LexinFintech (LX -4.79%), one of China's leading fintech companies, had a challenging 2020 as a result of the COVID-19 pandemic. Net income plunged 52% year over year in the third quarter as a result of surging expenses and provisions for credit losses. Shares also plummeted nearly 60% in 2020 following citywide lockdowns across the country.
But Lexin is bouncing back, rolling out new products as part of a big push into digital retail. And in February, Lexin outlined its vision for "Maiya" -- a "buy now, pay later" service that could help it penetrate one of the world's biggest consumer markets.
Investors have responded with optimism, sending shares of Lexin to a six-month high. But is Maiya really that big of a deal?
Why "buy now, pay later"?
A "buy now, pay later" (BNPL) payment option allows shoppers to buy products and pay for them over time. The usage of BNPL has exploded in recent years, driven by millennials' aversion to credit card debt.
This payment method is especially popular in Western countries like Australia where consulting firm Oliver Wyman estimates BNPL accounts for 10% of all e-commerce. This is partly because BNPL players like Affirm and Klarna have been around for some years now, pioneering the concept in the U.S., Australia, and Europe. Maiya, according to Lexin, will be among the first BNPL players in China.
As a leading fintech player in the region, Lexin has long provided ways for shoppers to split purchases into installments, but Maiya will be different because its users don't have to pay interest for at least 90 days. Instead, merchants will pay Lexin a fee for every transaction made through Maiya.
Traditional deferred payment plans in China often charge double-digit interest rates. With that in mind, Maiya is an attractive option for Chinese consumers seeking the flexibility of installment plans without the accompanying cost.
BNPL could supercharge Lexin's growth
Investors are betting that BNPL can ride the boom in Gen Z and millennial spending to grow into a massive industry in China. For one, these younger consumers have already embraced flexible payment products such as Ant Group's Huabei and JD.com's Baitiao. But BNPL stands out, because of its zero-interest installments, a model that turns traditional credit on its head. Instead of shoppers shelling out interest payments, merchants pay a fee for transactions to be processed.
The result is that buying products becomes more affordable through BNPL -- after all, Maiya has the upside of installments with almost no downside. And with greater buying power, customers can afford to spend more money with merchants, which can improve the latter's sales too. It's a win-win for both parties.
Of Lexin's 106 million registered customers as of Sept. 2020, only 25 million have a credit line through its existing financial products. Most consumers think twice before applying for a credit facility with Lexin where interest and other fees can run up to 15% of a purchase. This is why Maiya is such a massive opportunity for the company. It can leverage the new service to convert inactive users into active ones with minimal acquisition costs.
On top of that, Lexin can drive new user growth through this unique offering. And the timing is perfect, given Ant Group has recently reduced borrowing limits for some its customers -- a move meant to appease regulators scrutinizing its business.
Why this matters for investors
Maiya represents the next step in the evolution of Lexin's business. Right now, the company primarily provides fintech services to banks by drawing on its technological expertise in customer acquisition and risk management to match borrowers with lenders.
With Maiya, Lexin is transforming from fintech into a consumption platform for young people to shop and spend their money. This will help Lexin tap into the spending power of China's young consumers, a much larger opportunity than its traditional fintech market.
That being said, BNPL is still very new in China. Worldpay estimates that in 2019, BNPL's share of e-commerce payments in the Asia-Pacific region was just 0.3% compared to 5.8% in Europe.
And while there's plenty of upside for Maiya, Lexin faces stiff competition from existing deferred payment plan providers such as Huabei and Baitiao. These services are likely to introduce their own versions of BNPL. Fortunately, the BNPL space looks big enough for more than a few players.
And if the stunning rise of Afterpay and Affirm is anything to go by, Maiya will unlock a new source of growth for Lexin while diversifying the company's revenue stream.