In 2015 China’s Central Bank contracted eight companies, including affiliates of Tencent, Ping An and Alibaba, to help build a credit system that could rival what other developed economies use. The experiment up until today has not fared well as lenders and e-commerce firms continue to use their own proprietary systems to determine risk of the borrower.
One of the main drivers behind the failure is companies were reluctant to share the data they collected. Also, conflicts of interest arose as users could be rewarded by using certain companies to drive their score up.
The People’s Bank of China officially ended the original consortium credit idea earlier this year and created a new company, Baihang Credit Scoring. The new company is structured as a joint venture by using the original eight companies and awarding them each with an eight percent ownership stake. The remaining 36 percent is held by state-owned National Internet Finance Association.
The new idea is seen as a scaled back version of the original framework, allowing general information to be shared but companies would hold back their most sensitive data. It is focused on providing credit scoring for online lending platforms.
The new system resolves some of the issues which stalled the prior program but still does not reach the level seen across the developed world. Companies can use the system as a first step in the lending process and then run the borrower through their own models to ensure they fit the correct risk profile.
Coming up with a country wide system for a population as large as China’s is not an easy task. They have also begun to implement their Social Credit system which goes beyond financial services and has some interesting added elements. The social credit system takes into account financial transactions, driving record, social media activity, whether or not you have donated to charity, if you performed a heroic act and much more. The system as currently designed is meant to reward good behavior, which can come with discounts on airfare, and punish bad behavior, which can restrict travel by denying access to train or plane tickets.
China has plans to have their social credit scoring system country wide by 2020, with cities like Rongcheng already experimenting with the program.
India is another country that might be able to offer some lessons to China. The implementation of the Aadhaar, which is a 12-digit unique identity number that can be obtained by residents of India, based on their biometric and demographic data, has helped to increase access to to the financial system.
Maybe we will see a combination of social credit and financial credit in the future in China that will be used to underwrite risk. In the meantime Baihang Credit Scoring was granted a three-year license to develop an effective credit scoring system for Chinese borrowers.