By: Carly Trachtman with contributions from Ethan Ligon and Ketki Sheth
 
It was a hot day in Jaipur and my colleagues and I stopped in a store to get a juice in Barkat Nagar market. Barkat Nagar is a typical Indian market brimming with activity from motorcycles, auto rickshaws, cars and pedestrians lined by stalls on all sides boasting everything from books to clothes to electronics. When it came time to pay, instead of pulling out credit cards, everyone in my group started searching their wallets to the right bills with which to pay. In fact paying with credit cards would not have been an option, as this merchant was one of many in Barkat Nagar that only accepts cash payments. This reliance on cash is not a phenomenon specific to the market, but a broader trend throughout many parts of India.

Over the last two years, the Indian government has been trying to change this trend and has been engaged in shifting its cash-based economy into a digital one, but their success to date has been relatively limited. Hence, in an attempt to better understand the Indian digital payment landscape, I traveled to Jaipur  last summer as part of a DCO-supported investigation, headed by CEGA affiliates Ethan Ligon and Ketki Sheth.

Given the economic diversity of India, I visited as many different markets as I could and was astounded by the differences I saw from market to market -- especially depending on the socioeconomic classes served by each. In an upper class shopping area, most merchants were able to accept credit cards and other mobile wallets for payment. Even the chai cart located outside of one of the shops had a prominent sticker reading “PayTM accepted here” (PayTM is one of the major mobile wallet providers in India). In the same market, I talked to a merchant in a larger store who sold children’s clothing. When I asked him if he was able to accept credit cards, he scoffed. “Of course I do!” When asked if it would be useful for him to receive loans based on his digital transaction history, he informed me that he had already used a lending service like this in the past and had indeed found it very helpful.

However, when I visited markets that weren’t catering to the elite, the cash economy dominated and digital payment options were severely limited. One such market I explored was in a low income area of the Shastri Nagar neighborhood. Small stalls selling everything from bags of rice to school supplies to women’s formal shoes were packed together on the sides of the street. A portion of produce sellers were organized together under a tent, whose roof was part formal structure and part cloths tied together with string. I walked up to a small stall where a young man was selling cell phones, an item that seemed to me expensive enough to not warrant payment in cash. When asked if he accepted digital payments, he told me he did not accept credit cards, but did accept payments from several mobile wallet services; however, almost all of his customers paid in cash. He explained that people in the area got paid in cash and so they paid for everything in cash. When asked about where he got loans for his business if he needed them, he replied that he would mostly borrow money from friends and family, because getting a bank loan was a long and tedious process.

These two interactions highlighted how just within a few miles of each other, in the same city, there are merchants who are fully integrated into digital finance and its related benefits (including credit), and those who are excluded. While the average penetration of digital finance across India is known to be low, this average statistic hides significant variation across markets serving different socioeconomic classes. Many of the merchants who lacked credit expressed a strong desire to get formal loans for working capital and business expansion, if there was a more accessible process. So how do we bridge this gap?

Digital credit may be part of the answer. If low consumer demand for digital finance is driving low adoption of digital payment systems, then informing merchants about the benefit of digital credit tied to digital finance may be an alternative driver for adoption. For merchants who have limited formal credit histories, a digital payment transaction history can provide proof that they run a viable business. So in this sense, digital credit can help simultaneously with two distinct goals: to increase financial inclusion for small-scale merchants and to facilitate the transition to a digital economy.

However, switching away from a cash-based economy may be a slow, tenuous process, as consumers, merchants, and intermediaries all adapt to new ways of doing business. Despite these difficulties, our research shows a potential silver lining. A recent survey of over 6,000 fixed store merchants conducted by People Research on India’s Consumer Economy (PRICE) in conjunction with the USAID funded initiative Catalyst, found that while only about 3% of merchants had reported ever receiving a formal business loan, around 96% of merchants reported having a formal bank account and around 80% reported having a smartphone. This suggests a potential need for digital credit, and that many merchants possess the technological literacy and some of the necessary infrastructure to manage digital loans. Hence, perhaps with the right push, merchants will find it worthwhile to adopt digital payment devices. This will likely make them eligible to access digital starter loans. Our team is hoping to explore this avenue further to improve financial inclusion for merchants in Jaipur.
 
Carly Trachtman is pursuing her PhD in Agricultural and Resource Economics at UC Berkeley. She traveled to India during Summer 2017 to conduct qualitative interviews as part of the DCO funded pilot study “Mobile Payments and Inclusive Credit: A Silver Lining in India's Cash Crisis?” This study received a second round of pilot funding in November 2017.

By: Zenan Wang

Wenge Chang is a renowned crab farmer in Sihong county. His farm has bred multiple “the king of crabs”, the biggest crab of the year in national contests. Sitting in an office full of trophies, he complained to us how he struggled getting loans to expand his production. Despite a business with CNY￥200,000 to CNY￥300,000 annual revenue and an excellent credit history, Mr. Chang found that few banks would give loans to help him expand his production because he could not provide collateral. Farmland in China technically belongs to the government and farmers are only allowed to operate on the plot assigned to them. They can rent land from others if they want to expand production, but can neither sell nor use the farmland as collateral. But for Wenge Chang that’s all the valuables he’s got, a lot of land and a lot of crabs.
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For people living in the rural part of China, getting a loan from banks is not easy.  Because of the national policy to support rural areas, big national banks are required to charge a very low interest rate for farmers. But evidently, banks do not make much profit from such low rates. As a result, it’s nearly impossible to get a loan from the four big national banks. Most of those banks do not have branches in rural areas. Even Agricultural Bank of China, one of the four banks whose mission was to support agriculture when it was established, pulled out of most rural markets.

Rural borrowers usually turn to regional commercial banks and credit unions. Those banks typically charge a competitive market interest rate, which is much higher than those charged by the national banks. But regional banks’ top priority is often lending to local private enterprises, which also have low chances of getting credit from a national bank, and are willing to pay high interest rates. In contrast, lending to small holders without collateral is extremely costly, plus charging high interest rates may be politically dangerous. As a result, it is no surprise to see that regional banks aren’t swarming to lend to small holders.

Chinese internet giants have identified this niche market and their fintech subsidiaries are racing to expand financial services in rural areas. By 2016, almost all the tech giants in China have declared that developing a rural finance service is one of their company’s long-term strategies. Despite pressure from their peer fintech companies, the competition from banks is almost non-existent. When a company manager told me that they are planning to provide a new type of loan that takes chicken coop equipment as collateral, I asked him how they are going to compete with traditional banks with this product (it seemed to me that banks should have being doing this and would have more of an advantage than this company). The company manager responded that they thought the same thing at first. But after they did their research and ironed out the details, he was very surprised at how easy it was to implement the idea and that no bank was doing it. It seemed that the traditional banks really lack an appetite for giving out small loans, he concluded.

However, the fintech companies will not be satisfied with profiting from a small niche market. They want to disrupt the entire financial industry. Managers at many fintech companies like to use buzz words such as “Big Data”, “Cloud Service” or “Artificial Intelligence” to inadvertently remind us that they are a technology company rather than simply another financial service provider. They are indeed bringing a new perspective to an old industry. During my conversation with managers of such fintech companies, it became clear that their ambition goes beyond making profit off small loans, but to make everything “digital”, which in turn could lead to more innovation. For example, a company provides production management software for free to its husbandry loan recipients, and subsidizes farmers to install smart environmental control systems that constantly transmit real-time data to farmers’ cell phones and the company’s data server. What might the company be able to do with such data, one might wonder? For one thing, this kind of production data could be used to detect fraudulent behaviors from borrowers, to provide technical support to farmers, or to design and offer actuarially fair insurance products. Data is the new gold of the fintech era, and Chinese fintech companies are already mining it.

While some companies are trying to collect enough data to generate a digital profile for everyone in the country, others are already thinking “why not get a profile for every chicken, every pig in the country as well?” The rise of financial technologies and data mining for digital financial services marks the beginning of a new era in which fintech companies could increasingly wield more and more power over consumers and their financial decisions.  

Zenan Wang is pursuing his PhD in Economics at UC Berkeley. He traveled to rural China in Summer 2017 to interview recipients of a husbandry loan product for his DCO funded study “Access to Digital Credit and Its Spillover Effects in China”.

By: Shazeda Ahmed

Imagine if receiving a credit score were as easy as using some of the most popular mobile apps—Uber, Venmo, Amazon, Facebook Messenger. In China, fintech firm Ant Financial (a spin-off of tech giant Alibaba) has created a mobile payments app, Alipay, whose credit rating feature has issued over 200 million “social credit” scores using exactly these types of data inputs. Think of Alipay as a web browser attached to a mobile wallet: within the app, anything users can pay for digitally, from medical appointments to tuition, or car rentals to airfare, is factored into a Sesame Credit score. Sesame Credit takes traditional financial information such as bill repayment into account, alongside behavioral data (e.g., donations to charity), social network information (who one’s friends are within the app and how well they score), and demographics including education level, gender, and occupation. One common use of the scores is to qualify for consumer credit through the Alipay feature Huabei (literally “just spend”). Additionally, high-scoring users can share their scores with third parties for deposit waivers and expedited services, with examples including bicycle and car rentals, hotels, dating websites, and even visa offices at certain foreign consulates.
 
At WIRED, journalist Mara Hvistendahl has written a fantastic article about her experience signing up for Sesame Credit while living in Beijing. Some consumer protection concerns she raises include opacity about which transactions might raise or lower a score, and how data previously collected for a purpose unrelated to credit evaluation might later be drawn into one’s rating. An example is the list of students who were reported for cheating on the national college entrance exam (similar to the SAT), which Ant Financial has discussed using as an additional data source for downgrading scores. The company already draws from government-issued blacklists of debtors to decrement users’ Sesame Credit scores as an incentive to repay their debts. Ant Financial has even boasted that in some instances after debt repayment, there are users whose low scores plateau and never recover.
 
Another concern that Hvistendahl raises, and that an upcoming research project of mine will address, is the question of what data third parties exchange with Sesame Credit. Several hundred companies have entered into such agreements. As Hvistendahl notes of one car rental firm, if a user “crashes one of the rental company’s cars and refuses to pay up, that detail is fed back into his or her credit score.” Given that the number of Sesame Credit’s third party partners is on the rise—most recently, eight Chinese cities have announced that landlords will be allowed to use the scores to evaluate potential tenants—it is critical to establish security standards for these data exchanges. What other data are third party partners sharing with Sesame Credit, and how aware are users that this is occurring?
 
While in Beijing on a Digital Credit Observatory pilot study grant this summer, I spoke to Sesame Credit users to get a sense of their consumer protection concerns. While a few people raised issues including data security and privacy, the most interesting complaint I heard from users was that they disliked the way the app tries to mimic social media. Whereas the app wants more data about people’s social networks to assess correlations, users expressed annoyance that the app encouraged them to add complete strangers (e.g., street food vendors) as “friends” in the app. Even people who like Alipay and Sesame Credit told me that they prefer to keep their social interactions removed from the app’s assessments. Yet they might not be able to maintain this separation for much longer, as China’s dominant social media and messaging company, Tencent (owner of WeChat), is currently experimenting with its own social credit product.
 
While the system is relatively under-regulated, it is time for the regulators, tech firms, researchers, and users to discuss much-needed consumer protections such as limits on both the types of data that can be used for social credit scoring, and applications of these scores. Credit repair mechanisms and more detailed user-facing descriptions of the types of data that factor into the score may be the first steps toward demystifying the process.
 
Shazeda Ahmed is pursuing her PhD at UC Berkeley’s School of Information. During Summer 2017, she traveled to Beijing to conduct qualitative interviews with users of Sesame Credit to understand consumer protection concerns. Her study “Consumer Protection Oversights in the Chinese Social Credit System” received funding through a DCO travel pilot grant in Spring 2017.  

To learn more about WeChat Pay and Alipay's plans for advancing rural financial inclusion, check out this CGAP brief "China's Alipay and WeChat Pay: Reaching Rural Users".