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China’s lending sector under pressure due to crackdown on data crawling

A recent crackdown on predatory lending and illegal data use practices has shown the extent to which smaller lenders rely on the credit risk management services based on alternative data.

MioTech Research2020-01-23

Many smaller lenders in China have grown so dependent on alternative data sources and risk management solutions that the recent crackdown on illegal and other malpractices in data mining and usage has led to a small crisis for the lending sector.

China’s lending markets for smaller businesses and consumers boomed in recent years thanks to the opening of certain financial sectors to the private sector and the rise of China’s consumer economy. Moreover, the advances in financial technologies and big data have helped the quick establishment of a digital data-based credit risk assessment and management industry that enabled the rapid expansion of these market segments.

The digital data industry enjoyed a relaxed regulatory environment in the early years. But it didn’t take long for the illegally obtained or shared data to appear on the underground market. Predatory lenders and debt collectors are able to purchase direct identification information like phone numbers (which is mandated in China to be registered with the national identification number of the user), contacts lists and call records. Many data vendors that claim they have adopted sophisticated big data or artificial intelligence techniques are actually touting such type of information they have harvested with uncomplicated technology.

As predatory lending and debt collection practices became more rampant in the last few years, Chinese financial regulators and law enforcement authorities have launched a series of campaigns to dismantle networks of predatory lenders and debt collectors in the last couple of years.

More recently, law enforcement agencies turned their attention to the suppliers of non-traditional data, digital payments and other technological services of these predatory lending operations. The Ministry of Public Security, China’s principal police and security authority, have cracked down on a number of such companies since September of this year, according to the its latest press conference on the matter held in mid-November. (link in Chinese)

A number of alternative data and services providers that were unaware that some of their clients or business partners had run predatory lending services or illegally sold data had also been investigated.

Shortly after the press conference at the Ministry of Public Security, financial regulators of major cities and the central bank began to require alternative data vendors and major lenders to conduct internal investigations on their data sources, the data usage of their clients, and their own data collection operations.

It’s not the first law enforcement crackdown and investigation in the data scraping and crawling industry. But the immediate effects caused by the latest one have shown the extent to which the lending sector, especially smaller privately owned lending businesses, are reliant on alternative data for credit screening and risk management.

As it’s hard for data vendors or related services providers to know whether their clients facilitate predatory lending or use the digital data for illegal purposes, and the next moves of regulators and law enforcement authorities are unclear at the moment, many data vendors and bigger online lenders that have developed their own data mining tools have temporarily suspended their data scraping and crawling operations.

This move has immediately driven up the prices for digital data and data crawling services. It is reported that the prices for custom data crawlers have more than tripled within a couple of weeks. Some businesses that have lost suppliers of data and related services have begun experimenting with new approaches such as collaborative development with established companies in this field, which means high additional costs.

The sudden loss of data sources and service providers took many lenders that had been dependent on alternative data and solutions for credit screening and loan monitoring by surprise. It is reported that many have immediately reduced their lending volumes due to increased risk concerns. Some have attributed a recent rise in delinquencies to the loss of the data-assisted anti-fraud and risk management services.

At the same time, the lending industry has begun seeking broader types of data, which may involve more sophisticated technology. China is a leading player in the development of artificial intelligence (AI) applications in terms of private-sector investments and the application of the AI techniques in the financial sector. By using the latest advances in certain branches of AI like image recognition and natural language processing, the newly emerged data technology developers are able to extract information that was previously not readily available and the predictive analytics capabilities boosted by the advances in machine learning provide financial services more powerful risk monitoring services.

The development of the alternative data market in China in the last decade or so coincided with that of many segments of China’s financial sector, such as credit risk rating, non-bank lending and equity investment. As these segments have a very short history, the emergence of alternative data came just in time to compensate for the shortage of traditional data for credit risk assessment, loan monitoring, investment decisions, etc.

The alternative data industry rose in China in a short period of time thanks to the fact that both the Chinese government and private sector saw it as one of the next major contributors to economic growth. The Chinese government issued national plans to promote the development of “the data economy”, and big data and artificial intelligence startups have attracted much venture capital.

To tackle the issues like data protection and privacy, China issued Cybersecurity law in 2017. Earlier this year, a series of standards and measures on data collection, usage and protection were rolled out.

Despite temporary setbacks in the credit risk management and lending markets, the recent crackdown is welcomed by the finance industry. It is expected that after regulators come out with more clear guidelines, there will be a round of consolidation in the data industry. Given the increasing regulatory requirements and market demands, a high level of technological sophistication and investment associated with technological development will be required for the players who wish to emerge winners out of this crisis.