In the financial industry, creditworthiness is the decisive factor which differentiates between good and bad borrowers within the lending business. Credit assessment plays a central role in underwriting loans, aiming to identify potential risks of default.
" Like many things, the internet and social media has changed the [Chinese personal-loan] game."
Greg Au-Yeung, Head of Technology China, ANZ
On these broad terms, China is little different to the developed world. The basic components of credit analysis are the same, the ‘Five Cs’: Capacity to repay the loan; Capital for the individual/corporation; Collateral of the borrower as guarantees in case of default; Conditions that describe the loan purpose; Character of the individual.
The digital world is changing the nature of credit assessment and in China this is happening particularly rapidly, with particularly Chinese characteristics – and plenty of implications for the rest of the world given the massive growth in Chinese e-commerce and financial technology (fintech).
Historically, bankers made credit decisions based on industry analysis and firsthand knowledge of the local economy and would-be borrower. But like many things, the internet and social media has changed the game. More analysis is available but customers want decisions more quickly.
Facebook, for example, has technology that allows lenders to assess borrower’s creditworthiness by checking their friends’ credit scores. Kreditech, a German fintech start-up offers credit and banking products to people with little or no credit history, already analyses keyboard strokes and the browsing history of borrowers applying for loans to determine the prospect’s personality and identity.
Another fintech start-up, Hong Kong-based Lenddo, targets the underbanked middle-class borrowers and small-business owners with a proprietary algorithm using hundreds of data points collected from social media sites to assess the likelihood of a borrower repaying a loan.
And it’s not just banks. According to the Harvard Business Review, “creative retailers are using the new technologies to innovate just about everything stores do from managing inventory, to marketing, to getting paid.”
The online retail revolution has fostered a marriage of traditional commerce and technology.
In China, many industries, including the banking sector, are highly regulated with strict capital requirements, foreign ownership ceilings and other rules and regulations.
However, the government adopts a more liberal approach towards the technology industry, providing an unparalleled opportunity for hi-tech firms to thrive, especially with e-commerce and internet companies including Baidu, Alibaba, and Tecent.
About the same time Zopa, the world’s first online peer-to-peer (P2P) lending service was launched in 2006, Ning Tang brought P2P to China, and established CreditEase. Although CreditEase was initially an offline P2P company relying on physical branches and a sales force to expand, the concept has triggered an evolution in the shadow banking industry.
Technology start-ups were formed to enter the Chinese online P2P marketplace and compete with non-bank operators already in the lending business.
After 10 years of rapid growth, CreditEase’s loan book today is estimated over $US7.5 billion and employs 25,000 employees. According to Crowdfund Insider, China’s 2015 P2P market size is $US150 billion, the world’s largest, and roughly four times the US market.
According to the credit ratings agency Moody’s, China’s shadow banking industry has increased by 53 per cent in 2015 and reached RMB 53 trillion ($US7.9 trillion), which equivalents to 79 per cent of the country’s GDP.
Although it’s loosely defined, the shadow-banking industry in general constitute of non-bank operators including trust, microcredit, guaranteed, P2P, and in some cases, underground personal lending market.