Financial technology start-ups are creating new models of lending. They mine streams of digital data with clever software to calculate creditworthiness instead of relying on a person’s credit history, the main ingredient in traditional credit scoring.
So far, the new breed of big data lenders has focused on niche markets — recent college graduates, immigrants and payday borrowers — where people often have scant or inconsistent repayment records, and the conventional math of risk analysis stumbles.
ZestFinance, a pioneer in the field, is moving into a huge market where credit histories are scarce: China.
ZestFinance and JD.com, a Chinese online retail giant, are announcing a joint venture to provide a consumer credit scoring service in China. The venture, JD-ZestFinance Gaia, will initially be used to assess credit risk and offer installment loans for purchases on JD.com, which has 100 million active customers and generates yearly revenue of $20 billion. The venture intends to eventually offer the credit-analysis service to corporate customers throughout China.
JD.com sought out ZestFinance, tested its technology and came away impressed. Last fall, Chen Shengqiang, chief executive of the Chinese company’s finance unit, visited the ZestFinance offices in Los Angeles and spoke to Mr. Merrill and members of his team. Soon after, Mr. Merrill traveled to the Chinese company’s headquarters in Beijing to work on setting up a test of ZestFinance’s technology, working with JD.com data.
In China, JD.com had a very different assignment for ZestFinance, using different data sources than in America. Only 20 percent of Chinese adults have a credit score, and they often are given credit through the People’s Bank of China, the nation’s central bank, and through affiliations with large state-owned corporations.
Across the broader population, lending tends to be more personal and informal — cash loans from networks of friends and relatives.
But China’s leaders are seeking to stimulate consumer spending to make its economy less dependent on industrial exports. Expanding consumer credit is part of the formula, and the government is allowing private companies, like JD.com, to innovate.
Since early 2014, JD.com had been offering its own consumer loans of up to a few thousand dollars for purchases of televisions, smartphones, computers, refrigerators and other merchandise. JD.com’s business model is sometimes compared to a combination of Amazon and UPS.
Like Amazon, the company buys goods from manufacturers and has a national network of distribution centers and warehouses. It also has its own fleet of delivery vans. JD.com handles more than two million orders a day, and offers next-day delivery in much of China. It is a full-service online retailer, unlike its better-known rival, Alibaba, whose marketplace connects buyers and sellers.
In its test run for the Chinese company, ZestFinance built risk models using JD.com transaction data: what people buy, when they buy it, what brands they choose, where they live and other nuggets of information in the sales data.
In its test, the creditworthiness predictions made by ZestFinance were compared to the results of JD.com’s experience making loans, which was essentially the control group. The ZestFinance algorithms won handily.
The Chinese online retailer, said Josh Gartner, senior director for international communications for JD.com, hopes to “greatly improve the efficiency of deciding who should be offered credit or not.”
Data science methods, Mr. Gartner added, can fill a gap “where traditional metrics tend to be less useful, and China would obviously be one of those places.”
In a statement, Mr. Chen pointed to the potential value of the joint venture beyond JD.com itself. He called the link-up with ZestFinance “a foundational step toward building a reliable system for assessing credit risk that will help meet the huge market need.”