Why India and China won’t follow footsteps of the U.S. credit bureaus

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India and China are at the center of innovation in the fintech industry. There is a lot of enthusiasm to serve these large markets (2.5 billion people) that, historically, haven’t had access to traditional financial products due to lack of technology or market reach.

These limitations of technology and reach are quickly evaporating and VCs are excited. Fintech startup funding in Asia is growing at a fast clip (even faster than the U.S.).

Source: KPMG and CB Insights

Source: KPMG and CB Insights

There is a clear massive opportunity with 3 major positive trends for these markets:

1. No current financial products: There is a huge need for all types of financial products. About 300–400 million people in India and 250 million people in China don’t have a bank account (close to the size of US population). These people are either poor or living in areas where traditional banking institutions can’t/don’t provide services. A deposit account is the most basic service, getting access to credit and other financial products is even more difficult. If you combine the population that has bank accounts but doesn’t have access to other financial services, then these numbers become much bigger. There is a significant latent demand for credit products, payment systems, and other types of financial products among this population.
2. Increasing Mobile/Internet Penetration: This is THE biggest trend driving strong optimism for Indian and Chinese markets. A large part of Chinese population is already coming online through mobile phones (675 million new unique phone users were added in China in 2015 and India crossed 1 Billion mobile subscribers in 2016). It is indisputable that these two countries are the largest in mobile inclusion and companies are fighting to provide better and faster internet access. For a large part of this new population their mobile phone will be the only access point for all fintech services.
3. Better Regulatory Environment: Another big advantage for fintech startups in India and China are their limited regulatory requirements (U.S. has been imposing more regulations on fintech startups especially in lending after the 2008 mortgage crisis). Asian countries are embracing digitization and developing regulatory policies with a much better view of the future (Reserve Bank of India issued 21 banking licenses recently and some went to startups). The governments want to increase financial inclusion and they are creating policies to help startups achieve this objective as fast as possible.

Many companies in fintech are innovating on credit products specific to these countries. They are replicating some successful concepts in the U.S. with a focused local implementation (like P2P lending in China) and developing local business models (like wallets in India). These companies are also innovating on underwriting models as they don’t have traditional bureau credit data (since most people never had bank accounts or any credit), sources of acquisition, and collection systems.

The bureaus are an integral part of a healthy credit system of any country. They are expected to provide accurate and up to date credit, employment, and identity data for all borrowers. They are a database of relevant financial information that is used by all lenders and who all lenders report to.

In the U.S. bureaus are pretty well established (with Equifax, Experian, and Transunion being the major ones). They collect information from public records, banks, and other credit providers. A machine has been built and they enjoy benefits of network effects as new lenders who want to access credit data need them and also report to them (because borrowers want to build credit). They are also highly regulated and all reporting is done according to standards specified by the government and the bureaus (they are a pain to work with — those who’ve dealt with them would know).

In my view, the bureaus won’t be able to get a hold in countries like India and China. They are structured and organized to work in the developed world and adapting to a developing world will require a significantly different approach.

They will face multiple challenges establishing themselves at the center of credit in countries like India and China. I have listed a few ways these countries operate differently than the U.S. (which makes it challenging for the bureaus to adapt):

1. No unique identity tracking systems — To identify a unique person, a bureau needs to get a unique identity. Most people in the U.S. have SSN, but China and India don’t have anything similar. India is trying to implement Aadhaar Card, but implementation has been slow (there is PAN Card for people with jobs, but that segment is very small). Mobile penetration may help create a unique identification with phone numbers or social networks may help, but a unique identity system is still far from something close to the U.S. This will create issues for bureaus to uniquely identify borrowers where 90% of the population uses prepaid phones, changes their phone number frequently, doesn’t own homes and is employed in jobs where they don’t pay income taxes.
2. Lack of credit card penetration (dislike for credit cards) — The most common form of credit product in the U.S. is a credit card. This is not true for India and China. Credit cards have not been able to get a foothold in these countries because of high merchant fees, traceability, and dislike for credit cards among consumers. In a nation of 1.2 billion people, there are only 25 million credit cards in current circulation in India (compared to 600 million debit cards) and average credit card spend is 50% of average debit card spend. As an example, my father has about 12 credit cards and he doesn’t use any of them. I used them a few times for him, but he just doesn’t like them. This is a pretty common sentiment in India. China is better, but no different. There are about 200 million cards in circulation (still a small number based on other China-level metrics). Credit cards have been around for a while, but never took off in these countries where people still prefer to spend only the money they have.
3. Wallets have quickly become far more popular — In contrast to 25 million credit cards in the past 20 years, India has >150 million wallets in 5 years. These wallets act like prepaid cards and have become significantly popular and are also the reason for a couple of fintech unicorns in India. People are transacting a lot more on wallets than they have ever done on cards. This is more inline with their spending habits compared to credit cards. As they become more popular and have network effects (merchants accepting them and customers using them), they’ll become the standard for digitized spending instead of credit cards.
4. Paternalistic households — Another cultural factor in these countries is that young generation lives with their parents and parents shield their kids for a long time. It is not uncommon to be living with parents until you are 30 years old or married. This means that spending on credit cards and other products don’t really reflect an individual’s credit behavior. Even if someone is spending money on cards, family comes together to pay the bills every month and payment behavior is not representative of their credit risk.
5. More lenders with unique structures — In the U.S., most of the credit market is captured by traditional banks and lenders. In all areas of credit including credit cards, auto loans, student loans, and mortgages, a large part of the market is captured by a few organized players (strict regulations have prevented startups to provide credit). This is not the case in India and China. There are at least 2,000 P2P lending platforms in China and all of them are using their own sources of data. Some big companies like Wechat and Alipay have their own walled gardens for payments. This is where most of the transactions happen. It will be incredibly difficult for bureaus to get these players to open up.

These are just some of the issues. There are additional problems layered on top of these like creating policies for a debit heavy world, deciding the data to put in those reports, use of data by existing and new merchants, generating credit performance takes decades (during downturn and benign credit environments), etc..

The pace of growth and a significantly difficult dynamic makes me believe that credit bureaus of the developing world will look different than they look in the U.S. The bureaus would either need to reinvent themselves or new types of local bureaus would come up. These new bureaus will provide lenders with a simpler API based integration and collect data relevant to them (including debit and wallet transactions).

Here’s to the next 10 years of credit scoring.