The cooperation between banks and third-party institutions in the online lending business is an effective way to make loans more accessible for small and medium-sized businesses and reduce their financing costs, experts said.

"Third-party institutions have strong customer acquisition and risk control capacity with regard to small business loans while banks can provide a large amount of funds at low prices. This will effectively combine social resources that have complementary advantages by giving full play to their own characteristics. As a result, micro and small enterprises which had to rely on high-cost funds in the hands of the general public can now receive loans from banks at lower costs," said Bai Xuemei, vice-president of CD Finance, a rural microfinance institution headquartered in Beijing.

China's top banking and insurance regulator issued draft rules on commercial banks' online lending business in May. The regulator affirmed the cooperation between banks and third-party institutions on offering online lending services to small businesses and gave specific instructions on how to promote sound development of this business model. Now that the policy is clear, banks and third-party institutions will make long-term arrangements accordingly, Bai said.

One of the pain points of the cooperation is whether third-party institutions are allowed to charge service fees directly from the clients, considering that regulators are pushing for reduction of the comprehensive financing costs for small businesses.

"Regulators should clarify the range of companies' comprehensive financing costs that is acceptable to them. They should also take into account that the amount of labor contributed to the cooperation between banks and third-party institutions varies from one institution to another," Bai said.

For those institutions that reach out to small businesses and rural households in towns and villages, it is hard to cut their operating costs because the assets under management per client manager are very small, she said.

As the regulators keep urging banks to lower lending rates for micro and small enterprises, they should evaluate banks' performance in this regard separately from the service fees charged by third-party institutions. Otherwise, many large banks dare not enter into partnerships with these institutions on providing loans online to small businesses due to concerns that the comprehensive financing costs will be higher than regulators expect after service fees charged by third-party institutions are written into bank contracts, she said.

Despite the challenges, people still expect to see an increase in the volume of online lending business through banks' cooperation with third-party institutions, including fintech companies.

"Commercial banks, whether big or small, are not familiar with customer acquisition on the internet or using alternative data provided by third-party service providers to conduct credit investigations. Under the circumstances, fintech companies will serve as necessary enablers for banks," said Victor Li, executive vice-president of Pintec, a Beijing-based fintech total solutions provider.

"As financial regulations have become mature and the market has become rational, people have realized the importance of banks in complying with relevant laws, regulations and guidelines. Fintech companies should make full use of their technical features, flexibility and familiarity with the internet ecosystem to boost market growth through cooperation with financial institutions."

Currently, business models of banks' cooperation with third-party institutions on the loan business and their partnerships are still evolving.

In the past, fintech companies were less involved in the loan business. They charged banks service fees by offering technology services. But there has been a change in the digital ecosystem in the last few years. Both parties believe that they should be jointly responsible for the performance of the loan business. Otherwise, banks are unable to judge whether the software and solutions provided by a fintech company are the best.

"This change has led to profit and risk-sharing between banks and third-party institutions. However, such a risk-sharing model is starting to meet regulatory challenges, which we believe will bring us back to a balanced point that fintech companies without financial licenses will focus on technology, rather than sharing risks and bearing loan losses upon requests by banks," Li said.

"The cooperation between IT service providers and banks is making a transition toward a new model highlighting cooperation in business and innovation activities. The new model with an emphasis on innovation, that integrates quantitative analysis with business scenarios, is still in the process of rapid development. The market is still facing uncertainties, and participants are still exploring the market where challenges co-exist with opportunities."