The Case for an Alternative Credit Scoring Ecosystem in Hong Kong

A new whitepaper commission by the HKMA describes alternative credit scoring and how it works, and explains why it can help the banking industry and MSMEs.

The Hong Kong Applied Science and Technology Research Institute (ASTRI) has published a white paper outlining how FinTech can be adopted to collect and utilise alternative data to evaluate borrowers’ creditworthiness.

The whitepaper, commissioned by the HKMA (Hong Kong Monetary Authority) is in part aimed at improving the business scale of banks’ existing MSMEs financing services and MSME’s access to finance.

MSMEs account for more than 98 percent of business establishments and employ about 46 percent of the private sector workforce in Hong Kong, the paper says. “Yet many face significant challenges in securing a bank loan due to their lack of financial information and the significant burden faced by banks in conducting credit assessments and monitoring related processes.”

“MSMEs play an important role in the economy,” said HKMA chief Eddie Yue. “Fintech is believed to be an essential tool to help expand MSMEs’ access to credit by lowering costs and better managing the credit risks.”

“Hong Kong is well positioned to drive fintech development given the support from the industry and society as a whole.”

According to ASTRI CEO Hugh Chow, the odds are stacked against MSMEs who may rely on offline or cash transactions and who may not have the most orderly and neatest of accounting books.

“They may also need the funding urgently and the weeks it takes for an application to be processed could prove fatal if the difference between survival and bankruptcy is counted in days.”

The white paper sets out how Hong Kong can take advantage of AI (artificial intelligence) and machine learning to explore a wide variety of data from many sources to assess the creditworthiness of MSMEs.

These data points can come from cash flow information, point-of-sale transaction records, utility bill payments and even information from online accounting software programs, the paper says.

The paper lays out the technological components needed to handle and process such data for use in alternative credit scoring.

It also proposes building an effective alternative credit scoring ecosystem for banks and providers of alternative data in Hong Kong that can handle data management, credit assessment automation, and monitoring.

The paper suggests steps that need to be taken by the players in the ecosystem to support this proposal, offering a roadmap for the adoption of alternative credit scoring in Hong Kong.

According to the paper, continuous support by the government and infrastructure facilitation for data sharing are critical to maintaining the availability of alternative data.

In addition, the continuous development of innovative machine learning models is required to enhance the handling of model validation, performance, data privacy, fairness, and interpretability.

Finally, a centralised data-sharing platform could facilitate an ecosystem that will expedite the adoption of alternative credit scoring by banks in Hong Kong.

The paper, available here, was launched at Hong Kong Fintech Week.

It comes as the HKMA unveils details of a new project called the ‘Commercial Data Interchange’ (CDI), a consent-based financial infrastructure through which consumers and businesses will be able to share data with banks via fintechs, utilities, payment gateways.

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