ZestFinance is headed to China in search of new borrowers.
Chinese e-commerce company JD.com and ZestFinance announced last week that they had formed JD-ZestFinance Gaia to help creditors better assess consumer lending risk in China.
The L.A. firm is part of a fast-growing alternative underwriting assessment industry that looks beyond traditional FICO scores. ZestFinance has a program that assesses the likelihood of loan repayment by American borrowers that uses algorithm-driven software to dig up patterns in consumer behavior, such as cell phone bill payment records, Web browsing history and social media site membership. It sees a lack of credit history among Chinese consumers as a big opportunity.
JD.com took an undisclosed minority stake in ZestFinance as part of the deal and will provide data on its shoppers to help kickstart the venture’s credit rating efforts. JD.com will also use the credit ratings to finance its customers’ purchases of durable goods such as refrigerators, televisions and smartphones.
“Chinese shoppers are hungry for convenient, reliable and fair credit channels,” Shengqiang Chen, JD Finance’s chief executive, said in a statement. “This requires both a systematic method for making decisions and a robust infrastructure that enables lenders to share data – neither of which is sufficiently developed yet in China.”
JD-ZestFinance Gaia ultimately wants to be a credit rating system that not only can be used to rate the credit worthiness of JD.com shoppers, but can be carried to other retailers as well.
Steven Dietz of Santa Monica venture capital firm Upfront Ventures, an early ZestFinance investor, said in a blog post that if the partnership works, “it should become the FICO of China.”
“Consumers in China – even those who are affluent and might traditionally be considered prime borrowers in another country – have found themselves almost entirely cut off from credit for traditional retail purchases,” he wrote.
Chinese consumers are known for their inclination to save rather than borrow, but as they have become more optimistic about their economic future interest in consumption has gotten ahead of the country’s traditional lending system. ZestFinance sees that gap as an opportunity to play catch up and more.
“As China uses advanced data science to make credit decisions, its underwriting will likely leapfrog approaches used by most lenders in established markets, which are based on technology created decades ago,” ZestFinance Chief Executive Douglas Merrill said in a statement.
The Chinese government also has encouraged more consumption, as part of a strategy to transform the economy from one based on investing in manufacturing and infrastructure to one based on consumption and services. A more sophisticated consumer lending system is expected to will pay a critical role in those efforts.