After nearly two years, China's Digital Credit Rating platforms are still unlicensed...

Written by Leilei Wang || May 23 2017

There is a big blank space on individual credit scoring in China. The national individual credit reporting system was founded in 2005 by the Credit Reference Center, a part of the People's Bank of China (PBOC). But at the end of 2015, only 870 million individuals were included in the database, and only 370 million people’ credit history was in the system, covering just 26% of the whole population. On Jan 5th 2015, the Chinese government authorized 8 companies to prepare their own personal credit scoring platforms. One of them, Sesame Credit, is owned by Ant Finance and is the largest platform, but remains unlicensed.

The Sesame Credit system was launched on 28th Jan 2015.  Based on people’s shopping habits and historical data on Taobao, payment history data through Alipay and data from outside partners, Sesame Credit created their own assessment system in terms of credit history, behavior, payback capability, identity and network. According to their ranking, users can enjoy different service including free deposit for renting bikes or check-in at hotels.

3 months after the launch of Sesame Credit, in Apr 2015, the consumer loan product Huabei 蚂蚁花呗 was launched. Huabei loans range from 500 to 50,000 and individual credit limits are based on Sesame Credit. Over 60% of Huabei's users have never used any traditional financial services before.

Banks get involved

The individual credit evaluation systems soon caught the interest of banks as the platforms provided new credit information on borrowers. In June 2015, the Bank of Beijing and Sesame Credit signed a strategic cooperation agreement. The Sesame Credit result is taken into consideration as supporting documentation when people apply for a credit card or loans from the Bank of Beijing. CEB bank, Bank of Huaxia, Minsheng Bank and Industrial Bank Co., also worked with Sesame for credit card issuance.

Although Sesame Credit has done a good job in terms of user feedback and is used by several banks and financial providers, 28 months have passed and Sesame Credit still does not have an official license from the PBOC, and neither do the other 7 companies.

Good business, but no license.

The PBOC announced that no licenses will be issued in the near future because no company meets the requirements. According to a statement from Wan Cunzhi (万存知), the PBOC's Director of Credit Bureaus, on the 24th April 2017, “Credit licensing is a very sensitive and complex issue. Licenses will definitely be issued, but when and how depends.” He pointed out that now is not the right time for issuing licenses because of the uncertain internet finance market, the public’s high requirement on privacy protection and the the fact that the eight companies are far below the qualification.

Three issues contribute to the current situation:

  1. All the eight companies want to establish their own businesses based on their own records, e.g. Ant Financial payment history contributes to the Sesame ranking, which will only reflect part of the users’ overall credit situation.
  2. None of the eight companies is an independent third-party. All of them are backed by a company or group which provide financial services. So potentially ranking systems use parent/group-friendly policies and can lead to biased results. To stay objective, the valuation company should not be linked to any financial service providers.
  3. The eight companies hold limited data and create their own ranking system, which makes sense but cannot be applied in every situation.

The national individual credit reporting system used by commercial banks consists of information from all licensed financial institutions and public authorities such as the courts and police offices. Compared with this, the eight only use pieces of information mainly from their own platform, which needs further perfection.

The Future

In the future we should see the industry consolidate around one platform that will contain all of the data. Similar to the way the government is using Wang'Lian to consolidate the payments market, this could be a government controlled platform, or be an independent platform that plays the role of the leader, taking all the data from the eight, reforming the valuation system on personal credit information and sharing in a secure environment.

The individual credit market keeps growing based on China's increased appetite for credit, hence, there are plenty chances for big data analysis, credit evaluation system development, smart contracts and potentially leveraging distributed ledgers. But for the country to realize the real benefits of digital credit rating, consumers, companies and the regulators all need to be happy - which in China, is not always easy.