Loans to consumers and merchants, and distribution of wealth management products, two of the primary services that finance operations provide, can lead to contingent liabilities and potential capital calls for internet companies,” said Lina Choi, a Moody’s vice president and senior credit officer. “These risks will persist even after the finance operations are de-consolidated, although further removed from the core business. The loans and wealth management services will still be offered with the internet companies’ brand names, and the strategic relationship between the core and finance operations remains.”

The warnings came amid the aggressive pace at which Chinese internet companies are disintermediating the traditional brick-and-mortar businesses. In the past year, half a dozen of China’s biggest technology companies have been awarded new banking licenses.

While these licenses give the technology companies to bring innovation to bear on finance, creating the newfangled field of financial technology, or fintech, there’s also a more practical synergy. Moody’s sees synergy between online retailers and their online financing business, which draw more customers to their core business.