Yesterday, I wrote about a Marc Andreesen interview/Tweetstorm that called for disruption of financial products through better technology. One of the examples he gave was the use of big data tools and social networks to provide enhanced consumer credit scores. This is an important idea, something we have been hearing about for a few years. Banks know enough about their customers through their own data stores, as well as a few online data sources, that they can create credit profiles that are a world better than traditional metrics like FICO.
In my post, I suggested that other companies were doing something similar with credit for businesses. I was thinking of Alibaba. I have been taking a close look at that company’s financial filings lately, and I stumbled on this interesting tidbit. It turns out that Alibaba has a side business in micro loans to merchants who sell products on Alibaba’s websites.
For a variety of reasons, small business credit in China is severely constrained. China’s financial markets are still highly regulated and not that mature. As a result, a very large percentage of credit ends up going to only the largest firms. Another problem is that there are few robust credit reporting companies in China. There is no obvious analog to Dun & Bradsheet. So while banks in the US are using data tools to supplement existing credit reports, Alibaba is essentially creating something new in virgin territory.
From their filings:
“Using transactional and behavioral data from sellers on our retail and wholesale marketplaces, we have developed a proprietary credit assessment model through which we evaluate our borrowers’ ability to service loans, assign credit scores to each borrower, pre-approve credit limits and extend loans.”
That’s a pretty good description of the process, probably the clearest piece of prose you can find in an SEC filing.
This is interesting for a few reasons. First, I do not know of any companies in the US that are trying this, please let me know in the comments who is. Consumer lending appears to be a market poised for change, but we have a pretty robust commercial credit market, and the opportunity for disruption may be much smaller there. There are a few companies I know that are starting to track private companies (like Mattermark and CB Insights), but I do not believe either of them have hard financial data yet.
Second, Alibaba appears to be doing this rather well. From other parts of their filings, it is clear that their predicative model on creditworthiness is pretty robust. True, they still have defaults, but the defaults hew pretty closely to what they forecast each quarter.
Alibaba does have a few advantages here. In addition to providing e-commerce marketplaces for the people they are lending money to, crucially, they also control the payment system behind that. So they know their borrowers’ cash flow status in real-time.
My initial reaction to this was a sense that Alibaba is something special, a unique case. Then it occurred to me, that what we are seeing is a reshaping of finance. The idea of what constitutes a ‘bank’ or ‘lender’ can easily change. Imagine Facebook taking everything it knows about you and assigning you a credit score? Or Google aggregating search traffic to identify promising borrowers. And for that matter, why not Wal-Mart or Target. Anyone with enough data that they can gauge the risk of non-payment. Not that far-fetched. There is a lot of potential for disruption.