Econ_May_05

The Economist

May 5th 2018

SPECIAL REPORT

FINANCIAL INCLUSION

HACKNEY IN NORTH-EAST London prides itself on being

one of the capital’s most ethnically diverse boroughs. The

council identifies only 36% of the population as “white British”.

Dalston Junction, a now-trendy part of the borough, buzzeswith

a down-at-heel sort of cosmopolitanism: a Caribbean bakery;

the Halal Dixy Chicken shop; the Afro World wig-and-exten-

sions parlour; dozens of outlets for Lycamobile (“call the world

for less”) and formoney-transfer firms.

It is also diverse in wealth. Nearby gentrification is sprout-

ing in a few trendy coffee bars and a sleek creperie. But Hackney

is also, on a measure of “multiple deprivation”, the 11th most de-

prived ofmore than 400 local-authority areas in Britain. Dalston

has more than the usual number of charity-run second-hand

shops and at least four pawnbrokers.

Competingwith this last group is a branchofOakam, a Brit-

ish lender set up in 2006. It advertises itself as an “alternative to

doorstep lenders”, the traditional financiers for those beneath

the bar set by mainstream banks. Originally aimed at recent im-

migrants, it extended its reach to the rest of those “lacking access

to basic financial services”—a group it puts at 12m across Britain.

A report published inMarch 2017 by a House of Lords committee

estimated that1.7madult British residents have no bankaccount;

40% of the working-age population have less than £100 ($140) in

cash savings; and 31% showsigns of financial distress.

Britain is not the only rich countrywhere big chunks of the

population live largely outside themainstreamfinancial system.

In America the Centre for the NewMiddle Class, the think-tank

arm of Elevate, a Texas-based online lender specialising in the

“nonprime” market (not immediately creditworthy), estimates

that109mAmericans are nonprime and a further 53mare “credit

invisibles”, without enough of a financial history to be assigned

a credit score. A survey by the Federal Reserve last year found

that 44%ofAmericanswould struggle tomeet anunexpected ex-

pense of $400without selling something or borrowing.

Banksmake goodmoney out of thewaymany peoplewith

bank accounts and a decent credit standing raise funds at short

notice: using a credit card or dipping into the red on a current

Rich countries

The bottom rung

Tech and data offer hope of more financial inclusion in

the rich world, too

The most extensive use of “alternative” data (which, unlike

“alternative” facts, do have a basis in reality) ismade in China. In

2015 the government awarded eight firms licences to develop

consumer-credit ratings. Alipay’s is the most advanced. A good

score fromthe firm’s Zhima (Sesame) credit agencymay allow its

holder to hire a car, use a bike-sharing service or book a hotel

roomwithout paying a deposit, and let himsee a doctor without

having to queue to pay. At one time, it is reported, it even allowed

people to jump security queues at Beijing airport. Lonelyhearts

flaunt their credit ratings in online-dating profiles. For thosewith

a lower score, however, a Zhima ratingmaybe risky. According to

Xinhua, China’s state news agency, the database includes a list of

more than 6m people who have defaulted on court fines, which

has helped the courts catch up with more than 1.2m defaulters

who found that their credit score had plummeted.

Open Sesame

Ant says that Zhima improves financial inclusion. As of

2015, the People’s Bank of China (the central bank) maintained

credit histories for around 380m citizens. That is less than one-

third of the adult population, compared with nine-tenths of

Americans who have credit records. Zhima’s system, claims an

Ant spokeswoman, is transparent. The fivemetrics onwhich it is

based are indeed public: personal information, ability to pay,

credit history, stability of social networks and “behaviour”. The

meaning of this last one is not entirely clear. In 2015 Li Yingyun, a

Zhima director, told

Caixin

, a magazine, that someone playing

video games for ten hours a day might be rated a bad risk; a fre-

quent buyer of nappieswould be thought more responsible.

As concern about the misuse of online data mounts in Chi-

na, too, Ant nowtends toplaydown suchbehavioural data. Dou-

glas Feagin, its head of international operations (and a former

Goldman Sachs banker), says its algorithms rely heavily on the

debt-service andpayment history: “Past repayment history is the

best predictor of future credit performance.” In Lahore, Mr Sha-

hid of

FINJA

is also sceptical of claims made for non-traditional

data: “Everything is overrated except the payment history.”

For Ant, the credit score forms part of an “ecosystem” of on-

line services that support each other. It also offers loans, and

since 2013 has had a fundwhereAlipayusers can earn interest on

their surplus cash. The fund, knownasYu’e Bao (or “leftover trea-

sure”), offersmuch higher returns than bankdeposits. By the end

of last year it had become the world’s biggest investment fund,

with 1.58trn yuan ($243bn) in assets under management and

325maccounts, equivalent to nearly a quarter ofChina’s popula-

tion. It has an estimatedmarket share of 25%. Tencent has its own

online fund, Licaitong, linked to WeChat, with 300bn yuan un-

der management by the end of

January this year. Lufax, a sub-

sidiary of Ping An, an insur-

ance giant, started as a market-

place for peer-to-peer lending

but has turned itself into a fi-

nancial “supermarket”, offer-

ing loans, securities, mutual

funds, insurance andmore.

These Chinese giants

have shown that serving peo-

ple who until recently were re-

garded as unbankable can be

profitable. Greater financial in-

clusion, in effect, is a business

opportunity. Institutions in

richer countries are trying to

heed that lesson.

Eve

ybody’s cho

Source: ITU

Mobile-phone penetration

Per 100 people, worldwide

100

1995 2000 05 10 16

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