Finnovation: Big Data, Credit Scoring and the Chinese Fintech Ecosystem
Note: This article was originally published via LinkedIn on July 05, 2017.
Popular opinion suggests that China is the FinTech clone of Silicon Valley, attracting US$8.8bn of investment and encapsulating growth at a remarkable pace that is unmatched by Western counterparts. Synonymously, this is attributed to the internationally-acclaimed BAT phenomenon; Baidu, Alibaba and Tencent — China’s Big Data leaders.
Why? Because Big Data is the new black gold. As WIRED analogises, “Big Data represents a tremendous opportunity to drill-down and tap-into these critical insights.” But, unlike fossil fuels Big Data is a renewable-resource, providing unparalleled value in a world where the term ‘legacy system’ exponentially grows on a minute-by-minute basis.
The traditional Chinese banking system is broken
China’s banking sector is somewhat underdeveloped, at 20% loan penetration this is one of the lowest levels globally. SME’s account for 60% of China’s GDP, contributing towards 80% of urban employment and 50% of fiscal and tax revenues; yet only 20%-25% receive bank-disbursed loans.
Furthermore, of China’s 234mn unbanked adults, 71% live in rural areas and 54% within the poorest two quintiles of households.
The Industrial and Commercial Bank of China (ICBC) is China’s leading National Bank (AUM ~US$3 475bn). It has the largest local online revolving credit facility, extending ~US$259bn to more than 70 000 SMEs. However, with 0.29 cards per capita in circulation at the end of 2015; a card-based SME lending product is myopic and outdated.
- ‘Easy Loan’ Corporate Card: Together with ICBC POS system, providing SME transaction data.
- ‘Easy Loan’ Rural Card: Purchase of agriculture products only.
- ‘Easy Loan’ Online Card: For use within the E-Buy Mall e-commerce platform only (ICBC-owned).
Essentially, a ‘lending on swiping for immediate use’ service model is applied, with the core idea that by capturing customer data (and competing with BAT) the ICBC can mine, analyse and consolidate transaction data; using this as stimulus to determine eligible loan sizes. The hairy issue here is that the ICBC is completely reliant on POS integration to fuel this analytically-driven model.
From a credit scoring perspective; China’s Credit Reference Centre (CCRC) is a highly incomplete, centralised database containing records for ~300mn citizens. This indicates that ~2 in 5 Chinese citizens have a recorded credit history. Hence, the national 2020 vision — Social Credit System (SCS) using financial and social data. As such, eight licenses have been granted by government to develop a national scoring system: Alibaba, Tencent, Ping An, Pengyuan Credit Services, China Chengxin, IntelliCredit, Yin Zhi Jie and the credit division of Blue Focus.
A proactive government response is evident with the introduction of the Internet Financial Industry Information Sharing Platform (IFIISP) launched in September 2016:
- Enables member companies to analyse creditworthiness of applicants from multiple angles.
- Collates data from registered companies and provides an anonymised credit result.
- Inaugural members include Ant Financial, JD Finance, Lufax and Yirendai.
BAT — The power of innovation
The earliest private credit scoring initiative is the social credit service built and run by Ant Financial — Sesame Credit Management. Essentially, Sesame Credit analyses data generated on Alibaba’s shopping platform (300mn customers and 37mn SMEs); assigning a credit score ranging between 350–950. The higher the customer’s credit score, the more entitled that customer is to special privileges on the Alibaba platform and affiliated networks.
On the other hand, Tencent Credit uses data generated from WeChat and other social media data (via Weibo) to credit score individuals both within Tencent’s WeChat platform and the greater Tencent affiliate network. This is whilst JD Finance & Zest Finance (USA) are currently developing a credit risk evaluation service extending access to consumer credit across China.
Finnovation is rife
Despite BAT’s dominance, not only does the current landscape encourage innovation; but Chinese FinTechs have risen to the challenge. According to my research, there is an extensive list of promising FinTech’s pushing their agenda across the various operating sectors: Big Data/Credit Scoring (18), Consumer Finance (11), Lending (9), Payments (9), Wealth Management (15), Insurance (5), Alternative Finance (3), Online Funding (3), Online Brokerage Investment (3), Internet Securities (2), Bitcoin & Blockchain (2), Comprehensive Financial Services (3), Crowdfunding (1) and more.
These 84 FinTechs (not limited to) present intriguing IP, which, if anything may compete with or prove a suitable acquisition target for BAT. Hence, eight of China’s top 10 FinTechs fall under the top 27 global Fintech Unicorns.
As is the case with most markets today, the greater the number of FinTech and non-traditional initiatives, the more likely the Chinese government is to emphasise interoperability across mobile wallets and other banking services. By introducing an open-architecture policy, this not only democratises the ecosystem; but encourages a greater pace of innovation, essentially translating into direct value creation for all stakeholders.
Watch this space…
