China’s credit reporting market barely existed before the issuance of the Regulation on Credit Reporting Industry in early 2013 that consists of the licensing rules for private credit rating and reporting agencies. International rating agencies weren’t allowed to operate corporate credit rating service in China until recently. As of June 2019, more than 130 local business credit reporting agencies had registered with the regulator, many of who are tech startups or backed by established internet companies.
During the same period of time, the demand for business credit information and evaluation services increased sharply thanks to the economic changes such as the fast-increasing contribution of smaller private businesses and emerging sectors to GDP growth and increased credit risks of the conventional industries who are suffering from stagnation or declines, and China’s further opening up of its financial markets to foreign investors.
The business credit information collected the formal financial sector is far from enough. The formal credit providers, mainly commercial banks in China’s case, had long serviced bigger companies from the conventional industries, with a big portion being state-owned enterprises, and small private businesses had long been neglected due to higher perceived risks associated with them and its relatively small contribution to the economy before the recent structural change. Not only do the banks lack credit information of the smaller private businesses, they have also begun seeing challenges of managing credit risks of their existing customers from these old troubled industries as their loan decisions have long been based considerably on state policy directions and implicit government guarantees instead of sound credit risk assessment and evaluation.
Applying big data and more recently machine learning, many of the newly emerged business credit information and reporting services in China are not only able to provides efficient credit risk assessment and evaluation but other more powerful offerings such as real time or near-real time risk monitoring.
A wide range of tech companies have tapped into this field, ranging from startups focused on digital data-related services and established internet companies who believe the data generated from their e-commerce or business software platforms is an advantage in evaluating credit risk. The digital data-driven credit information and reporting services have been widely adopted by online providers of small business loans or commercial credit and increasingly by traditional financial services providers.
Online peer-to-peer lending platforms, more recently known as marketplace lenders, were early customers of the digital data-driven credit information and risk management solutions as small businesses have accounted for a considerable portion of their total borrowers. It didn’t take long for Chinese online peer-to-peer lenders to realize the high credit and fraud risks in lending and borrowing among strangers online. While many work with independent business credit reporting agencies, the leading players in this field have developed their own digital data-driven credit risk management systems that are increasingly able to leverage credit and behavioral data generated from their own platforms. CreditEase, parent company of leading peer-to-peer lending site Yirendai, established a couple of years ago a separate credit reporting agency targeting at business credit providers from both the online lending industry and traditional financial institutions.
Almost all major online and mobile services that connect businesses and consumers in China have begun making unsecured loans or lines of credit to merchants on their platforms, and their credit decisions are largely dependent on big data-based solutions, either provided by third-parties or developed by their own affiliates, that have factored in data generated from their platforms, such as sales metrics of the online stores and behavioral data.
Alibaba and JD, the largest and second-largest e-commerce companies in China, respectively, have long been offering unsecured loans, supply chain finance and other financial services to sellers and other businesses of their ecosystems. Developed on top of their experience in online business finance, they have each established a business credit risk rating and management company.
Zhima Credit, the one built by Alibaba’s fintech arm, entered the corporate credit rating sector in 2016. It leverages data from Alibaba’s e-commerce ecosystem and Ant Financial, Alibaba’s fintech affiliate that operates a variety of online payments and financial services to small and micro-businesses. As of the September 2017, Zhima Credit had rated more than 22 million small and micro businesses. (link in Chinese)
Many smaller online and mobile commerce platforms work with independent solution providers or innovative business credit providers. XWbank, an online-only bank that provides credit rating and underwriting solutions to both traditional institutions and fintechs, helps mobile services platforms such as Meituan, the leading platform for restaurants and other local services, and Didi, the dominant ride-hailing app, make loans to business borrowers with credit risk evaluation based partly on the data provided by these online platforms.
A variety of business software and solutions providers have also established their own business credit evaluation agency, using data ranging from payment transactions to tax records that their products or services are able to record. They include La Ka La, a major digital payment service provider, Kingdee, a major enterprise accounting and management software developer, and China Telecom, one of the three telecom operators that operates a popular mobile billing and payments service. Many other providers of business-facing services or platforms, especially accounting and finance software, let third-party credit risk evaluation solution developers like PINTEC, a finance tech solution developer, to access their data and evaluate their business customers.
Even business and financial search engines are entering this area. Tianyancha, a popular search service that aggregates all types of company information including business credit scores and reports from partnering agencies, has recently obtained approval from the regulator to set up a business credit reporting company.
Tech-driven corporate credit reporting agencies and data vendors are exploring new types of digital data to not only improve their existing offerings but also meet the demand of emerging trends in business credit and investments. They apply artificial intelligence techniques such as natural language processing and image recognition to explore new types of data on the internet.
The Chinese financial regulators have also been promoting the development of a national data platform for the sharing of credit data from both traditional channels and new data sources such as online lenders.