By Yue Wang
Original source: http://www.forbes.com/sites/ywang/2016/07/12/china-wants-to-rate-peoples-credit-with-online-data-but-misuse-by-companies-is-rampant/#2c7d2c86116f
As China tries to channel more loans to people and businesses underserved by its banking sector, a number of startups are rushing to solve a problem perplexing every lender in the country: the lack of credit histories.
China, unlike the U.S., doesn’t have a nationwide credit measuring mechanism such as the FICO score. Only one in five Chinese has credit data in the form of bank, car or house loans that can be obtained through the country’s central bank, the People’s Bank of China, according to Zane Wang, founder of Shanghai-based peer-to-peer lender China Rapid Finance.
The situation has led dozens of startups to develop credit-rating algorithms and test them with unconventional data sources such as online purchases, as Beijing tries to lend more to individual consumers and small businesses instead of ailing state-owned enterprises to buttress economic growth.
Demand for such services here is bigger than other markets. More than half of China’s 50 million micro firms have trouble obtaining loans because they lack collateral, creating a 22 trillion yuan($3.28 trillion) gap in their financing needs, according to a study the China Guangfa Bank published last year. Rating the credit of these companies often requires examining the creditworthiness of their owners as well as the companies’ operating activities, says Gu Lingyun, founder of Shanghai-based credit-rating company Ice Kredit.
In addition to shopping sites, the startups are also combing through court records, social media, restaurant files, transportation data and so on for behavioral patterns that correlate to repayment or default. These behaviors could provide a 360 degree portrait of the borrowers’ personal lives, which in turn can point to their creditworthiness, according to the companies.
For example, people who constantly buy children’s clothes online are less likely to default because their shopping habits suggest stable income and family ties, according to Gu. But someone who likes to chat at two in the morning probably doesn’t have the financial capability to repay because staying up borrowing money means he probably exhausted all means possible, he says. In rural areas where data is even scarcer, factors like the area of land one owns and the frequency of house renovation can all play a role in credit rating, Gu says.
“If you put all these data together and build a model to analyze them, then there is a good chance that you can get an accurate credit score,” he says at the sidelines of the Inaugural China Fintech Conference in Beijing on Saturday.
But there is a limit in using unconventional data sources, according to China Rapid Finance’s Wang. Analyzing users’ internet footprints is useful when giving out small loans averaged at several hundreds of yuan, but what one browses and buys online isn’t enough to support bigger credit decisions, he says. China Rapid Finance conducts face-to-face interviews when users try to borrow hundreds of thousands of yuan, Wang says.
“A person’s digital portrait is a close approximation of his financial capability,” he says, “But they are still not the same.”
Still, investors are taking notice. Gu’s company landed an angel investment in “millions of dollars” from venture capital firms Frees Fund, Yunqi Partners and Will Hunting Capital. China Rapid Finance raised $35 million from private equity firm Broadline Capital last year. In January, WeLab, a mobile-lending platform operating out of Hong Kong, raised $160 million in a round led by Malaysia sovereign wealth fund Khazanah Nasional Berhad.
But behind the surge in credit service and lending companies is China’s lack of privacy laws. The country, to date, has no clear set of regulations governing data collection and usage, except for a few scattered rules that are poorly enforced, according to Wang Zhicheng, a professor at Peking University’s Guanghua School of Management.
Buying and selling data without users’ consent is commonplace in China, according to Wang. Sometimes data providers can pull a few strings at the government and come back with information that is in legally grey areas, says Ice Kredit’s Gu.
Factors that could spark outrage in the west – such as birthplace, ethnicity, religion and sexuality – are sometimes being taken into consideration in credit decisions, according to Gu.
“It is a wild race here,” he says.
And worse, there are no boundaries in what lending platforms are looking at. In June, it was revealed that online lender Jiedaibao was asking for naked photos as loan collaterals, according to a report by the state-run China Youth Daily. The platform promised to lend more money to women who shared their nude selfies, and the practice led many to condemn the company online.
“The legal frame in privacy protection is still forming in China,” China Rapid Finance’s Wang says. “Laws are adjusted when problems pop up.”