China’s fast-growing world of using data to create consumer credit scores is being overhauled by the introduction of a new player licensed by the central bank.
On February 22, the People’s Bank of China announced its approval of Baihang Credit Scoring, the first licensed credit-rating agency for individual loans.
Baihang is backed by the National Internet Finance Association of China (NIFA), which owns 36% of Baihang, as well as by the country’s eight leading credit-rating agencies, including Tencent Credit and Ant Financial’s Zhima Credit, each of which owns 8%.
With a registered capital of Rmb1 billion ($159 million), that represents a Rmb80 million ($12.7 million) outlay for a credit-rating agency. What are they getting for their money?
The eight agencies have been told by PBoC to pool their credit data and build a nationwide database. Financial institutions will be able to access the database as a reference for their own lending and risk-management activities.
The vision is similar to America’s FICO, a private data-analytics company whose score measures consumer credit risk, and which has become a common reference in consumer lending in the U.S. Except, Baihang’s biggest shareholder is a state entity: NIFA is PBoC’s tool for regulating internet finance, in collaboration with the major financial regulators.
The PBoC has positioned Baihang as a useful tool to the tech credit scorers, as it should help prevent individuals from multilateral borrowing.
For now, each tech company works on a proprietary data set. By attracting repeat business, they can get a better measure of a credit, and use algorithms to offer competitively priced products. But the siloed nature of these data sets means no one knows if the same customer is using multiple lenders, meaning individuals could default at least eight times before the taps turn off. Baihang will put a stop to that by creating a nationwide registry.
Baihang may change the business model
According to a report by Chinese media site WDZJ.com, online loan balances reached Rmb2.8 trillion in 2017, a 36% year-on-year increase. Caixin, another Chinese media group, says 44% of online borrowers tap at least two lending platforms.
While this may help reduce default rates, the tech companies’ credit-score agencies are going to have to change their business models as their data will no longer be a company secret.
What hasn’t been decided is how, or whether, to compensate tech companies for surrendering the credit information they have worked to accumulate. Either Baihang figures out a business model to monetize the data, or the PBoC will simply decree it, suggests Zeng Guang, secretary general of Shenzhen Internet Finance Association.
“A nationwide database could have profound influence on the industry,” said Zeng. On the plus side for these tech companies, Baihang’s network should help tech companies cut their costs of information collection and customer onboarding and identity. This, in turn, should lead to lower interest rates for borrowers.
But it might mean fintech companies exit credit scoring, if there is no longer a competitive advantage. “I doubt other consumer credit rating agencies except Baihang would exist in long-term,” Zeng said. “This is certainly going to disrupt the industry.”
Instead, proprietary data will be fed into marketing, sales and product development, he said. But the large consumer credit scoring companies will shrink to being mere departments of their parent groups.
DigFin spoke with one official at one of the eight agencies, who declined to speak on the record. This person says for now it’s business as usual, with no plan to shrink the business – but everyone is waiting for the PBoC to fill in its plan with details.
“We can use data for retail commerce, which is what the business used to be,” this executive said.
Two databases may merge
There have been other, more traditional sources for credit scoring. The PBoC runs the Credit Reference Center(CRC), which covers 390 million people. But it sources information from banks, and the data is traditional financial statements.
The central bank decided the explosion in online lending, which relies on other types of consumer-provided data, something like Baihang was necessary.
Zeng says the PBoC may eventually decide to merge the CRC and Baihang databases.
Moody’s Investor Services, in a report released last week, expects Baihang needs a three-year period to assert its independence and accuracy in processing consumer information before any formal combination takes place.