One major drain on the American economy is the glut of consumer debt. In China, it's the opposite.
The Chinese are notoriously savvy savers, with a gross national savings rate of about 51 percent, according to the World Bank. In the US, it hovers around 17 percent. Saving is valuable, of course. But in recent years, as the growth of the Chinese economy has slowed---thanks to declining demand for exports and new real estate projects---the government has been desperate to get its thrifty citizens to spend, spend, spend and drive economic growth from within.
The problem is the nation of savers doesn't have a long history of consumer credit. According to a report by The University of Chicago's Paulson Institute, Chinese households borrow around 32 percent of their household income in a given year, compared to US households, which borrow 81 percent. And because China doesn't have a long history of consumer credit, lenders don't have a lot of data like credit scores to help them gauge the trustworthiness of potential borrowers.
"If you’re trying to build a broader credit infrastructure you need credit transactions. But if you don't have a broader credit infrastructure, you can’t have credit transactions. It's a vicious cycle," says Douglas Merrill, CEO of online lender ZestFinance.
It's a cycle he believes his company can play a role in breaking.
Today, ZestFinance announced it is joining Chinese retailer JD.com to launch JD-ZestFinance Gaia. The company will use information gleaned from customers' purchasing habits to create an alternative credit score for them. JD.com will use those scores to issue credit to customers. But while JD.com is the first customer of the new joint venture, Merrill hopes to sign additional retailers and lenders soon. That will open up credit for more Chinese citizens while feeding more data into the system, making for more accurate scores.
But while ZestFinance may be early to this space in China, it's not the first with the idea. In January, Ant Financial, the finance arm of tech giant Alibaba, announced the launch of Sesame Credit, a similar credit evaluating system that will use the spending and saving data on its hundreds of millions of customers to determine creditworthiness. According to The New York Times, it also will supplement that data with information from Alipay, Alibaba's payments service, and Yu'e Bao, Alibaba's money market fund.
Merrill says he only expects more competition as time goes on. But he believes ZestFinance's experience in lending will give his venture an edge. Merrill, a former chief information officer at Google, founded ZestFinance to give people with lousy credit scores a way to access loans without resorting to a payday lender. To do that, ZestFinance tries to more accurately predict risk by using tens of thousands of data points about an individual---from basic financial information to tiny details, like whether an applicant filled out the loan application in all caps---to determine creditworthiness.
That experience certainly won't hurt, but even Merrill admits that in China, the data will not only be different, it'll also be much more limited. "We had to build fundamentally new math to turn this purchasing-based behavior into credit behavior," he says. "It’s exceptionally difficult, and figuring out how to do that is the foundation of the platform."
Another challenge for new non-traditional lenders will be changing the cultural mindset around saving and spending. As Businessweek recently pointed out, a lack of trust in government policies still drives some Chinese citizens to stash their money. Still, The Paulson Institute report notes this attitude is beginning to change, as both credit card balances and bank loans to households continue to rise across the country, driven by a younger generation of Chinese consumers.
If companies like ZestFinance, JD.com, and Alibaba succeed in making credit options more readily available, it could make China and even more interesting market for tech companies who already view the country as the key to their futures. And just think: maybe someday, many years down the line, formerly frugal Chinese citizens will be as riddled with debt as Americans are. Ah, the wonders of technology.
