As one of the largest economies in the world, China has a huge demand for credit and it is only growing each day. Simultaneously, the number of adults (aged 15+) with a bank account to their name is also increasing. But it is observed that only 9.6% of Chinese adults actually access their bank accounts. These statistics highlight the state of formal financial institutions in China.
Although there is a demand for credit and formal financial institutions offering their services, people find it more convenient to opt for alternative financial solutions for their problems. The Government of China has developed several policies to address these issues and help alleviate poverty.
However, the huge gap between formal financial service providers and informal financial institutions is cause for concern. The implementation of the novel credit scoring system may help bridge this gap. In this article, we shall discuss the reasoning behind the development of this new credit scoring system and its implications.
Innovative Solutions Towards a Financially Inclusive Future
Digital technology is advancing at an unprecedented rate. Its applications are widespread and used in virtually every aspect of our lives. The finance industry, too, is making use of digital solutions to address its problems. Fintech and Big Tech companies are now providing more conveniently available financial services, thus, becoming a threat to traditional banking. Any financial service, from payments, savings, and borrowings to investments, can now easily be done over the Internet.
The digitization of currency promises to transform money itself. This disruption of the financial industry is much needed to address the prevalent problems. It has improved financial inclusion in many developing countries, and it can do the same for China’s economy as well. The credit scoring system present in China, especially, can benefit from the intervention of technology.
Understanding the Gap Between Available Financial Services and Reliance on Informal Financial Services
The growing credit industry in China demands reform in the present financial distribution system. The services available are inadequate and do not address the problems faced by the public. Growth through consumer spending is crucial at this time of economic slowdown, which is why China has tried to nurture the growing credit industry. But the rigidity and costliness of China’s financial institutions have deterred customers from utilizing the available financial services.
The big gap left by unsatisfactory services of formal financial institutions has increased the dependency of people on alternative informal financial service providers. The informal services include lendings from family or friends, online lending companies, and other forms of shadow banking. The informal services are appealing to both urban and rural borrowers.
Why Are the Masses Fearful About Accessing the Present Financial Services?
The amount of financial services available in China is not nearly enough to cater to the huge population of the country. Also, the financial institutions are not scattered uniformly. The urban population receives greater options as compared to the rural population.
Yet, in both sections of society, people favor informal or traditional lenders for their credit needs over formal financial service providers. The state of finance in China does not support the global appeal for responsible microfinance, and by being difficult for most people to participate.
This is mainly because of the following reasons:
- Formalized financial institutions are expensive, especially for their lower-income demographic.
- Technology is not being used adequately to solve financial access problems for the poor and unbanked.
- Although many government agencies and institutions have put in efforts to improve the financial inclusion of the country, due to the lack of a national financial inclusion strategy, these efforts are uncoordinated and ineffective in the bigger picture.
- Assessing the success of a financial institute or services requires a concise, complete, and comprehensive database which is greatly limited, hindering the tracking of progress.
- The whole financial system of China is product-centric rather than customer-centric. This resulted in very little knowledge about the kind of product or services required by the customers.
- In China, the financial sector is predominantly public. So, in order to remain commercially sustainable, government policies and regulations do not always promote the expansion of financial inclusion.
Problems of Former Credit Scoring System
Presently, the credit scoring system in China follows a centralized credit agency called Credit Reference Agency. The database of this system only has basic information about its users, even though it has over 800 million profiles. But this falls short of covering the large population of the country. The major problems of this credit scoring system are as follows:
- Basic information – the only information recorded in the credit scoring system is regarding the name and ID numbers.
- Incomplete database – The database is incomplete and does not even begin to cover the entire population.
- Lack of credit score – Only one-third of Chinese adults have credit records which are still not incorporated into a comprehensive score.
The lack of a credit score and bank documentation is very problematic for lenders disclosed by various reports, which are just similar to the comments on the Mor committee report and that hardly would corroborate, as they do not have any basis to judge the credit worthiness of individuals and businesses. In order to ensure their own safety, they refuse credit to customers who seem to be untrustworthy. Thus, reducing financial inclusivity. So, the market is full of high-risk consumers whose financial history is not available to lenders.
Introducing the New Credit Scoring System
The above discussion highlights the various problems with the prevalent credit scoring system that paved the way for the innovation of a novel credit scoring system. Ant Financial, the pioneer in promoting China’s internet finance and mobile payment movement, has come to the rescue. Much like its approach to payments, Ant Financial has tried to solve the problems of credit scoring using its digital finesse. They are doing much the same as building bridges between fintech and financial institutions by finconecta.
Ant Finance is an affiliate of Alibaba. The e-commerce platform provides Ant Finance with the information which is used as the basis to judge the creditworthiness of individuals. This credit scoring system stands out from other systems because of the scale and depth of access to Alibaba’s e-commerce database.
Other credit-scoring businesses use information from online activities, most of which are non-economic in nature. But any assessment using e-commerce information and payment platforms is far more insightful and accurate for determining credit worthiness.
Ant Finance is calling its new credit scoring system Sesame Credit. What truly separates it from the competition are as follows:
- Access to huge data – Sesame Credit has access to greater than 400 million annual active users and 37 million small businesses. Add to this the financial histories of over 400 million annual active Alipay users.
- Combining tradition with innovation – Sesame Credit uses a combination of cloud and data management with more conventional information sources such as bank and government records. This extensive research into the financial histories of customers to determine their creditworthiness gives more accurate results.
- Growing human and IT resources – As a part of Alibaba companies, Ant Finance is privy to much of its human and IT resources. It is also applicable to the databases of all businesses under Alibaba.
- Potential for partnerships – Ant Finance has a strong standing in China which gives them enough leverage to start strategic partnerships that can greatly amplify China’s future credit infrastructure.
Sesame Credit has started strong as it is already being used to assess the strong sales performance of businesses. Ant Financial is already providing loans to these businesses. Sesame scores are being introduced to standardize and improve this system of credit scoring.
Will the New Credit Scoring System Increase Financial Exclusion?
This new credit scoring system is proving to be quite useful in its application, but its drawbacks are also coming to light. The entire system depends on the adequate usage of the data-generating platforms by the users. As a precedent, the users should have access to smartphones and computers in order to access those services. Sesame Credit cannot determine the risk of investment on individuals or businesses without adequate background information about their financial histories.
Unfortunately, people living in rural communities mostly do not have access to smartphones or computers. They are kept from participating in the online exchange of goods and services. By default, the rural community is at a disadvantage when it comes to acquiring credit. However, this doesn’t always have to be the case. The example of the Kopo Kopo mobile money platform in Kenya highlights how an originally undigitized market can be converted into a community using digital services.
In order to improve inclusivity, Ant Finance needs to invest in rural communities, which they have by building rural service centers in over 14,000 villages and introducing an online shopping platform called “Rural Taobao”, which focuses on the needs of the rural communities. The service centers are used to deliver products to villages and remote regions of the country. They also provide access to the internet by providing computers.
Alibaba also partnered up with China Post to construct around 5,000 postal outlets to facilitate the movement and shipping of products. The greater number of postal outlets has proved to be immensely useful in reaching remote areas. Thus, Ant Finance has aided in improving the status of financial inclusion in the country.
What Does the Future of China’s Credit Score Look Like?
Ant Finance has played a crucial role in the global challenge to achieve financial inclusion by 2020. Their efforts in including communities in remote corners of the country have been extremely effective as larger portions of the rural sector now have access to the internet and better financial services.
The initial success of Ant Finance has boosted its business as it expands into non-financial sectors such as visa processing tools, matchmaking moniker, and flight and hotel booking perks. This addition may be the downfall of Sesame Credit, as it makes their platform feel like a gimmicky loyalty program. Also, the basis of their success–access to large amounts of data–cannot possibly include every person and/or business.
It is highly unlikely that every individual will be using one or other of Alibaba’s online services. And, without an online presence, Alibaba will have no data for those individuals. Thus, making it extremely difficult to be an all-encompassing national-level credit scoring system.
However, it is too soon to tell whether the initial success of Sesame Credit will continue or if it is more likely to succumb to market pressures. Also, there is a risk of using Sesame Credit as a surveillance system by the government’s new centralized credit scoring system.
Frequently Asked Questions (FAQs)
Q1. How does China’s social credit score work?
In China, the People’s Bank of China provides National financial credit reporting for both businesses and individuals. This system does not assign any numerical scoring. The scoring is based on the business or individual’s trustworthiness. A poor social score incurs penalties such as reduced access to credit and fewer business opportunities.
Q2. How to check your Chinese social credit score?
The two main portals to check the credit score in China are:
- The National Enterprise Credit Information Publicity System (NECIPS)
In both these portals, you can access your credit score by inputting your business name or code. NECIPS provides a more comprehensive credit score, but it is less user-friendly, whereas CreditChina provides the basic information and has a more user-friendly database.
Q3. What are alternative credit scoring techniques?
Alternate credit scoring techniques include several factors that are not generally included while calculating social credit scores. The data utilized to estimate alternative credit scoring include an individual’s credit history, social media usage, employment history, travel history, e-commerce, government transactions, property records, insurance, rental, and utility payments.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.
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