Bottom line: Sesame Credit’s new tie-ups with Unicom and a shared phone company are part of a string of deals to aggressively build up its credit rating business, and could add buzz to Ant Financial’s future IPO.
Lest anyone think Alipay is the only asset in financial services giant Ant Financial’s portfolio, the company’s newer Sesame Credit unit is also hankering for headlines these days, with a couple of new deals for its service. The larger of those will see China Unicom (HKEx: 762; NYSE: CHU), the nation’s second largest wireless carrier, waive deposit requirements for some of its users with high credit scores, based on Sesame’s system. The other deal looks similar, and will see a shared phone operator also waive deposits for people with similarly high credit.
This kind of aggressive promotion is quite typical of Jack Ma, founder of e-commerce giant Alibaba (NYSE: BABA) and one of the main people calling the shots at both companies. Ma likes to be ahead of the curve, and is quite aggressive about peddling his vision for emerging sectors like credit ratings. That strategy has served him well in e-commerce and electronic payments, where Alibaba now dominates.
Ant followers will also know the bigger picture is the company’s IPO plan, which hasn’t gotten much attention these days. Ant has been unusually low-key about the offering, even though the plan is likely to raise several billion dollars and could be one of the world’s largest since Alibaba’s record-breaking blockbuster IPO back in 2014. But this rapid build-up of Sesame could indicate the offering may come as soon as the end of this year, as it shows the company is looking for new stories to sell to investors.
All that said, let’s look at Ant and Sesame’s two latest deals and briefly discuss their broader significance. The bigger picture is that Beijing is trying to build up a field of credit rating services similar to those seen in the west, in an attempt to help companies make better decisions when lending or providing services to consumers and businesses. The central bank and various regional governments are also trying to patch together such services, alongside private firms, though none has emerged as a clear national leader.
Ant is trying to become that leader with Sesame, whose main source of data, at least initially, came from Alibaba and Alipay’s huge trove of information on consumers’ online spending habits. That does indeed seem like a good foundation for rating individuals’ credit, since one-tenth of China’s retail buying and a growing volume of other financial activity now takes place online.
Rewarding Good Credit
The larger of the two latest deals will see Sesame partner with Unicom, allowing mobile subscribers with good credit ratings to forgo pre-payments that would normally be necessary for calls under certain plans. (English article) As part of the deal, Unicom would also provide its own user data to Sesame Credit to use in calculating credit rating scores.
The second deal has Sesame teaming up with a shared economy company called Aihuishou, or “love recycling”, which has a unit that lets people frequently trade in their cellphones for new models. (Chinese article) The case is nearly identical, saying users with high enough credit ratings don’t need to put down a deposit to use the service.
One interesting note is that this phone sharing service sets the bar at 600 points under Sesame’s system, while the Unicom tie-up sets the bar a bit higher at 650 points. I’m not familiar with Sesame’s system so can’t comment in too much detail, but these figures do show the company is trying to put out its standards into the marketplace, which could theoretically prompt people to find out their scores and take steps to maximize them. That looks like a smart strategy by Ant, since it could drive more people to use its other financial services in a bid to raise their credit ratings.
These latest two deals come just a few weeks after Sesame signed a series of similar tie-ups with a half dozen operators of shared bike services that are all the rage in China now. Again, this shows that Ant and Sesame are being quite aggressive in trying to promulgate the credit rating service, since an important of that is letting people know that they now have credit scores.
From my perspective, this strategy looks quite smart and could well help Sesame emerge as the leader in this greenfield space. One of the big risks is regulatory, that the central bank might try to rein in Sesame and other private credit rating companies. The other is that Sesame could get into trouble if its system isn’t reliable and results in mass defaults by people who got high scores under its system. While both risks are certainly valid, the potential benefits seem much higher, and this aggressive string of deal signings could help Sesame to eventually become a leader in the emerging credit rating space.