ZestFinance Partners with Chinese Ecommerce Giant JD.com to Take Smart Credit Scoring Beyond the US
When we invested in ZestFinance five years ago, it was the very early days of data-driven lending. Douglas Merrill and his team had a thesis that they could use data to make better lending decisions and as a result make loans available to segments of the population that had been ignored or dismissed by the traditional banking system. As the recent Lending Club IPO and the emergence of other similar businesses has demonstrated, this is no longer a question — technology has and will continue to dramatically change the way consumers access capital.
The under-banked population is sizable here in the US, but it’s absolutely massive around the world, where the very concept of credit scores is generally nonexistent. ZestFinance has proven that it can effectively assess borrower risk by leveraging its understanding of a person’s social connections, online shopping and browsing habits, and other non-traditional signals. With this proof in hand, it’s only natural that the company is extending its reach beyond the borders of the US.
Today, ZestFinance announced that it is partnering with Chinese ecommerce giant, JD.com, launching a joint venture that will make consumer credit scoring available for the first time to Chinese lenders and expanding access to consumer credit for millions of consumers. JD.com generates $20 billion in sales from more than 100 million active customers in China. Under the JD-ZestFinance Gaia joint venture, the companies will offer installment loans for purchases made on JD.com, and give consumers a tangible score that should be portable across other commerce channels in the country. If this works as we expect, it should become the “FICO” of China.
While under-banked consumers in the US lack access to affordable or non-predatory credit options, consumers in China — even those who are affluent and might traditionally be considered prime borrowers in another country — have found themselves almost entirely cut off from credit for traditional retail purchases. Per Wired:
The problem is the nation of savers doesn’t have a long history of consumer credit. According to a report by The University of Chicago’s Paulson Institute, Chinese households borrow around 32 percent of their household income in a given year, compared to US households, which borrow 81 percent. And because China doesn’t have a long history of consumer credit, lenders don’t have a lot of data like credit scores to help them gauge the trustworthiness of potential borrowers.
Some innovative companies like JD.com have recently begun offering their buyers credit on large item purchases like appliances and furniture, but without the infrastructure of a credit scoring system, like FICO in the US. The results have been predictably sub-optimal. This is where ZestFinance, and the algorithm-driven system we’ve spent years refining in the US, can make an enormous difference.
According to the New York Times:
In China, JD.com had a very different assignment for ZestFinance, using different data sources than in America. Only 20 percent of Chinese adults have a credit score, and they often are given credit through the People’s Bank of China, the nation’s central bank, and through affiliations with large state-owned corporations…
But China’s leaders are seeking to stimulate consumer spending to make its economy less dependent on industrial exports. Expanding consumer credit is part of the formula, and the government is allowing private companies, like JD.com, to innovate…
In its test run for the Chinese company, ZestFinance built risk models using JD.com transaction data: what people buy, when they buy it, what brands they choose, where they live and other nuggets of information in the sales data…
In its test, the creditworthiness predictions made by ZestFinance were compared to the results of JD.com’s experience making loans, which was essentially the control group. The ZestFinance algorithms won handily.
As part of this new partnership, JD.com is making an investment in Zest, joining Upfront Ventures, Lightspeed Venture Partners, Matrix Partners, and others. We at Upfront are thrilled that one of the largest retailers and Internet finance companies in the world has validated the value and extensibility of the ZestFinance platform.
ZestFinance was started with the mission of providing fair and transparent credit to all consumers, including those beyond US borders. Entering the world’s largest market, by population, is a major step toward realizing this goal. Douglas and his team have spent five years building a product capable of delivering reliable risk assessment in emerging markets, where traditional metrics and data sources are even less viable. I’m incredibly proud of what they’ve accomplished. Hopefully, it’s only the beginning.
