The Non-Performing Loan rate in P2P lending is much higher than in regular banking and currently is sitting at 8-9% in China. The rapid growth of the industry lead to new companies desperately recruiting any talent available on the market. Often underfunded, new platforms had to compete with banks for competent risk management employees. As a result, many of the internal processes, which rely heavily on manual work at this point, is completed by employees with sub-par qualifications.
Furthermore, P2P platforms have limited access to PBoC-collected credit score data. Platforms then have to rely on incomplete and less timely data than really what would be necessary for effective credit decisions.
Proper risk-management systems and credit-score databases are crucial for the industry to stay healthy. Such systems are also beneficial to businesses in short-term as they allow to price products effectively. Third-party credit score and risk management providers are an important part of the ecosystem in China as they are in other markets.
The first quarter of 2015 saw an increased activity of multinational solution providers in China’s shadow banking. Xintong China announced a cooperation agreement with the US-based Experian to improve the former’s small-loan risk management systems.
Later in March, FICO announced that 11 of China’s leading P2P and micro-loan companies subscribed for its cloud-based credit risk management platform. The successful launch is a result of the lasting commitment to internet lending. FICO lists CreditEase, arguably the best-known internet finance platform, as its partner since 2011.
Yet the market for Experian, FICO and others, is becoming increasingly competitive. Paipai Dai, a Sequoia Capital-backed P2P market leader, claims to have 8-years’ worth of consumer credit information on its database. As a result its proprietary system is well-regarded by the industry and the company will offer it to third parties in the future, according to company management.
The higher-profile competitor is Sesame Credit by Ant Financial. Althought it is a new entrant, the firm has a massive transaction database and is well-positioned to create a product with highly accurate forecasts. In addition, Alipay can function as a high-bandwidth marketing channel to propel Sesame to become a financial brand with broad consumer awareness.
At one point, having experience in other markets was enough for foreign credit companies to make an impact in China. This is no longer the case. Increasingly companies will need to come with a unique and innovative value proposition or a big stash of data if they want to keep marketshare in China.