The big score: making or breaking China’s consumer credit market
If things go as planned, a growing army of data firms and credit-scoring outfits will use the information to pivot China towards a future powered by consumer spending
Eva Niu wants new boots and, like millions of young people in China, she’s hunting for a deal on Taobao, one of the world’s biggest online markets.
But unlike most online shoppers in China just a year ago, Niu will buy the boots on credit provided from within the same system she shops in. That’s quite a leap in shopping sophistication for a 22-year-old who has never considered going to a bank for a credit card.
“It’s hard for us college students to apply for credit cards,” the Beijing law school student says, pointing at strict rules at banks that she believes would disqualify her. “Maybe that’s why Ali credit is popular among the young generation.”
By “Ali credit”, Niu means the dense data-processing and credit-scoring operations at Sesame Credit, part of Ant Financial. Ant, in turn, is an affiliate of Alibaba, the New York-listed e-commerce giant that also owns Taobao and launched a licensed online bank this year.
Without Niu even asking for it, Taobao offered her a virtual credit card, called Huabei, with a credit limit of 4,000 yuan (HK$4,881) good only within Alibaba’s empire. Ever since she bought a bra on Taobao in 2010, the company has collected every snippet of her transaction data within the online mall. Those blips now feed into Sesame Credit to produce a credit score.
Behind Niu’s boots, the scoring, the helixes of data and the unsolicited credit, there is a cosmos of credit information sweeping through what has become in a few short years one of the world’s biggest markets for online payments and e-shopping.
If things go as planned, a growing army of data firms and credit-scoring outfits will use the information to pivot China towards a future powered by consumer spending, namely by better assessing the creditworthiness of the masses.
But the deluge of data blips and credit scores must find order, experts say.
Fierce competition between technology companies, traditional banks, data processors and the government threatens to produce massive yet lonely islands of consumer data, gripped tightly like digital gold by individual companies.
That outcome will produce only shadowy profiles of the new shopping class in China. The power of the credit reporting market in China lies in bringing the wealth of data, or at least large swathes of it, together under a few leading firms.
“Wouldn’t it be great to have this data all in one place? It would be the mother of all credit data structures,” says Andrew Jennings, a vice-president at the US software company Fair Isaac Corporation, also known as FICO. “But it’s not all in one place.”
The data is scattered across the market. Experts at the World Bank have pointed out that a three-tier credit market is emerging. The bulk of the players process data, package then sell it to creditors. Next year, FICO plans to launch a service that will buy raw data from companies, process it and market it to banks to help them make lending decisions on individuals.
A smaller group of specialised credit reporters are homing in on data from specific industries. Their access to a wide range of data is limited but the firms, Alibaba counted among them, are able to derive snapshots of creditworthiness for individuals, and even lend to them.
At the top tier of the market are real credit bureaus that gather data from across different industries to produce comprehensive credit reports for people.
Today, only the state-controlled Credit Registry Centre, or CRC, qualifies for the first tier. The People’s Bank of China launched the centre in 2002 and since then it has filed away banking data on more than 300 million citizens, with complete profiles of about 240 million.
The sheer scale of the CRC makes it one of the world’s largest credit bureaus. But it is far from comprehensive. In fact, out of the total population, there are about 500 million potential bank customers that have no formal credit record, according to FICO.
Together with the 60 million with incomplete records at the CRC, China has 560 million citizens – Niu, the boot shopper, included – who are a simply uncovered in the formal credit reporting market. That’s 560 million potential shoppers who will struggle to get bank loans or even pick up credit cards.
They have not all gone ignored, however. Those people, who by themselves would constitute the world’s third largest country, are the focus of China’s emerging internet and e-commerce giants, many of which will soon be fully licensed for the business.
Last year, the central bank announced that it would open the once-tightly-guarded credit reporting market to the private sector with a view to spurring competition and innovation. It invited eight firms, including affiliates of Ping An, Alibaba and Tencent to apply for credit reporting licences, hoping at least a few would become true credit bureaus.
The companies might call themselves credit bureaus but they have carried on with business as usual.
For years, Alibaba has collected transaction data from both merchants that sell goods on Taobao, and from the customers that buy the goods. From that wealth of data, it synthesises credit scores.
In much the same way, Qianhai Credit, which is owned by Ping An Group, has collected data from Ping An’s insurance business and from Lufax, a peer-to-peer lending platform that is also part of the group.
Those companies and others have towering silos of data, which neither share a common format nor combine with other caches of data to create richer and more comprehensive scores for customers. There is little to no sharing, and that limits their view of what customer creditworthiness really looks like.
The internet and tech giants pushing into the sector, despite holding some of the biggest stores of transaction data in the world, have only a cross-section view of individuals who have entered their ecosystems.
Some of the companies are bringing to the market “only e-commerce data, others are bringing public record data, while still others are bringing traditional consumer financial data. So each participating company in the risk information ecosystem is considering different types of data to determine the creditworthiness of a consumer,” say Thomas Brown, a senior vice-president at LexisNexis Risk Solutions. “China’s credit industry perhaps presents the largest big-data challenge around the globe today.”
The innovation and competition is good for the market, at least in its early stages. The challenge will be bringing more of the information together to form better scores, something that will boost efficiency in the credit market. Jennings pointed out that if each of the eight licensed companies produced scores for the same person today, those score could vary greatly.
“If it’s still that way in five year, it won’t be such a good thing because it means something hasn’t worked. You’ll have a plethora of different scores,” he said, while also encouraging the wave of innovation that has taken China’s financial industry by storm. “You have this situation – which is unique in the world – where the credit bureaus are actually banks but they are also competing with banks.”
The operators of the CRC, too, are trying to come to terms with the explosion of private data processing and credit scoring. One mismatch in the market is that traditional banks mainly engage the CRC for credit information.They lack strong connections with the emerging technology companies that are capturing data on hundreds of millions of people.
“We’ve served the credit market for the past decade very well,” Wang Xiaolei, a deputy director general at the CRC, said at a forum in Hong Kong last month. “But also now we are facing challenges, especially with the rapid innovation in the credit market.”
The challenges also point to the freest and most vibrant market China has ever produced. The businesses that have moved quickly into the credit industry are thriving and, most importantly, are getting consumers to spend more money – evidenced by China’s November 11 “Singles Day” spend-a-thon.
During the first half hour of the November 11 online shopping event, customers bought 4.5 billion yuan in goods using Alibaba’s virtual credit card Huabei. The name of the card translates into a colloquial “spend why don’t you”. By the end of that day, shoppers had bought more than 90 billion yuan in goods through Alibaba’s two major retail platforms, more than some of China’s biggest offline retailers sell in a year.
Deregulation of financial markets on the mainland has created an all-out battle over credit allocation in the banking sector, to which credit reporting has traditionally been subservient.
For decades, lending at state banks was based on paying ordinary people below-market rates on their bank deposits and funnelling those cheap funds to companies with cosy government relations. The system was at the heart of China’s plan to invest itself to a state of prosperity.
Small entrepreneurs have been all but left out of the credit picture, or at least left to the whim of loan sharks. For a small business to succeed, the owner would need plenty of cash on hand, or wealthy relatives willing to grant loans.
“The best way to develop the middle class is to have credit allocated by meritocracy and not by connections,” says Randal Kroszner, a former US Federal Reserve governor and a professor at the University of Chicago’s Booth School of Business. In other words, the system must figure out how to link innovative entrepreneurs with the capital they need to develop their businesses.
The ways normal Chinese people get access to cash have changed rapidly over the past three years. The final stage in dropping control over interest rates was made just last month, pushing banks to pay more for deposits while also competing more on lending rates.
The proliferation of banking and credit reporting licences to companies such as Alibaba is a big step in reducing the state’s monopoly on capital and responding to the credit needs of average citizens.
The gears of China’s economic engine are downshifting as well. The level of growth fueled by government spending is just now coming off a decades-long high, where more than 45 per cent of gross domestic product was created by investment. Trading that growth for the kind driven by domestic spending is one of the Chinese government’s top priorities over the next decade.
Last year, industry and construction still made up 43 per cent of China’s GDP, according to Capital Economics. Wholesale and retail trade had just a 10 per cent foothold.
The composition is changing as ordinary people make and spend more money. Fixed asset investment, a gauge on investment, grew by just 10.2 per cent in October, marking a continued decline from near 20 per cent just two years earlier. Retail sales surpassed investment last month to climb by 11 per cent year on year.
“I think this is a crucial period of time, much like in the post-war period in the United States,” Kroszner said. “But this is different from in the post war period in the United States because of the internet.”
When the US developed its credit market, starting in the 1950s, it grew with limited technology in a world dominated by banks. The core credit data that drove America’s decades-long consumption boom was derived largely from people’s interactions with banks and utilities companies. Digital data processing was decades away.
With licencing underway in China, the building blocks of a rich credit reporting market are in place.
The internet and the opening of China’s financial sector to non-bank companies has added layer after layer of new data.
The economy is primed for young shoppers and entrepreneurs to spend more money on credit.
“Banks want to expand their addressable markets. People want to improve their lives. The Chinese government wants to transform into a consumption-based economy,” Brown said. “The Chinese risk information ecosystem is the underlying foundation that ushers those desires from wishes to real-world reality.”
The market just needs a few private firms willing to lead the way.