Sunday September 18, 2016

Need a loan? Look no further than your messaging app!

Companies including Tencent and Alibaba are using data from messaging apps to provide their users with a credit score.

Companies including Tencent and Alibaba are using data from messaging apps to provide their users with a credit score. (Reuters)

Listen 12:43

A credit score.

For better or worse, you probably have one. But what if you lived somewhere without an established credit rating system? That's where new technology comes in. With the global spread of cell phones and mobile internet access, it's now possible to build up a financial profile based on the pattern of your online behaviour.

To dig into that, first, we have to understand how messaging apps are used in the Asia Pacific region.

In addition to being regular old communications tools, people use messaging apps to pay for things, from ordering concert tickets to paying utility bills. In China, that means using WeChat, the most popular messaging app.

In China, where North American style systems of credit ratings don't exist, the last year and a half has seen the rise of credit based on the huge amounts of data businesses like Tencent, the parent company of WeChat, have about their customers. It's a fascinating glimpse into how the tiny, ordinary activities we carry out online can have big impacts on our financial lives.

Edith Yeung is a venture capitalist in San Francisco. She's a partner with a company called 500 Startups, where she's, "focusing on mobile, VR, AR, AI, and Iot". That's virtual reality, augmented reality, artificial intelligence and internet of things.

She described an experience she had buying sandals in Beijing:

"The experience was seamless. Instead of me taking any cash or credit card even, they basically generate a QR code and I use my WeChat app and scan the QR code and immediately pops up a message and asks me, 'Would you accept?' and wants me to pay this 69 RMB equivalent of sandals. 

"I said yes, and there we go, and the whole transaction was done."

Nora Young: 

Even when you're physically in a store it makes sense to pay with the WeChat app?

Edith Yeung: 

Yes, and in fact the merchants encourage it. Not only in an actual store, also in restaurants. And what I notice is, you know, in China they are really, really great at super grassroots marketing. So Tencent actually gives the restaurants, or maybe even the waiter or waitresses, actual credit. A sort of incentive that payment method. So I found it in many, many stores and retail places. When I talked to the shopkeeper, they encouraged me to use WeChat payments instead.

NY:

So how do people use things like messaging apps to establish a credit score?

EY:

Obviously in the U.S. The 3 credit bureaus, we have this system for a very, very long time. So around the world, and actually in addition to China, places in Africa and South East Asia, there's different companies and government support to really want to build up a while personal credit system. The People's Bank of China (so basically the equivalent of the Federal Reserve), they actually request 8 companies, private companies, to work on building the personal credit bureau for China, including Tencent and also Alibaba.

Obviously, Tencent, in addition to WeChat, have many, many other internet services. They have tons of users playing games. they have also their own payment methods, their own blog platforms. And all these platforms have so many social behaviours that they keep track. the People's Bank of China basically want companies like Tencent and Alibaba using these big data. And there's tons and tons of social. transactional type data, or even who they pay. All these they have access to, so they're building up what they call the social credit score using all the data that they have for the individual users that have such a long, long, long relationships. 

Very similar system that Alibaba has. Alibaba is basically the Amazon of China. So if you can imagine the Amazon wants to build a social credit score for you, it's absolutely possible. They know exactly the association if you pay with a bank or credit card, and how often you shop, or how much do you pay. And all these behaviours are super interesting. So if Amazon or Facebook wanted to build something like this, that's something they're absolutely capable of doing. 

But more fascinating to me is, obviously in North America we don't have that, so we have the independent company, the 3 credit bureaus, to constantly extract, or pull, data from various different places where by pay the have to submit these data. Instead what the Chinese government has done is, they want these private companies to start building their own credit score based on data they own. It's a little over 18 months or so that they've been building this. Both Tencent and Alibaba now have their own credit score system, which allow third party banks or various different loan or insurance, and even dating sites, to have access to these scores. 

NY:

But isn't that sort of scary? Like, all of the data they have about the purchases people make? I mean I can imagine of Google were giving me my credit score based on all of my interactions all over the internet and all of the Google services I use.

EY:

It's absolutely possible. And if you think about it, it's not just Google. Google, Facebook, Amazon, Apple. Which also have access to your credit card and you behaviour. In addition to that they even have the location of where you're going everyday. And, obviously, in North America there's a lot more privacy laws and security around this. But if any of these companies want to create a score based on your behaviour, or transactional, or social, they absolutely can do that. But having said that, I think, obviously, they're creating something from scratch.

The concept of credit scores didn't even exist until early 2015. And they're just starting to slowly build this up. So it was still very young. A lot younger than the credit system we have in North America. 

NY:

They're amassing these credit scores by looking at the type of payments that people are doing. What else are they looking at in order to determine your credit score?

EY:

Just to summarize, obviously Alibaba, transactional type payment, which doesn't matter from buying books, is very similar to our behaviour in the US or in Canada. You can do a lot of shopping online, even for groceries. 

In addition to payment, or your social behaviour, or your frequency of paying utilities, or transportation. They keep track of all these, and, obviously, they know exactly who you're talking to. And also, what sort of the equivalent of business account, similar to Facebook, WeChat also has their official account, which is the type of business you communicate with. 

So this combination of all these data points create this credit score for you. 

NY:

That credit score can come with some perks.

EY: 

Definitely, at about 700, you have better treatment. 

Recently there's the equivalent of Travelocity in China. If you have a score that is 700 or above, then they will automatically give you a free visa to Singapore, for example. There's also car rental services. If your score is about 650 they wouldn't need you to put a deposit when you rent a car.  So there are many, many of these third party services now building on top of the credit score system that they created.

NY:

I know that one of the things that people have talked about when it comes to Alibaba and its social credit score, which I think is called Sesame, is some concerns that maybe things like, are you being a good citizen, or are you being social compliant, factor into what your score is. Do you know anything about that?

EY:

Of course. Me, personally, I visit China but I don't have a Chinese account or anything, so personally I don't have a Sesame score. Having said that, as I mentioned earlier, Sesame score opens up for other third party services to use it. One of the things that I find so funny, is there is a service called Baihe, which is equal to the Match.com of China. They allow the users, if they want to, to display their Sesame score on their dating profile. There are millions of this dating service's users that decide to display their Sesame score as part of their profile, because in Chinese culture people actually quite openly tell their potential boyfriend or future husband, if you don't own a house, if you don't own a car, which sometimes is definitely the reflection of your score. So if you can afford, and be able to loan money for your house, obviously your score probably will be higher. And it's an indication of, now you can support a wife. 

Surprisingly, even though in North American we're very conscious about privacy, of Big Brother types looking at my score, I really think that culturally, particularly in China, they don't really care as much. Because even though right now we are aware of the existence of the Sesame score, because they are definitely creating a system around it in some way even more transparent, and telling the normal population, "this is happening." Eitehr you want it or not.

But before I think most of the Chinese population realizes that the government has always been watching. People in North American are very conscious about it. It's not that the Chinese are not. They've always been conscious of it, and now this is a more formal system, that in some way makes things a little easier for their lives. 

NY:

So if I'm an average Chinese citizen, would there be a way for me to get a credit score other than by letting one of these companies comb through my data?

EY:

Even compared to in the US, what I'm used to is, I don't think that even we have a choice. When we buy a house, when we buy a car, when I got my mobile phone, there's a space on your social security, your ID card, you pretty much will be given a score whether you want it or not. 

NY:

Edith, thanks so much for your insight on this.

EY:

Totally! This is a really exciting time to rethink how the money will work for the future.