Xin’An (XA) Bank in partnership with the i3 Programme funded by Metlife Foundation is using Natural Language Processing (NLP) based digital applications to increase women’s access to finance in the An’hui province of China. Their work carries several learnings for market-system actors in designing women-centric financial services.

China has about 8 million registered Small and micro-sized enterprises (SMEs) and around 60 million individual-owned unregistered micro-enterprises. According to the Chinese Central Bank, MSMEs account for more than 90% of market participation, 80% of employment, 70% of patents, 60% of GDP growth, and 50% of the taxes collected.

Despite its significant contribution to the economy, one of the biggest challenges faced by SMEs in China is the availability of capital. While all entrepreneurs face significant challenges, women-led enterprises face disproportionate barriers as a result of gender-discriminatory social and cultural norms that often limit women’s mobility and social networks limiting their scope of expanding their business. Moreover, constraints on access to finance, digital access, high unpaid care burden, time poverty, lower access to productive assets, limited entrepreneurial networks, and lack of confidence in business skills are critical factors that inhibit women’s entrepreneurial journey.

IFC estimates that more than 70% of women-owned SMEs worldwide have inadequate or no access to financial services, resulting in a $300 billion gap in financing.

Why it’s even tougher for women entrepreneurs to get funding in the credit-starved SME sector in the province

An’Hui Province is one of China’s underdeveloped areas with a population of around 60 million and a severe lack of economic opportunities. The province has a high incidence of migration to other nearby regions within China such as Shanghai and Jiangsu, as people move out in search of employment opportunities. Most of the migrant workers are men, leaving behind women and children in their hometowns in the province.

To add to the household income and provide for the family, women in An’hui operate small businesses and run enterprises, in addition to managing their household and caregiving responsibilities. Of the nearly 3.4 million registered self-employed individuals, almost half are women (1.2 million), yet the latter remain financially underserved due to a lack of access to suitable credit products.

Ms. Yang an entrepreneur in the trade business is a typical example. Despite having developed stable relationships with big corporate suppliers, she faces financing pressure due to the long time gap between the purchase of stock and its sales, especially at the end of the year. Most of the income she collects comes from WeChat or other digital payment channels and these don’t build up a bank account transaction history to prove a business’ potential for loan approval from traditional banks. This leaves her to seek alternative funding methods from fintech providers; however, the credit she qualifies for are smaller-sized loans with higher interest rates making it inadequate and expensive for stocking inventory.

“It’s just too tiring for me to collect all these paper materials from various government departments especially when I have kids at home. I don’t like big banks; they always think I’m not a qualified business owner as a woman and that my business is not stable enough. There are always reasons to reject my loan application.” - Ms. Yang, Anhui province China

Experiences like that of Ms. Yang accurately reflect the gap in the market. Though China has been one of the frontiers in digital financial inclusion, technology hasn’t yet been able to cover the financial needs of low and moderate-income people. The stereotypes and biases against women business owners are consciously or unconsciously carried in both human loan investigation and big data credit analysis.

According to a recent study, only 16% of women-owned SMEs worldwide report dependence on bank loans as a source of capital to fund their businesses, as compared with 22% of those owned by men. This could be explained by the established gendered social norms and how the credit methodology exacerbates rather than neutralize those biases.

Data inequality exists even across alternative data credit rating systems as the required digital footprint typically favours men. Moreover, unlike in developing countries where guidelines on the fair credit act ensure that elements such as gender are not factored into the algorithms, China has yet to impose an equivalent guidance.

Very often, we see human bias being carried to the lending decisioning algorithms wherein factors like women under or above a certain age, married or divorced, become critical variables for credit decisions, preventing women from accessing necessary credit for their enterprise.

These challenges and biases have created a vicious cycle for women SME-owners with many of them hesitant to seek credit from formal sources. What they need is an unbiased, non-intimidating and inclusive system of credit assessment and loan approvals

Mr. Sun Xiao, CEO of XA Bank, explains the problem which is rooted deeply in the mindset of financial institutions.

“Many bankers don’t trust women entrepreneurs and are not bold enough to design products for them. From my experience, women are better borrowers if we compare the default rate, and they use money in a more cautious way. And empowering women means supporting an entire family: the kids and the next generation. So, I’m very confident and willing to lend to women.”

XA Bank’s women-centric approach to diagnosing and addressing the challenges

XA Bank, a newly licensed private bank, saw the challenge in its entirety but also recognized an opportunity to promote gender equality for a sustainable future in the province. XA Bank’s CEO Mr. Sun had the experience of working with the Ma’an’shan Rural Commercial Bank of An’hui and had seen the success of the World Bank-sponsored IPC technology in enabling rural commercial banks to provide credit to women entrepreneurs. That experience enabled Mr. Sun to continue empowering women entrepreneurs in the tech-savvy XA Bank. While the IPC approach was effective for building deep relationships and understanding customers’ credibility, it had a heavy reliance on offline loan officers. For XA Bank, the commitment to serve women-owned SMEs encouraged them to continuously invest in new technology to create more inclusive financing frameworks.

XA Bank summarizes the ethos, underlying their approach, by saying:

“We believe that the essence of small and micro-enterprise credit is ultimately about assessing willingness and ability to pay through various tool kits. Big data and other methods partially solve the risk control decision caused by information asymmetry for smaller amounts of credit with the rule of thumb. But when it comes to credit demand with very little data and larger ticket size, big data does not work that well.”

The NLP-based AI credit product improves women’s experience of the loan process, reduces inefficiencies at the financial institution level, and enhances access to credit for women-led enterprises

After in-depth market research, XA Bank, supported by the i3 program developed a Natural Language Processing (NLP) based digital application for women entrepreneurs. The product aims to lend to local entrepreneurs with a credit demand between 200,000 RMB to 1,000,000 RMB for an interest rate of 7-8%. It only requires a digital app which allows end customers to freely answer questions to a virtual ‘investigator’ and upload information, while back-end analytics would do automatic comparing and analysis. Further, there would be only one field visit from the bank for signing the contract and the loan would be disbursed within two days.

NLP is a subfield of linguistics, computer science, and artificial intelligence concerned with programming computers to process and analyze large amounts of natural language data. The goal is to equip a computer to understand the contents of documents, including the contextual nuances of the language within them. The technology can then accurately extract information and insights contained in the documents as well as categorize and organize the documents themselves.

XA Bank’s NLP solution had a virtual investigator NLP wherein customers could answer questions as if they were interacting with a real person without having to face any conscious or unconscious bias that they may have to face during actual human interaction. The system captures the voice and transforms it into text messages. XA Bank’s NLP also collects ‘soft information’ like the family details, the cross-checks of different answers, the tones, and facial expressions for credit building. The analysis serves for credit rating purposes as well as to guide women entrepreneurs through the loan application process, eliminating unfamiliarity with digital technology.

XA Bank explains its innovation this way:

“In addition to digitizing traditional credit processes, this NLP-based approach also obtains more information through set questions, especially those that are not available in big data. Information, which is an important part of risk control approval. In addition, NLP technology can also break the limitations of time and space, allowing the efficient and fast image of AI Goddess Loan to be displayed anytime, anywhere.”

The NLP system has increased efficiency, for both XA Bank and end customers and eliminated the need for labour and a pen-paper data analysis. More importantly, it has revolutionized the engagement between financial institution agents and women entrepreneurs and minimized gender-based discrimination in the credit approval process.

For people like Ms. Yang, who were previously dissatisfied with the inefficiency of financial institutions taking 10-15 days to process loans, today enjoy a smooth 30-minute application, with a 5-minute approval, and 2-day settlement service. The timely funding has enabled her to further expand her business, increasing her income and in turn, her ability to be more secure and resilient in the future.

Another entrepreneur Ms. Zhang, whose business was severely affected in 2020, required immediate cash to sustain her business. While most of the banks were hesitant to lend money to her, she successfully received 350,000 RMB credit from XA Bank through simple steps. Now with the economic recovery, Ms. Zhang has successfully repaid the loan and expanded her business outside the province of Xi’an and Zhengzhou. She continued to seek support from XA Bank with a second financing of 850,000 RMB for this expansion. Satisfied by the service, she now saves with XA Bank with her business earning surplus income, building her financial resilience.

The future of XA Bank’s product: iterations and capacity building to continue improving the financial health of women entrepreneurs

Between 2019 to June 2022, XA Bank has provided credit to more than 3,000 women SME owners spread across multiple industries and age groups. The current default rate is negligible (0.35%), which is much better than the market default rates for the SME segment.

In 2021, XA Bank integrated electronic signatures, electronic contracts, remote video and other technologies to ensure that the entire process from application to disbursement goes fully digital. This enables the AI loan product to be zero carbon emissions as well. XA Bank also piloted women’s capacity-building programs and workshops partnering with An’Hui Women’s Federation and Women Entrepreneurs Association.

For XA Bank, the work for empowering women entrepreneurs does not stop at providing credit. The bank remains committed to pioneering technology innovation to achieve its SDGs as an inclusive, focused financial institution.

“We understand this is not a one-off ‘only credit’ service. It’s also about continuously upgrading based on customers’ feedback. We have to build up an ecosystem beyond financial services to empower women as better business owners. We are trying hard to do it step by step,” – XA Bank

Studies from Forrester and Deloitte demonstrate that customer-centric companies bring in 5.7 times more revenue and 60% more profits than their counterparts. Piloting the AI Goddess Loan product with XA Bank from the very beginning helped the i3 program realize the power of customer centricity. XA Bank’s adoption of a women-centric approach has helped them innovate a technology-led product and make finance available to previously underserved segments of women.

By building its credibility and trust among low-income clients through its gender-conscious design, XA Bank is not only enhancing their customers’ financial health but also growing its own business potential. Their focus is not on the design of a singular product, but rather on shaping an ecosystem that works for women entrepreneurs relying on continuous customer feedback. Their vision, strategy and execution, show that when financial service providers prioritise people before products by improving technology to suit customer needs or by simplifying processes, they gain customer trust and loyalty and shape new pathways of staying competitive and relevant to their customers.

Two years of the project under the i3 program serves as great practical learning for industry practitioners in the midst of the global transition from financial inclusion to financial health.