October 3, 2019
Financial markets operate on trust. Therefore, we have lenders seeking assurance of the creditworthiness of the borrower before lending. The concept of credit scores was built upon this principle and involved assessment of existing and previous credit history, available assets, and the ability to repay the lender back.
The FinTech industry has developed solutions for more accessible banking and investment alternatives, including mobile-based payments, e-wallets, peer-to-peer lending, digital KYC, and so on. These solutions have revolutionized the way people participate in the financial markets and made it easier to conceive of a more financially inclusive world. While financial technology continues to realize its potential in financial inclusion, there is another significant event of its transformative utilization in a major part of the world.
In 2015, in context of multiple ponzi schemes creating panic and distrust in its financial markets, China announced its vision for a nationwide social credit system that would, as the State Council's official document stated, “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step” in the form of a ‘Social Credit System.’
Until as recently as 2011, there were 460 million citizens in China that had no credit history or bank accounts. This lacuna of a credible database of civic credit history meant that the single-party government regime, whose actions are often described to be borne from the consistent pressure of maintaining its legitimacy, had two critical issues to resolve: first, there was a significant lot to do on the financial inclusion front, and second, it created a fertile ground where distrust could be engendered – people could default on loans, companies could sell counterfeit financial products with little repercussions, and as is the law of cause and effect, the implications could take the form of protests.
The transformative journey of the financial services sector from merely measuring credit scores to evaluating social credit scores indicates the emergence of a specific type of movement. This movement is aimed towards the construction of a system that assigns citizens social scores based on their public behavior, rewards them with incentives for positive actions, and penalizes them for what is deemed anti-social, or even anti-government. Originally intended as a tool to curb defaults, measure creditworthiness, and foster trust, the concept of ‘social credit’ is also argued to be transformed into a sociopolitical tool. Contrary to the widespread misconception of a single monolithic system of social credit measurement under the government, what actually exists is an ecosystem involving multiple parties – both public and private. It is only now, as the self-determined deadline of the vision for nationwide scoring and evaluation approaches, that the government is seeking to unify these multiple systems.
One strategic start in this direction was the creation of ‘Baihang’ by the People’s Bank of China in 2018, which brought together the credit scoring systems of the eight companies that were initially selected in 2015 to develop pilots of ‘consumer’ social credit.
Practically speaking, it has been difficult. Economic giants like Alibaba and Tencent refuse to share their strategically built data-reservoirs with each other under Baihang.
In January 2015, when the People’s Bank of China granted official licenses to eight private companies to conduct social credit pilot tests, Alibaba’s Ant Financial was one of those eight companies, and it rolled out a pilot called Zhima Credit (Sesame Credit) within a few weeks. Zhima Credit has emerged as one of the most prominent social credit scores in China, but it isn’t part of an integrated system by state, yet.
In 2017, Tencent started testing its social credit score, named Tencent Credit, for WeChat’s more than 800 million monthly active users. By this time, Sesame Credit already had 520 million users.
This was a time when the demand for increased protection of user data and privacy started to surface for online businesses. It is easy to understand why if you knew that China had a government blacklist with 15 million people named the ‘List of Dishonest Persons Subject to Enforcement,’ which reportedly has resulted in over 32 million plane tickets and 6 million train tickets canceled as punitive measurement.
Tencent and Alibaba’s hesitation to cooperate with the government’s credit scoring company Baihang’s to share their customer credit/loan data and personal information is not just about consumer privacy concerns. It is also about giving up control over valuable customer data. The 460 million people in China without any credit history depend on the growing FinTech sector to access loans. It is interesting to note that earlier, Tencent and Alibaba were made shareholders in Baihang to encourage them to cooperate.
Even as these private systems are nationalized, more than a dozen local governments such as Guangzhou, Rongcheng, and others already have developed their own ‘citizen’ social credit scoring systems. Unifying these systems or at least bringing oneness to the ecosystem of social credit in China is a goal that would require the scaling of numerous walls and crevices to reach.
The integration of autonomously administered Hong Kong and Macau into the system is yet another point that lies out of reach as per the present developmental conditions.
It is hard to imagine such a system in India where privacy concerns about Aadhaar were debated on the news for months. While ‘credit rating’ is not a new concept as CIBIL scores in India or even the FICO score in the US are the lifeline for lenders, China’s introduction of the ‘Social Credit System’ in the financial sector is absolutely unique because it widens the perspective on credit measurement – measuring it not only in financial terms but also within social and political constructs. Though already present in some form or the other, according to a report, the concept of social credit could be mainstreamed in the US as well as across the world by as early as 2026 and the infrastructure to support social credit systems would represent a nearly $13 billion global opportunity by 2024.
It is important to debate the pros and cons of social credit systems and their transformative potential with financial technologies, and reconsider why the Chinese have already largely come to terms with the concept. While you thought this debate is getting old, China has made an interesting move to deliver on its plans to launch the credit system by 2020, and citizen’s privacy concerns were joined by companies’ life and death concerns.
In September 2019, China’s National Development and Reform Commission (NDRC) announced that it is pushing ahead with a corporate ranking system, part of its larger social credit system, which will affect 33 million companies. Reports suggest that this part of the rating system would include court rulings, licensing, tax records, product quality and punishments by market regulators, and other dimensions to decide if a company is trustworthy. Jörg Wuttke, President of the European Union Chamber of Commerce in China, highlighted it as “the most concerted attempt by any government to impose a self-regulating marketplace, and it could spell life or death for individual companies.” The year 2020 is not far, and it would be interesting to see how this system is implemented and how its results unfold.