Archive forConsumer Credit Rating

Decentralised ledger platform Hyperledger wins SWIFT’s Innotribe Startup …

SWIFTs Innotribe Startup Challenge 2015, which seeks to recognise some of the worlds top businesses in fintech, has finally concluded with a winner.

US-based decentralised ledger platform Hyperledger which enables the transferring digital assets has secured the title of Innotribe Startup Challenge 2015s top fintech company, walking away with US$50 000.

Forming part of major financial services conference Sibos in Singapore, the event brought together a total of 20 companies 12 early-stage and eight growth-stage companies that pitched in front of an audience of industry experts, VCs and representatives from some of the worlds leading financial institutions.

Read more: Here are Africa’s 5 Innotribe Startup Challenge finalists

The final event follows a year of regional showcases in London, Cape Town, Singapore and New York where a total of 60 companies pitched. South Africas YueDiligence, Notafy and Ugandas Iwiafrica were among the chosen top startups.

Read more: Innotribe Startup Challenge announces Africa’s 14 fintech semi-finalists

Below is a list of the 12 early-stage companies that pitched:

YueDiligence offers actionable and light-touch due diligence tool for entrepreneurs, investors, and service providers to assess deal readiness.

Notafy provides secure messaging infrastructure to help companies communicate with their customers via mobile instant messages instead of a costly SMS.

Iwiafrica (or IntelWorld) delivers mobile applications on top of existing mobile wallets to help banks and merchants increase mobile ecommerce.

Pariti helps people to avoid high-interest debt, access fairer rates of credit, and build a more secure financial future by offering tools, guidance and access to low-cost loans.

Revolut allows customers to exchange currencies at interbank rates send amounts through social networks and spend money with a multi-currency card accepted anywhere.

Sedicii proposes a technology based on the Zero Knowledge Proof Protocol eliminating the transmission, storage and exposure of private data during authentication or identity verification.

Read more: Innotribe Startup Challenge expects cryptocurrency, payments to be big

Bitspark is a leading crypto-financial services provider for the APAC region pioneering the world’s first blockchain powered end to end Remittance service in addition to a blockchain auditable feature-rich trading exchange.

Jewel Paymentech is a Singaporean company providing an automated risk management platform for banks and payment facilitators to manage e-commerce merchant risk through predictive analytics.

Trustingsocial is inventing consumer credit rating for emerging markets by applying Big Data and Deep Learning technologies to social, mobile and web data.

Hyper is developing Hyperledger a distributed ledger platform tailored for financial institutions to help mitigate settlement risk and prevent trade breaks and cut reconciliation costs.

SizeUp provides financial institutions with big data for their small business customers to make smarter decisions through data.

Token helps banks meet the requirements for fast and secure payments by providing an end-to-end payments ecosystem accessible to developers where all transactions are authorised using digital signatures.

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Moody’s issues ‘credit negative’ warning for Kansas schools over Brownback …

The international debt rating agency Moody’s on Friday issued a “credit negative” warning for Kansas school districts, saying schools are “financially challenged” by Gov. Sam Brownback’s block-grant funding system.

Moody’s report said the block grant system puts financial stress on school districts, particularly those like Wichita with growing student populations and limited opportunities to raise revenue to serve them.

“Relative to the old school aid formula, this approach potentially disadvantages growing districts because the allocation of funds does not fully take into account enrollment growth,” the report said.

The credit negative doesn’t mean that school districts will see an immediate downgrade in their bond debt ratings, but it is a factor that Moody’s will take into account when rating their debt in the future, Moody’s spokesman David Jacobson said.

Schools’ bond ratings function much like an ordinary consumer’s credit rating. The better the rating, the easier and cheaper it is for them to borrow money for major purchases like new schools or remodeling projects.

Lower ratings generally result in higher interest charges, because the risk for investors is perceived to be greater.

The block-grant system, passed by the Legislature at Brownback’s request this year, essentially freezes funding for two years while the Legislature works toward crafting a new school finance plan. A three-judge school-finance court has ruled that the block grants fail to meet the constitutional requirement for the state to provide suitable funding for education – a ruling currently on appeal at the state Supreme Court.

Under the old school finance formula, a district’s revenue was determined by its enrollment, plus “weightings” providing extra money for poor, limited-English and other harder-to-teach students.

As an example of the stress brought on by the switch to block grants, the report cited Wichita schools’ struggle to fund education for an influx of foreign refugee children, even though the district has raised taxes, cut spending and dipped into reserves to fund this year’s operations.

“The district is facing a squeeze from growing enrollment, increased operating expenditures, and flat state aid,” the report said. “The quandary is not unique to Wichita Public Schools.”

Moody’s also disputed a standard contention of block-grant supporters, who have claimed that it increases flexibility for school districts to move funds around within their budgets to cover critical needs.

“While this offers the opportunity to shift funds to other initiatives, we do not expect it to offset much of the financial impact to a growing district,” Moody’s report said.

In a statement, the governor’s office stood by its longstanding but disputed claim that the state is providing more money for education than it did under the old formula.

“The block grant, providing an historic four billion (dollars) for K-12 education, is a temporary funding measure as Governor Brownback works with legislators and educators to craft a new funding formula that is stable and predictable,” the statement said.

State Rep. Jim Ward, D-Wichita, called the credit negative “another example” of Brownback budgetary failure.

“It’s nothing the districts have done or that they can control,” Ward said. “And the people who are going to reap the consequences of this are the schoolchildren and parents and taxpayers of Kansas.”

Diane Gjerstad, the Statehouse lobbyist for Wichita schools, said the impact on the district itself should be minimal because it has already sold almost all the bonds authorized by voters in the 2008 election.

She also said she wasn’t surprised to see Moody’s raising questions about schools.

“The bond houses have been telegraphing for the last couple of years increased skittishness about (Kansas) state financing and its impact on state government at all levels,” she said.

In April of last year, Moody’s downgraded the state’s bond rating from AA1 to AA2 – from the second-highest rating to third – reflecting concern over a slow recovery from the recession and tax cuts enacted by the Legislature and governor that weren’t offset with spending cuts.

The other major rating agency, Standard amp; Poor’s, followed in August with a similar downgrade.

Wichita schools have the same AA2 Moody’s rating the state has.

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China’s Lenders Want to Check Your Social Media

There have generally been two ways to get a bank loan in China: You either have lots of assets already, or you know somebody powerful enough to pull some strings. That may be about to change — although, at first glance, the shift might not seem for the better.

On Friday, Tencent, owner of WeChat (China’s most popular app and social networking site), said it plans to open a credit rating service, one that ranks borrowers by the quality of their online social networks. No longer will a prospective borrower need to cultivate a relationship with a bank VP to get a loan; instead, she may have to maintain a group of sensible and solvent online friends.

In a sense, Tencent is aiming to expand and systematize the countrys existing system of credit. Personal networks, or guanxi, have long been Chinas primary form of social currency (not least because they offer a basis for trust in the absence of a consistent and reliable legal system). Chinese people wont hesitate to assess an individual’s social status on the basis of his social ties, and well-connected individuals have always relied on their personal relationships to secure bank loans. Under Tencents system, anybody’s connections, no matter how modest their backgrounds, can be called upon to sway a skeptical banker.

Tencent Credit Bureau, as the subsidiary is known, also squares with the Chinese government’s long-deferred goal of making more capital accessible to the small and medium-sized entrepreneurs who create most of China’s jobs. The government had hoped loose monetary policy would be sufficient, but the easy money it has released into financial markets during the last year has mostly landed in the coffers of well-connected and inefficient state-owned enterprises, according to the Wall Street Journal. Small borrowers, especially small businesses, have been forced to turn to “alternative” lenders such as China’s usurious shadow banking sector.

Banks can’t be blamed entirely for their nepotistic approach to lending. Until now, theyve lacked other ways to judge borrowers creditworthiness. Part of the problem is that cash still dominates the Chinese economy. Of the 4.9 billion pieces of plastic in Chinese wallets in 2014, only 455 million, around 9 percent, were credit cards (the rest were debit and bank cards), and, according to China Daily, those cards belonged to a mere 20 percent of the population. Low levels of credit participation means theres no track record for private credit reporting agencies to evaluate.

In 2006, the Chinese government tried to counter this problem by establishing a credit reporting agency under the aegis of the People’s Bank of China. But, because the agency is dependent for its information on state-owned banks that are reluctant to share their data, its risk assessments tend to be too thin to be of much use. They often lack, for example, a detailed overview of a borrowers repayment history.

The government is now turning to the free market for a solution. In January, eight companies — including Tencent — were given approval to start private consumer credit rating agencies.

Lacking access to traditional types of data, these businesses are forging their own measures of creditworthiness. For example, Alibaba’s entry, Sesame Credit Management, will mine user data from Alipay, the company’s third party payment site. Late on a payment for an order of widgets purchased on Taobao, the online marketplace? Alipay and Sesame will know — and so will anyone requesting your credit report.

Tencent also has access to commercial data (though not nearly as much) via information culled from its shopping platform, its newly licensed WeBank (China’s first online bank) and its forthcoming brokerage. But its greatest advantage over competitors is its ability to combine that data with information culled from the interactions of its 800 million social media users. Though the company hasn’t offered many specifics about how it plans to use social networking data, state-owned China Daily reports that the company is a firm believer in the idea that “birds of a feather flock together.” Tencent has said that information about online behavior will “help financial institutions know their potential debtors better.”

So far, at least, nobody in China has raised privacy concerns over Tencents proposal to allow private lenders to peer into users digital social interactions. What remains to be seen is whether credit ratings might, in turn, influence how Chinese social media users select their online friends in the first place. After all, part of the reason Americans pay their credit cards on time is for fear of damaging their credit ratings. In the same way, a person in China who is interested in a mortgage might soon feel inclined to cut ties with old friends with a track record of not paying their bills.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Adam Minter at aminter@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net

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China’s lenders want to check out your social media

Banks cant be blamed entirely for their nepotistic approach to lending. Until now, theyve lacked other ways to judge borrowers creditworthiness. Part of the problem is that cash still dominates the Chinese economy. Of the 4.9 billion pieces of plastic in Chinese wallets in 2014, only 455 million, around 9 percent, were credit cards (the rest were debit and bank cards), and, according to China Daily, those cards belonged to a mere 20 percent of the population. Low levels of credit participation means theres no track record for private credit reporting agencies to evaluate.

In 2006, the Chinese government tried to counter this problem by establishing a credit reporting agency under the aegis of the Peoples Bank of China. But, because the agency is dependent for its information on state-owned banks that are reluctant to share their data, its risk assessments tend to be too thin to be of much use. They often lack, for example, a detailed overview of a borrowers repayment history.

The government is now turning to the free market for a solution. In January, eight companies — including Tencent — were given approval to start private consumer credit rating agencies.

Lacking access to traditional types of data, these businesses are forging their own measures of creditworthiness. For example, Alibabas entry, Sesame Credit Management, will mine user data from Alipay, the companys third party payment site. Late on a payment for an order of widgets purchased on Taobao, the online marketplace? Alipay and Sesame will know — and so will anyone requesting your credit report.

Tencent also has access to commercial data (though not nearly as much) via information culled from its shopping platform, its newly licensed WeBank(Chinas first online bank) and its forthcoming brokerage. But its greatest advantage over competitors is its ability to combine that data with information culled from the interactions of its 800 million social media users. Though the company hasnt offered many specifics about how it plans to use social networking data, state-owned China Daily reports that the company is a firm believer in the idea that birds of a feather flock together. Tencent has said that information about online behavior will help financial institutions know their potential debtors better.

So far, at least, nobody in China has raised privacy concerns over Tencents proposal to allow private lenders to peer into users digital social interactions. What remains to be seen is whether credit ratings might, in turn, influence how Chinese social media users select their online friends in the first place. After all, part of the reason Americans pay their credit cards on time is for fear of damaging their credit ratings. In the same way, a person in China who is interested in a mortgage might soon feel inclined to cut ties with old friends with a track record of not paying their bills.

_ Adam Minter is based in Asia, where he covers politics, culture, business and junk.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view

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What to do if Someone Files a False Tax Return in Your Name

Few things cause more concern than a letter in the mail from the Internal Revenue Service (IRS).

Though the agency sends out letters or notices for many reasons, identity theft is one of the fastest-growing issues for the IRS. In short, identity thieves have been capturing Social Security numbers and other tax filing data in order to file fraudulent returns for the purpose of stealing tax refunds.

This has been a watershed year for such activity. Just this past tax season, TurboTax, the leading tax preparation software company, had to stop transmitting state tax returns and introduce new safeguards after a run of suspicious returns. In March, the US Treasury Department reported slightly over 2.9 million incidents of tax-related identity theft in 2013, up from 1.8 million in 2012. As to dollar loss, in January, a General Accounting Office (GAO) report said the IRS had prevented an estimated $24.2 billion in fraudulent identity theft tax refunds in 2013, but actually paid $5.8 billion in refunds later determined to be fraudulent.

These events are in addition to ongoing phishing scams — fraudulent emails sent on behalf of the IRS asking for Social Security numbers and other account information — which continue to target taxpayers and the agency. Such acts are particularly tough on taxpayers who are not particularly tech- or security-savvy.

Tax identity theft is really no different than any other form of identity theft in terms of damage done. Thieves illegally obtain your Social Security number and go to work on your finances and reputation. The damage will probably turn up on your credit report in the form of new (and likely unpaid) credit or loan accounts you dont recognize or credit inquiries from employers or agencies youve never contacted. The problem may take months or years to straighten out.

However, the recent wave of tax-related identity theft is troubling because taxpayers not watching their credit data very closely might have a delayed awareness of the crime. To begin, many taxpayers find out theyve been hacked only from a physical letter from the US Postal Service arrives — the IRS never sends taxpayer-specific correspondence via email — saying that more than one return has been filed in the taxpayers name. That could mean a significant amount of time has passed between the hack and the taxpayer hearing about the problem. Electronic filers might find out sooner because their return might bounce if a fraudulent one was successfully filed earlier.

Recent reports quote the IRS as saying it tries to settle such cases within 4-6 months, but others indicate the wait is longer. Anyone dealing with identity theft needs to move fast and be actively involved in containing the damage; regulators cant do it for you and services that say they can handle everything probably wont.

If youve been a victim, heres where you start:

First, go to the identity theft action pages on both the Federal Trade Commission and the IRS websites for the immediate ways to deal with the problem. Keep in mind the process will include the following immediate steps:

  • Order your current credit reports and then putting a fraud alert on each at the three major consumer credit rating agencies — Equifax, Experian and TransUnion. Follow up in a couple of days with a phone call to make sure those alerts are active.
  • Start a physical or computer-based file where you can organize, date and file all contacts, communications and paperwork associated with your case and any fraudulent transactions you find.
  • Create an identity theft report with the FTC and your local police department. This will help you document the fraud and help regulators and law enforcement if there is an arrest.
  • Make a call list for all creditors, banks, investment companies, utilities and your employer to let them know about the breach. If you work with qualified financial and tax experts, inform them too. If youve spotted fraudulent accounts, contact those entities to put a freeze on them and thereby limit potential losses. Think about your list this way — if youve shared your Social Security or other personal or financial data with any trusted entity, they need to know youve been hacked so they can take their own security measures. In some cases, you may need to change account numbers.

If youve never experienced this type of identity theft, dont take your luck for granted. Explore the following to stay safe:

  • Even if you file your taxes by regular mail, make sure you set up your own personal IRS e-services account, because news reports have surfaced that identity thieves with access to Social Security numbers and other personal data are setting up those accounts in taxpayer name, illegally filing and collecting refunds.
  • Review and schedule receipt of your three credit reports throughout the year. By law, you are entitled to one free copy of each of the agencies reports annually. Staggering receipt of your credit reports, rather than checking all three at once, will let you see inaccuracies and potential illegal activity throughout the year for free.
  • Get in the habit of sharing as little personally identifying information as possible in person and online.

Bottom line: Tax-related identity theft has been on the rise, so redouble your efforts to review your credit information and limit sharing of personal and financial data in general.

Nathaniel Sillin directs Visas financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney

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Practical Money Matters | What to do if someone files a false tax return in …

Identity theft is one of the fastest-growing fraud issues at the Internal Revenue Service). Online thieves have been capturing Social Security numbers and other tax filing data to file fraudulent returns, principally for the purpose of stealing refunds.

Just this past tax season, TurboTax, the leading tax preparation software company, had to stop transmitting state tax returns and introduce new safeguards after a run of suspicious returns. In March, the US Treasury Department reported slightly more than 2.9 million incidents of tax-related identity theft in 2013, up from 1.8 million in 2012.

As to dollar loss, in January, the General Accounting Office said the IRS had prevented an estimated $24.2 billion in fraudulent identity theft tax refunds in 2013, but actually paid $5.8 billion in refunds later determined to be fraudulent.

In terms of damage, tax identity theft is really no different than any other form of identity theft. Thieves illegally obtain your Social Security number through online or other resources and then go to work on your finances and reputation. The first you’ll see of it will be on your credit report in the form of unfamiliar (and likely unpaid) accounts or unusual credit inquiries from employers or agencies you’ve never contacted. The problem may take months or years to straighten out.

Hearing about a false tax return might take time. Many taxpayers find out they’ve been hacked via a physical letter from the US Postal Service – the IRS never sends (http://www.irs.gov/uac/Report-Phishing) taxpayer-specific correspondence via email – indicating that a duplicate return has been filed in the taxpayer’s name. That means a significant amount of time might have passed between the hack and the taxpayer learning about the problem. Electronic filers might find out sooner because their return might bounce if a fraudulent one was successfully filed earlier.

Recent reports quote the IRS as saying it tries to settle such cases within 4-6 months, but news reports have indicated wait times might be longer. This is why anyone dealing with identity theft needs to move fast and be actively involved in containing the damage. Regulators can’t do it for you and advertised services that say they can handle everything probably won’t. You’ll need to investigate and clean up your own records.

If you’ve been hit, first go to the identity theft action pages on both the Federal Trade Commission (http://www.consumer.ftc.gov/articles/0008-tax-related-identity-theft) and the IRS (http://www.irs.gov/Individuals/Identity-Protection) websites for immediate ways to deal with the problem. Start with the following immediate steps:

? Order your current credit reports and set a fraud alert on each at the three major consumer credit rating agencies – Equifax, Experian and TransUnion. Follow up to make sure those alerts are active.

? Set up a physical or computer-based file where you can organize, date and file all contacts, communications and paperwork associated with your case and keep track of any fraudulent transactions that occur.

? Create an identity theft report (http://www.consumer.ftc.gov/articles/0277-create-identity-theft-report) with the FTC and your local police department. This will help you document your contacts with regulators and law enforcement if there is an arrest.

? Make a call list for all creditors, banks, investment companies, utilities and your employer to let them know about the breach. If you work with qualified financial and tax experts, inform them too. If you’ve spotted fraudulent accounts, contact those entities to put a freeze on them and thereby limit potential losses.

If you’ve never experienced this type of identity theft, don’t take your luck for granted. Even if you file your taxes by regular mail, make sure you set up your own personal IRS e-services (http://www.irs.gov/uac/Step-1-Create-an-IRS-e-services-Account) account, because reports have surfaced that identity thieves are opening false accounts with stolen taxpayer data. Finally, schedule receipt throughout the year of your three credit reports, which you can receive free once a year.

Bottom line: Anywhere your Social Security number goes, identity thieves follow – this tax filing season proved that. Safeguard your data and check your credit reports several times a year for irregularities.

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JD Finance Reports Massive Surge in Borrowing

A visitor walks past the stand of JD finance, a product of online shopping site JD.com, formerly called jingdong.com or 360buy.com, during an exhibition in Beijing, China, 2 November 2014. [Photo: Imagine China]

JD Finance, part of Chinas online direct sales giant JD.com, has reported rapid growth in its consumer finance business.

The Internet financial services provider said that the amount its customers borrowed jumped by more than 7-hundred percent in June compared to the same period last year.

JD Finance has tens of millions of customers in China.

Apart from the growing number of people who borrow money from JD Finance to shop on the companys e-commerce platform, the company also offers small loans.

The Beijing-based company is planning to launch a new consumer credit rating system in the next few weeks.

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Capitalising on inefficiencies in China

Data from the Shanghai Stock Exchange (SSE) in 2013 showed that 55% of the total profit of all listed companies originated from the financial sector. But as a percentage of the total number of listed companies on the Shanghai bourse, the financial sector represented less than 2%. It would seem that the finance industry is earning what economists call supernormal profit. The term stems from Adam Smiths theory of the invisible hand, which states that long-running supernormal profit is abnormal for any industry under efficient market conditions. For that to persist, some other stakeholders must be paying the bills.

There are two primary reasons for this abnormal situation in China:

First, the Chinese capital market has always been a relatively closed market where only a handful of foreigners can invest via the Qualified Foreign Institutional Investor (QFII) scheme. Similarly, only a handful of privileged domestic funds are allowed to invest overseas via the Qualified Domestic Institutional Investor (QDII) programme. As a result, the massive amount of wealth generated by the middle class during the past 40 years of great economic progress is kept within the Chinese capital market. When you combine that with the 4 trillion RMB (US$639 billion) worth of quantitative easing introduced after the global financial crisis, it does not take a rocket scientist to figure out that local banks and financial institutions are flooded with cheap money. The cost of funding for banks is, therefore, relatively low.

Second, given the oligopolistic structure of the local banking and finance industries, it is a common practice for banks and finance houses to direct loans to big boys that are deemed too big to fail, even if their projects or business models are unprofitable. These would be the state-owned enterprises (SOEs), state-related enterprises (SREs), and industry conglomerates. Banking revenue from these sources has a remote chance of default given the implicit government guarantees. Eventually, the low cost of funding successfully marries the stable flow of revenue to generate supernormal profits for banks.

Other stakeholders, such as SMEs, still get their bank loans albeit at a much higher cost of capital. Predictably, these SMEs turn to the shadow banking system to fulfil their funding needs. Instead of fulfilling its primary role of enhancing the flow of capital from stakeholders that have excess money into the hands of those with brilliant investment opportunities, the Chinese financial system has largely evolved into an inefficient system that survives on paying out low-interest rates to depositors while lending out money to inefficient, but too big to fail enterprises.

This inefficient allocation of capital has also given rise to internet finance, with the likes of Alibaba and Tencent becoming real threats to traditional banks by breaking down the intermediation system and allowing ordinary savers to invest directly in higher yielding investment products. Will the confluence of both lead eventually to the obsolescence of traditional financial intermediaries?

Shadow play

On a recent visit to Shenzhen, I met a general manager of the citys largest non-profit business. Over coffee, he asked if my friend and I would be interested in investing in a capital-protection wealth management product with one of the local banks. Heres how he says it works: For a minimum subscription of 1 million RMB, the bank would sign a contract with the investor, guaranteeing a fixed return of 8% per annum, with full capital protection and a one-to-three year term. And for a minimum subscription of 3 million RMB, the bank could offer a better deal a guaranteed fixed return of 10% per annum, with full capital protection and a three-year term.

The banks, he said, take the investors money, lend it out to corporations, charge them 15% to 18% interest per annum, pay the investor 10% per annum, and pocket the difference. If corporations could not pay up, the bank would sell off pledged collateral to fulfil its obligation to investors, and that was how the bank could offer guarantees on both capital protection and fixed-interest payments.

What could possibly go wrong with this business model?

Value of collateral might drop below par value of loan.

Full capital protection given by a bank is only as valid as the normal operation of the bank. During a liquidity crunch, would such protection be upheld?

If these banks have a wide deposit base and can utilise it to fund these lucrative loans, why are they borrowing from investors at an 8% interest rate when they could source it from depositors at less than 1%?

To date, no bank bankruptcy has occurred in modern China (since 1949), even though there have been a few reports of near-bankruptcies. It is widely believed within the industry that regulators are too in awe of the potential systemic risk to let a bank fail. However, regional banks are testing the limits of central regulators through the moral hazard dilemma. In other words, bankers know their balance sheet will be protected regardless; therefore, nothing is going to stop them from structuring risky wealth management products that have huge domestic demand.

Regulators have rendered such explicit guarantees to be illegal for fear of systemic risk. The loophole, however, is that the compliance responsibility only rests with the banks while any contract signed between investors and banks is still recognised by the legal system. In short, while it is illegal for banks to offer such explicit guarantee terms, it is completely legal for investors to purchase it. That is why such products are being sold discreetly, and only to high net-worth individuals who have close contacts with private bankers, our Shenzhen contact explained.

Its hard to know how big and widespread the capital protection products hold is within the wealth management product family. But given the fact that banks are offering 8% per annum for investors money, they must have exhausted the legal limit on depositors money that could be used to finance the lucrative SME loans.

New cogs in an old engine?

At the same time that shadow banking is growing, internet finance through the likes of Alibaba and Tencent are fast gaining ground. Since they secured commercial banking licenses from the China Banking Regulatory Commission (CBRC) in September and July 2014, respectively, the internet big boys onslaught into the financial industry arena has been nothing short of spectacular. With both companies going a step further in gaining clearance from the CBRC to establish their consumer credit rating operations in January 2015, their presence may prove revolutionary. Indeed, internet financing in China has been touted by some of its hardcore supporters to be the panacea towards establishing a more convenient payment mechanism, and one that has the least informational asymmetry. With the rise of internet financing, these supporters say traditional intermediaries such as a banks, securities houses, and financial exchanges could gradually lose their relevance, leading to a great reduction in the cost of capital for every stakeholder within the ecosystem.

One school of thought has attributed Alibaba and Tencents success to loopholes within the legal framework. By the time regulators caught up to them, their financial business operations had surpassed the point at which they could be contained. This too-big-to-fail argument might sound plausible on the surface, but to those with a better understanding of the Chinese legal, cultural, and political systems, where nothing happens by chance, it barely holds water.

First, when it comes to legal enforcement in China, the interests of the country and political party override everything. Regardless of whether the regulatory framework is robust enough to deal with such innovative evolution, the Chinese government still possesses the power to stop anything it deems unfavourable.

Second, given that most of the banks with sizable balance sheets in China are state-owned, it is next to impossible for both Alibaba and Tencent to throw their punches directly at these state-owned money-spinners.

Third, Alibaba and Tencent are Chinese-owned enterprises. One of the best ways to tackle the inefficiency and complacency within state-owned banks is to create external competition. However, national interest still takes top priority. To strike a balance between safeguarding national interests and injecting competition into the finance industry, grooming homegrown enterprises like Alibaba and Tencent is the preferred solution.

The Chinese government did not question Alibaba or Tencents entrance into the consumer credit market. Also, Alibaba and Tencents encroachments into the banking sector occurred during a series of banking reforms specifically directed to tackle the complacency and inefficiency within state-owned banks. Does this mean then that despite their innovative business models and products, the likes of Tencent and Alibaba are new cogs in an old state-driven machine?

The capital allocation conundrum is a central issue to Chinas economic future. Shadow banking and internet financing appear to be new solutions to a problem that may be too big to solve by the government on its own. How all this will develop in the next few years will influence the shape of Chinese capital markets. Witnessing this evolution is exciting, and continued analysis is called for.

*Alan Lok, CFA, is the capital markets policy director of CFA Institute in Asia Pacific

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Synthetic Identity Theft: How Crooks Create a New You

Credit: Yuriy Zhuravov/Shutterstock

Its called synthetic identity theft, and its harder to detect and protect against than traditional identity theft. It happens when the bad guys combine real personally identifiable information with fake data, then open new accounts with that cobbled-together identity.

As often happens with regular identity theft, synthetic identity theft is when your Social Security number is used without your authorization, explained Robert Siciliano, Boston-based identity-theft expert and spokesperson for BestHomeSecurityCompanys.com. But theres a crucial difference.

What the [fraudsters] often do, Siciliano said, to trip up the credit bureaus, to trip you up, to trip up the lenders, everybody — is theyll use a different name, or a variation of your name, something that doesnt point back to you. So the primary identifier is your Social, but everything else is pretty much different.

MORE: Best Identity-Theft Protection Software

In typical identity theft, a fraudster pretends to be a victim by using that persons real name, Social Security number and other personal information. The criminal doesnt change any of that pilfered data.

But in synthetic identity theft, explains Adam Levin, chairman of Scottsdale, Arizona-based identity-protection firm IDT911 and a former director of the New Jersey Division of Consumer Affairs, a criminal essentially creates a whole new identity.

This kind of identity thief starts with a real Social Security number, but then adds fake credentials, such as a fake name, address, birth date and so on. Its a Frankensteins monster, stitched together from various parts into something that looks approximately like a real person.

Bad guys then use these manufactured identities to apply for jobs and build credit little by little, for example by obtaining cellphone service or credit cards — small accounts that, properly maintained, can establish enough credit to obtain larger loans that wont be paid back.

Since such a criminal only uses some of a consumers personal information, the fraud often wont show up on the legitimate SSN holders credit report. On the other hand, negative information attached to another file can be linked to the individuals file in the credit bureau, negatively affecting his or her credit report and credit score, according to the Federal Trade Commission.

Since this type of ID theft does not affect your main credit file, it often doesnt hit your credit report, nor will a fraud alert or credit freeze help, the FTC noted. It takes longer to find out youve been victimized, making it harder for you to clear your name. When [the criminals] run up thousands of dollars of debt and disappear, the creditors will eventually back track to you.

How synthetic identity theft can hurt you

Synthetic identity theft has been around for a while, but it is having more of an impact than it used to.

We think synthetic identify theft is a fairly large problem, said Stephen Coggeshall, chief analytics and science officer at ID Analytics, an identity-risk and fraud solutions provider in San Diego. Our estimates are that about 2 percent of applications for credit cards and cellphone accounts are synthetic identity thefts.

If someone uses an individuals Social Security number successfully and defaults on a loan, Coggeshall said, the fraud can result in harm to that consumers credit rating, even though the name and date of birth attached to the fraud are different.

Siciliano said recent changes in the way Social Security numbers are generated are responsible, in part, for enabling the bad guys to get away with synthetic identify theft so easily.

In 2011, the Social Security Administration implemented Social Security number (SSN) randomization as a way to deter fraud — until then, it was fairly easy to guess an individuals SSN if you knew where and when the number had been issued. But the randomization change also made it harder for anti-fraud detection technology to spot when a previously issued number is linked to a fake identity, Siciliano said.

How to tell if youre a victim of synthetic identity theft

You might be able discover if youve been a victim of synthetic identity theft by watching for the consequences, Coggeshall said.

The credit-reporting bureau Experian recommends that you check your annual Social Security statement to ensure that your reported income figure for the year is in line with what you actually earned, and to be on the lookout for mail that is sent to your home with someone elses name.

Still, that may not be enough.

The only way that I know to stop this as its happening is these identity-theft protection services, Coggeshall said.

Identity-theft protection products, such as TrustedID and LifeLock, monitor an individuals personal information by searching the Internet for unauthorized uses of his or her Social Security number, credit cards and debit cards — and alert that person if anything changes.

There are a few [such products] out there, he said. What you want to do is get these alerts as the attempt is occurring.

  • Identity-Theft Victim? Heres 6 Things You Need to Do
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  • 10 Simple Steps to Avoid Identity Theft

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White House regrets not sending top official to Paris

Washington — In a rare admission of error, the White House said Monday that President Barack Obama or another high-level representative should have joined dozens of world leaders at an anti-terror rally in Paris.

While leaders from Europe, the Middle East and Africa linked arms for Sunday’s march through the boulevards of Paris, the United States was represented by its ambassador to France. Attorney General Eric Holder was in Paris for security meetings but did not attend the march.

“It’s fair to say we should have sent someone with a higher profile,” White House spokesman Josh Earnest said. The administration also announced that Secretary of State John Kerry, who was on a long-planned trip to India Sunday, will visit France later this week.

The White House appeared to have been caught off guard by both the scope of international representation at the rally and by the criticism of the decision to send only Ambassador Jane Hartley. Monday’s admission of error seemed aimed at blunting criticism that the decision was tone deaf or disrespectful of the longstanding US alliance with France.

France has been on edge following the attacks that left 17 people dead and heightened fears about the spread of terrorism in the West. Three of the gunmen, who claimed allegiance to Islamic extremist groups, were killed by police, though French authorities said Monday that as many as six terror cell members might still be at large.

Before the White House acknowledged its misstep, Florida Republican Sen. Marco Rubio said the administration had made a mistake by not at least sending Holder or Kerry to attend the Sunday rally. And Sen. Ted Cruz, R-Texas, wrote in an op-ed article posted online Monday by Time Magazine, “Our president should have been there, because we must never hesitate to stand with our allies.”

Some Obama administration officials, too, privately expressed frustration that a high-level US representative did not participate in the march. Earnest said the White House took the blame but that Obama himself was not personally involved in the decision. Earnest would not say who was responsible for deciding the administration’s participation in the event.

The fallout from the weekend rally underscored the degree to which the Obama White House has sometimes struggled with symbolic gestures.

Earnest suggested it was the elaborate security apparatus required for presidential travel that prohibited Obama, as well as Vice President Joe Biden, from traveling to Paris on relatively short notice.

Privacy proposals

President Barack Obama on Monday proposed strengthening laws against identity theft by requiring notification when consumer information is hacked and protecting students’ private data.

Obama also called for more free access to all consumer credit rating services. While customers can get annual credit reports free once a year, FICO credit scores typically cost money to obtain, although some banks have been offering them free to customers.

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