Photograph by Stockbyte

A U.S. and Chinese company are trying to give China's consumers access to credit by bring a new concept to that country: the credit score.

By Leena Rao
June 25, 2015

Credit scores are a routine metric for rating credit worthiness in the United States. But there is no comparable assessment in China, despite its status as one of the world’s biggest economies.

ZestFinance, a US company that blends machine-learning with big data analysis to create more accurate credit scores, is hoping to change that. The startup has partnered with JD.com, China’s second largest e-commerce company, to create a joint venture that will provide credit risk scores to Chinese lenders so they can extend credit to consumers.

As part of the transaction, JD.com has invested an undisclosed amount of funding in ZestFinance, which had previously raised $100 million in financing to date.

Founded by former Google veteran Douglas Merrill, ZestFinance launched three years ago to apply big data analyses to credit scoring and help lenders more accurately evaluate prospective borrowers. Instead of determining credit worthiness based on 10 to 15 pieces of data, ZestFinance uses tens of thousands of data points to assess in a matter of seconds a borrower’s ability to pay back loans.

China provides a huge opportunity for ZestFinance because there is no centralized credit bureau like in the United States, said Merrill, Google’s former chief information officer and vice president of engineering. He explained that only 20% of Chinese citizens have credit cards while the rest of the population uses only cash and debit cards to pay for items.

“China needs a way to provide credit in a world where there is no credit score,” Merrill said.

ZestFinance and JD.com’s new credit score is being first implemented on the Chinese e-commerce giant’s site. Chinese consumers shopping on JD.com will now be able to apply for a line of credit to buy items from the e-commerce company. ZestFinance and JD.com will use data from consumers’ past and present online shopping habits to predict risk.

For example, the algorithms will take into account factors like what time of day the person is buying something (which could hint whether they have a day job), what type of item they are buying, and their history of buying expensive items. JD.com says it has more than 100 million active customers.

Merill says that while JD.com is the venture’s first customer, eventually the credit score analyses could be adopted by other lenders or e-commerce sites.

Online banking, and in particular, web-based lending, is gearing up to be massive opportunity for Chinese technology companies as the country’s middle class explodes in size. An affiliate of JD.com’s main competitor Alibaba, Ant Financial, which operates Chinese online payment giant Alipay, today started operating its online bank, MYbank. According to a Wall Street Journal report, Ant Financial is also using customer payment history to evaluate borrowers’ creditworthiness and plans to issue loans of under 5 million yuan, or $800,000, to small businesses and consumers in China.

Merill says that ZestFinance and JD.com also have plans in the future to evaluate lending risk for Chinese businesses.

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