We all know popularity isn’t everything – but it may soon get you a bank loan in Hong Kong. In a new twist in the city’s open banking storyline, banks could soon be encouraged to consider social media activity and other alternative data sources when carrying out credit checks on customers.
This new initiative – known as the Commercial Data Interchange (CDI) – promises to re-ignite the open banking revolution in the Asia financial hub, as the local banking regulator (the HKMA) looks to build a new platform to allow and incentivise data flows between banks and their customers.
What is the proposal?
To use the regulator’s own words:
“CDI is a consent-based infrastructure that enables more direct, secure and efficient data flow between banks and sources of commercial data to enhance inclusive finance in Hong Kong.”
There’s a lot to pick apart in this description, so let’s break it down:
The HKMA isn’t proposing new regulations or legislation – yet. Instead, the CDI represents a new ‘clearing house’ for data, which would allow multi-directional data flows between banks, customers and third party data sources (think: ratings agencies, telecoms companies and social media platforms).
The idea is that sharing different types of data would allow banks to better assess credit risks for less established customers – not all loan applicants can provide the reams of financial data/collateral that help banks get comfortable lending to wealthy individuals and large companies. This explains why the CDI would be ‘consent-based’ - the promise of better access to bank finance would be the trade-off for customers agreeing to share their precious data through the CDI.
“…enables more direct, secure and efficient data flow…”
This sounds a lot like ‘open banking’, which had its genesis in Europe and which we’ve covered at length on this blog. However, the data flowing through the CDI would be heading in the opposite direction to the usual open banking flows. The European version of open banking starts with banks sharing details about their products and services (through ‘APIs’, which allow different IT systems to talk to one another) with third party fintechs, who then use these APIs to create new customer-facing banking solutions. Under the CDI proposal, banks’ customers would allow third parties to share data about their business with banks, who then use this data to provide suitable banking products and services. Essentially, under this model, the CDI is the API.
“…banks and sources of commercial data…”
The CDI will allow banks to access ‘commercial data’, which they can use as part of an alternative credit scoring methodology. The idea here is that the number of ‘likes’ received on a business’s social media channels could (taken with other data) be a helpful proxy for the strength of that business and its ability to pay back a loan. Being able to access this data straight from the source (and crucially, on an ongoing basis) could provide a bank with an alternative to the audited financial data that might be used as part of a traditional credit assessment. Other examples of commercial data could be phone records, rent payment history, and bank balances.
“…to enhance inclusive finance in Hong Kong…”
The HKMA has so far focused on how the CDI could help support the large population of small and medium-sized enterprises (SMEs) in Hong Kong. SMEs often face difficulties getting loans from banks that use a conventional approach to assessing creditworthiness. The CDI promises more inclusive finance as it would enable SMEs (and other customers) to use their own data to enhance access to financial services.
What does it really mean?
Open banking has certainly taken a slower path in Hong Kong compared to other markets. In designing previous open banking initiatives, the HKMA allowed banks to decide how data should be shared through APIs. However, a lack of clarity on data privacy risks and a lack of incentives for banks to allow access to their data has meant that customers have not seen the same data-fuelled innovation that is emerging elsewhere. Against this background, CDI represents a shift to a more direct approach by the HKMA, as it creates the incentive and the platform for banks and customers to share data.
The Hong Kong Monetary Authority used Hong Kong Fintech Week 2020, the city’s flagship fintech event, to announce a range of initiatives to further foster the fintech ecosystem...