China Fintech: 2nd Consumer Credit Bureau in Sight Now

On January 4, the People’s Bank of China (PBoC) accepted a license application for consumer credit bureau led by the National Internet Finance Association of China. The name of the credit bureau is Baihang Credit Scoring.

As of now, the Credit Reference Center of the central bank is the only consumer credit bureau in China.

Lending has always been the prerogative of traditional banking led by the Big Four in China. With the advent of Internet that started some twenty year ago, we saw the creation of a new and sizeable industry called Internet Finance even before Fintech was gaining traction in other parts of the world.

The industry, being a nascent and immature one flooded by entrepreneurs and punters, has been hit with a lot of failures, notably in the P2P lending space, amidst frauds and scandals.

To regulate the developing industry, the National Internet Finance Association of China was formed almost two years ago consisting of over four hundred members including some traditional financial institutions. Led by a former vice president of the PBoC, it is supposed to be controlled by the central government and the member list boasts the who’s and who of the Internet Finance industry.

In the meantime the information asymmetry situation is still a concern. The Credit Reference Center of the People’s Bank runs the only bureau now somewhat restricted by the depth of the lending history of consumers. But this is going to change with the acceptance of the license application by the Association, joining hands with eight others.

The eight others are none other than the credit service companies of the like of Baidu, Alibaba and Tencent that have accumulated massive behavior and social data on Chinese consumers. Each of them has previously been waiting to be the second bureau and can now only go along with the Association.

In building their respective businesses, Baidu, Alibaba and Tencent (the so-called BAT firms) have aggregated a lot of consumer and business data. Alibaba has probably started ahead of all others in this game.

Jack Ma began as a manager in the database department of the Commerce Ministry (MOFERT in those days) before he built his spectacular B2B and B2C portals of Alibaba. He has got trade data and later payment data on consumer and business.

Tencent, with its messaging and social media products, has amassed even larger database with social behavior data, and later payment data. Their databases cover also the communities under-served by banks. That is greatly in line with the Chinese government’s policy of Financial Inclusion.

In theory that could be the best of both worlds as the two bureaus are complementary. In the US, there are three national consumer credit bureaus with similar datasets. Their differentiation is in subsequent data analytics and marketing.

In Hong Kong, one agency has a monopoly with six other financial institutions setting out the data contribution scheme. Its business has grown tremendously over the years due to the proliferation of new data products after HKMA’s Code of practice issued on sharing of positive consumer credit data by financial institutions.

In practice, it all depends on how data, if any, are contributed and shared by the different shareholders in the second bureau. I remember, in the early days of establishing the Commercial Credit Reference Agency in Hong Kong, how banks argued fiercely among themselves on the definition of some terms such as loan delinquency, what loan data to share, etc, as big banks have less to gain from all this sharing.

I can imagine such discussion can only be more heated in China’s second bureau due to the data variety, privacy and keen competition among them.

Some milestones in Consumer Credit Bureau:

1999 – Creation of TransUnion HK Ltd. from Credit Information Services Ltd.
2003 – HKMA guideline on sharing of positive consumer credit data
2006 – Credit Reference Center of People’s Bank established
2015 – 8 credit service companies on inspection list by People’s Bank of China
2016 – National Internet Finance Association of China incorporated
2018 – National Internet Finance Association of China applies for Consumer Credit Bureau license with 8 credit service companies under inspection