Alternative Credit Scoring: Drivers and barriers of alternative credit and ACSS adoption in China and the United States of America

Innovations in the provision of credit using alternative credit scoring systems (ACSSs) are fundamentally reshaping retail lending across the world. Online financial technology platforms are leveraging automation, alternative data, and AI to supercharge the provision, distribution, and marketing of loans. Frictionless onboarding and streamlined credit underwriting have lowered transaction costs faced by both consumers and providers. The inclusion of non-traditional sources of credit information, coupled with innovative algorithmic credit risk assessment methodologies, has reduced information asymmetries that lie at the root of financial exclusion. As a result, individuals and businesses that have long been underserved or excluded by traditional credit providers are now able to borrow more conveniently, quickly, and cheaply than ever before.

Against the backdrop of favorable funding and regulatory conditions for fintech innovation during the past decade, startups have proliferated across the lending value chain and fueled exponential growth in loan volumes. While much of this growth has been driven by financial inclusion, it has also come at the expense of incumbent bank and nonbank lenders’ market shares, particularly in the unsecured personal and SME lending space. The rapid pace of bank disintermediation in recent years has raised questions about the ultimate extent of disruption: does it portend a fundamental reshaping of the retail credit landscape? Will traditional lenders be relegated to support functions – the proverbial “dumb pipes” of the credit system – or rendered obsolete altogether? Or rather, does it reflect a new modus vivendi between upstarts and incumbents which are concentrating on different market segments?

We answer these as they apply to retail lending markets, drawing on findings from our interviews and existing research, and evaluating two hypotheses: bifurcated market equilibrium and specialization, versus disruption and structural change.