Open Sesame! Give Me Some Credit

> Posted by Kimberly Lei Pang, Digital Learning Specialist, UNICEF

In the story of Ali Baba and the 40 Thieves, the magical word “sesame” was used to open the seal of a cave where Ali Baba found hidden treasure. In China today, the same word is connected to another kind of magic, one that reveals hidden identities of the socially and economically disadvantaged. Sesame Credit (“芝麻信用” in Mandarin) is a product launched by Alibaba that pulls from transaction records on e-commerce platforms to understand a person or company’s creditworthiness. Such innovation in credit scoring is part of the “social credit system” that the Chinese government is building to make up for the longstanding shortage of credit data.

Access to credit, a major indicator of financial inclusion, has gained increasing attention from Chinese policymakers in recent years. For a country experiencing an economic slowdown and widening income gap between the rich and the poor, credit accessibility has the potential to spur growth and level the playing field for the poor. However, despite China’s efforts to improve financial access, a large portion of its population neither uses nor has access to credit. Data from the World Bank’s Global Findex study showed that Chinese people (aged 15+) have relatively high levels of formal bank account ownership (79 percent, 2014) but low levels of credit usage (14 percent, 2014). In fact, China’s formal credit use is the lowest among the five BRICS economies. Aside from the rigidity and costliness of financial institutions, a significant barrier to borrowing is the lack of reliable credit scoring in China. Established just 11 years ago, China’s credit bureau CCRC covers credit profiles for only a quarter of China’s 1.4 billion population and shares that information only with selected banks. Lenders thus often have no access to borrowers’ financial histories and tend to make rather arbitrary decisions on borrowers’ creditworthiness. As a result, many individuals and microenterprises find it difficult to get a loan, as steady employment and collateral assets are commonly required for formal credit.

In order to fill the gap in credit scoring, a few non-banking institutions in China were awarded licenses by the central bank to seek innovative solutions to collect data and create credit profiles for people who would otherwise have no credit scores. One of the solutions is Sesame Credit. Although alternative credit scoring is nothing new in the financial inclusion space, what sets Sesame Credit apart is its direct access to a unique database of consumer information: 400 million annual active users on Alibaba’s e-commerce and payment platform, which includes purchasing volume, payment histories, personal information, and social networks. Having a “Sesame Score” is suddenly equivalent to a new identity for China’s credit invisibles, including students and migrant workers. Depending on their scores, they can now take out loans, pay mortgages, find better jobs, and even step up their dating game.

While Sesame Credit has shown some early success in expanding access to credit for underserved consumers, it also comes with inherent drawbacks that present problems for potential borrowers.

First, Sesame Credit is tied to the ownership of a smartphone or computer. China’s rural areas, where 44 percent of China’s total population resides, have a smartphone penetration rate of only 32 percent (2015). Internet users in rural areas only account for 27 percent of all of China’s internet users (2017). Therefore, rural residents who need access to credit the most may still be left out.

In addition, Sesame Credit has not explained how exactly it calculates its credit scores, besides saying that it is a “complex algorithm”. This lack of transparency causes information privacy and protection concerns. Consumers do not have the opportunity to check the accuracy of the underlying data or know how to make improvements.

Last but not least, as part of the country’s social credit system pilot, Sesame Credit also takes into account a diversity of nonfinancial factors and behaviors when assigning users credit ratings. It is suspected that a minor traffic violation can also determine a consumer’s ability to pay back a loan. One can easily argue that a nonfinancial factor like a minor traffic violation shouldn’t negatively impact one’s ability to access credit.

All told, it’s great to see that, in its efforts to promote a more financially inclusive economy, China is encouraging credit underwriting innovations such as Sesame Credit to improve access to financial services and foster experiences with formal financial services among the unbanked. Yet, it’s still too early to tell if Sesame Credit has the potential to effectively reach critical mass as well as provide reliable insight into consumers’ credit worthiness. What is clear is Chinese policymakers and regulators must strike a balance between the space for innovation and the need for greater transparency and consumer protection. A social credit system may indeed work as intended if the system holds both consumers and financial service providers accountable.

Kimberly Lei Pang is a Digital Learning Specialist in the Digital Strategy Section, Division of Communications, UNICEF NYHQ. She is also an Executive MPA candidate at Columbia University’s School of International and Public Affairs.

Image credit: Jens Schott Knudsen / flickr / CC BY 2.0

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