You come to the store, fill up your basket with food and go to the counter. Cashier scans everything, it’s 103.59 EUR, the screen lights up, you look at it and smile – transaction is accepted and your account is charged.
Next morning you look at your watch – 8:47, you can still make it. You run up the stairs and get outside – just a couple of blocks left. Finally the office building is near, but it is on the other side of the road and the light is red. It’s 8:56, you don’t have time, you look left and right, let the last car pass and cross the street. 8:59 you’ve punched your card at work – pure luck.
You get to your desk, get your phone out of the pocket – there are two recent notifications. First, your credit score has been lowered, second – the fine for jaywalking was charged from your account.
This might sound like a utopian future or a conspiracy theory, but this is a reality, at least in China. It started with publicly shaming people using CCTV cameras, facial recognition and billboards to show faces and names of jaywalkers.
As you jaywalk across the street, CCTV picks up your face and sends it to the servers where AI is matching it against the database. This database is also tied up to the credit scoring system – that’s how your score is lowered, and also to the payment system – which lets the government to bill your account for the amount of the fine.
What helps – all of this technology can be provided by just one company – Ant Financial.
Ant Financial
It all started with the square. In 2011 Ant Financial launched a new version of the Alipay app, with a built-in QR code reader. QR codes can help you with the simplest functions, like scan it and open the website, but in this case it had a monetary function. Waiter could print QR code, so you can tip her, beggars could print it out, so you couldn’t dismiss them with a simple “I don’t have cash on me”. It started to propagate all over China. From high-end restaurants and hotels, to fast-food chains and mom and pop shops. Quickly cash became unnecessary in China. Young and old used mobile phones to pay for things offline.
It also worked online, when Jack Ma decided to launch e-commerce site Taobao, the company faced a major problem – although the user activity was high, there were very few transactions – people didn’t trust each other with money. That’s when Alipay was added to the mix.
At first it worked like an escrow mechanism. Buyer would send money to the Taobo bank account and only after confirming receiving the item, Taobao released the funds to the seller. There were two issues with this. First, Alibaba didn’t have any sort of financial license, but Jack Ma decided to risk it. Second, there were errors. Chinese banking system was very antiquated with a lot of manual work. So Alibaba started to cooperate with Chinese banks, together with the first partner – the Commercial Bank of China, Alipay created online version of the process that was once manual. Banks started to partner with Alipay and by the year 2010, the company had connections with more than 200 of them in China.
The next logical step and the one users also asked for – keeping balances in the Alipay account. This would allow to use those funds on Taobao and lower the friction for making the transaction and potentially cheaper. Alipay introduced virtual accounts, which allowed the company to provide more financial services in the future.
In its portfolio Ant Financial also has Yu’e Bao – the worlds largest money market fund. Sesame Credit – a private credit scoring company. ZOLOZ – biometric-based identity verification platform. Ant Cash Now – consumer loan service. Insurance services, banks, credit card products and a couple of joint ventures in India, Thailand, South Korea, Philippines, Indonesia, Hong Kong and more.
Ant Financial has well over 700 million users in China (which is about half of the population of the country), it also has passed the 1 billion user mark worldwide. That is one of the factors which allowed it to raise $14 billion with a valuation of $150 billion, which is about the same as the combined market capitalization of Morgan Stanley and Goldman Sachs or all of the FinTech unicorns in US and Europe – combined.
Data Collection
Alipay has everything in its app. You can order food, pay your bills, pay for parking and car insurance, buy movie tickets, it knows about your fines and how well you tip. In Western Internet we are concerned with privacy policies of companies one by one. Facebook has information on you, so does Google, Netflix, Amazon, eBay. Some data brokers try to collect all of it together, buying up everything they can, but there are no incentives for tech giants to sell it. Facebook has to buy information from credit card companies to know what you’ve bought. But here, all of this information is in one app. As you have financial data, social circle and add to that behavioral data and you can “rank” the person pretty easily.
That’s why, when Chinese government decided to issue licenses for the social credit scoring companies, Alibaba was first in line. It was one out of 8 companies who got the license in the beginning of the 2015. With it at hand and all the data it started the development of Sesame Credit.
Sesame Credit
Sesame Credit is a credit scoring system, which analyses all the data available and shows you the score. The range of the Sesame score is between 350-950 points, with 700 and up being excellent credit score and range between 350 and 550 is considered the worst, which will give you more of a punishment than perks.
As this is still an experiment, Sesame Credit is optional, but nobody knows if it still calculates your score even if you didn’t signup.
It is reported that credit score consists of your general credit history (35%), financial status (25%)- the amount of money on users Alipay account, online behavior and preference (20%), personal characteristics (15%) and relationships (5%).
Couple of ways the high credit score makes your life easier:
Better treatment at Hospitals
Two years ago Sesame Credit launched a program called “Credit Medical Treatment”, which is available to those with the score of 650 or higher. It allows to cut lines and pay for treatment upfront in the app. If the normal waiting time in the hospital is more than 2 hours, with “Credit Medical Treatment” it drops below 1 hour mark.
Try out before buying
On Alibaba’s e-commerce platform Tmall, users with high credit score can try out items before buying them. That way you don’t have a risk of regretting buying decision. Not only that, but there are also frequent promotions, such as the ability to try out the new Ford or some new smartphone for 30 days without the need to buy it afterwards. This is only available to the people with the highest score.
No Deposits
If you have high enough credit score in many instances you won’t need a deposit when you otherwise would have. One example is bike renting platforms which allow users with credit score of 650 or higher to rent bicycles in the bigger cities in China without deposit.
Not only that, but you don’t need the deposit in other places, like using shared umbrella, or public phone charger. Going back to hospitals and “Credit Medical Treatment”, with the score of over 600 you don’t need a deposit when renting a wheelchair.
It goes even further, in some instances you don’t need a deposit even when you are renting the apartment if you have high enough score.
Libraries
There are even perks in Public Libraries for people with higher scores. If you are eligible, you don’t need to pay a down payment and can set up library card for free. In some libraries you don’t even have to set up a card and just borrow books using your ID.
Lounges at Train Stations
As China’s train stations sometimes can get very crowded, especially in peak seasons, for members with high credit score there are now special lounges, where they can relax. In this case though, you not only need a high credit score, but you need to buy a higher fair ticket or have a platinum status.
Some of the governments are starting to accept Sesame Credit. For example, users with a score over 750 can apply for Canadian visas without the need for submitting bank statements. You just download the copy of the report in the Sesame Credit app, which is generated specifically for visa application and provide it to the embassy.
The Dark Side
While the perks are nice, some of the elements of credit systems are Orwellian at best. In some areas of China, when you call person on the phone, the siren sound is played and you hear a recorded message warning that the person is on the blacklist, because they have low social credit score, it also asks you to urge the person to pay the debts.
You will have a lower score, if you don’t have friends on the platform, or if you don’t pay your bills through Alipay, or even if you don’t buy anything on Alibabas e-commerce websites. It means that to have all the perks of the high credit score you have to be all-in in the Ant Financial ecosystem. If you are someone that uses Alipay here and there, when you apply for Sesame Credit, you will see your score closer to the bottom half. This could incline you to spend more on Taobao, pay your bills through Alipay, that means having more money on the account, which can be then used for other purposes as well.
People are talking about the green bubbles and Apple ecosystem lock-in, when a student doesn’t get added to the iMessage group chats, because he has Android and the group chat goes green. Now, in China, if couple of friends decided to see, who’s credit score is higher. Their income may differ and so may their habits. When four out of five realize that their score is much higher than that of their friend, what do they do? Is it worth it to abandon the friend just to get their score get higher (or not to get lower)? For some it is. They will either shut him out of their lives or force him to make decisions he doesn’t want to make, just to improve his credit score, so he stays friends with them.
And after social credit score becomes mandatory in a year, anyone will be able to see anyone’s score. The best case scenario will be, people will try to help and encourage those with lower scores to change some habits. But most probably people will just isolate lower scoring friends, because there is a risk of your score getting lower because of such friendship.
But the biggest and probably scariest controversy about credit score in China was its implementation of the blacklist. Its official name – the List of Dishonest Persons Subject to Enforcement, the catalogue of excluded people. By the summer of 2019 there were 7.49 million names. What is a punishment? You can’t buy plane tickets, the system says our are “not qualified”, you can’t buy properties, take loans or travel on top-tier trains. You can get on the list even for stealing just a pack of cigarettes and there is no appeal mechanism, it just ruins your life.
One businessman was placed on the list after a dispute with another company, after that the banks cut him off, so he was unable to pay employees salaries, business partners abandoned him. It was like torture. Luckily he was able to pay the court the money it ordered and was removed from the blacklist.
In the west
As China is full steam ahead, the west doesn’t want to be behind forever. There is no shortage of FinTech companies in Europe and US. In 2018 American FinTech companies received $11.9 billion in funding, while European received $3.5 billion. There were 39 VC-backed unicorns in FinTech which combined were worth $147.37 billion. Those are all record numbers.
In Europe the biggest FinTech companies are N26 and Revolut. N26 as of valuation had 2.3 million users and raised $300 million with valuation of $2.7 billion, while Revoluts last valuation was $1.7 billion with more than 3 million users.
N26 has a banking license in Germany, which gives it the ability to provide credit to clients in certain markets, as it does already. Revolut up until recently had an EMI license, which prohibits crediting clients, so it was solely focused on acquiring the user base. In the end of 2018 it also got banking license in Lithuania, which will give the company the ability to issue credits – the goal of every financial company.
In the spring and later autumn of 2014, Google led two rounds of what could be described as quietest $160 million combined investment in Credit Karma. Search engine company didn’t even bother to comment the news. So what is Credit Karma? It allows you to view your credit history weekly for free, which is something unprecedented in the US. Not only does it give you the graph showing your score over time, how it compares to others by income, age and state, how certain factors impact your score, but you can also simulate how your score changes by paying off debt or applying for new credit.
It also allows users to aggregate their financial data from banks, credit cards, loans and transactions and provides information on habits that could be changed in order to improve your financial health.
In the end of 2018 Google obtained banking license in Lithuania, which allows it to provide payment services all over the Europe.
Those are only preparations, while Apple in partnership with Goldman Sachs already started its expansion into the world of credit. Using its strong stance on privacy and its clout among users it launched Apple Card. Company claims it will give you the lowest interest rate possible. It will show you how to pay off your debt so you don’t have to pay any fees, again, with stated goal of improving your financial health.
Why do those companies provide you mostly free services, try to grow the biggest user base and promise to improve your financial health, especially Goldman Sachs, who Apple partnered with – not the most beloved bank in the world? Credit is a very profitable business and when you hook the client, for many it is close to impossible to get out. Your good financial health means companies can give you more credit, to the point where your income barely covers the monthly payment. This is the ultimate lock-in.
With cash practically going away all over the world, there is hardly anything we can do in the future other than use those services, or at least one of them to function in the world. The only possibility to somehow distance yourself from all of it, is to not opt-in without thinking about the consequences to all the new features, regardless of how futuristic and fun they sound, second – try to use only services from the companies you trust at least some and third and final advice, which is very important also now – don’t get into too much debt, try to control your finances yourself, understand where you spend it. This will help you immensely going into the future.
