As we look to eventually exit the pandemic, there is no doubt that the focus will turn to how to stimulate economic recovery. Key to achieving this will be the ability for individuals and businesses to gain access to credit and key to making credit available will be having the best possible understanding of an individuals and a business’s ability to pay back any borrowings.
As we come out of the pandemic ‘knowing your customer’ is going to be more crucial than it’s ever been. When I use the term ‘know your customer’ I am not just referring to compliance with KYC regulations but to the whole customer lifecycle from acquisition, risk assessment, account management and collections.
All of these points of contact with customers are changing as the relationship is more and more online. As we have all experienced this shift to a digital world has been accelerated by the pandemic. There is no doubt that the move to digital services can provide significant benefits to many. But as we have also seen it can increase the risks of financial crime, including cyberattacks, fraud, data breaches and money laundering. In such a world having access to relevant comprehensive information on a timely basis is going to be even more crucial.
So what changes (if any) are we likely to see in the credit information space as a result of the push to restart economies and the ever quickening move to a digital dialogue with customers? Many is the answer with a number already taking place. Changes in the ‘data landscape’ and in the use of technology I believe are two of the major ones. I also believe that you will see a significant shift in the service offerings of the credit information providers to support the growth in digital services and help limit the risks I mentioned above. Alongside all of this will be the challenge of regulatory developments that will come about as governments look to support individuals and businesses rights.
There is no doubt that the pandemic has increased the degree of information asymmetry between lenders and borrowers. While some businesses may appear solvent due to government support (e.g., subsidized loans, repayment holidays), their condition may weaken when this support expires. Credit providers are likely to see a deterioration in traditional credit history of businesses. The same can be said of individuals as measures put in place for them also expire.
It is likely that if credit providers are relying on traditional credit information they will start to see a growing number of individuals and businesses who will fail to meet their lending criteria. There is no doubt that despite having had issues during the pandemic some of these individuals and businesses will have managed to recover and will be a good risk going forward. So how are credit providers going to identify these? One way will be through ‘alternative data’.
Around the world, alternative data can take many different forms; from non-financial data such as utility data (gas, electricity, telco), to transaction data such as current account information or online e commerce transaction information to data from social media platforms. In the case of non-financial data credit providers are able to gain a better understanding of how an individual or business is able to meet their commitments. With transactional data credit providers are also able to better understand cash flow and income. By accessing these ‘alternative data’ sources, credit providers are able to fill ‘the gap’ in their knowledge of a customers’ finances.
Prior to the pandemic the credit information industry had already identified that there was a gap in the information they could supply to provide a 360 degree view of a customer that credit providers need to make effective lending decisions and ensure such things as affordability requirement were met. Whilst credit information providers have always been able to provide a view of outgoings, providing information on income has been more of a challenge.
The evolution of ‘open banking’ and ‘open data’ post the financial crisis of 2008 driven by the desire for governments for individuals and businesses to ‘own’ their data has provided the credit information industry the opportunity to fill the ‘gap’. The introduction of the 2nd Payments Services Directive (PSD2) in Europe has further supported this move.
Using open banking and open data channels driven by an individual’s consent has enabled credit information providers to enhance the level of both alternative and additional data they can provide. These channels provide credit information providers with real time access to new sources of data via APIs alongside the traditional monthly updates from lenders. This customer driven ‘self-reporting’ of data (on the basis it required consent from the individual or business) is changing the customer dynamics for the credit information providers with individuals and businesses also being seen as the ‘customer’ and more and more direct engagement with them as a result.
Is this really the case I hear you ask? Well you only have to look at the advertising campaigns about ‘boosting your credit score’ and ‘taking control of your credit score’ to see that it is already taking place. Another example of the move to customer driven ‘self-reporting’ is the increasing ability for consumers to supply their property rental data to the credit information providers through specific organisations that have been set up to collect the data from individuals. This whole area was supported by the UK government with its Rent Recognition Challenge in 2017.
Further afield (particularly in the Far East) the data landscape is also changing as a result of the growth in e-commerce platforms. In countries where credit information is less developed this type of data is increasingly being used to grant credit to individual and businesses. As a result such platforms are moving from e-commerce operations to also being credit information and financial services providers challenging the current players in the market. One well known example of this is Alibaba with its Ant Financial arm.
As these platforms play an increasing important role in the provision of finance there has been some concern over the fact that they operate outside the financial services regulatory infrastructure that protects individuals and businesses and prevents systemic shocks. In China were a number of the e-commerce platforms are based action is now being undertaken to ensure that the financial services arms are required to obtain the necessary licences and permissions.
So taking all of these developments into account there is no doubt that the data landscape is changing and will continue to change further as a result of the pandemic and the move to digital. So what is going to happen with all this new alternative data? Will credit providers be able to use it? Will it replace traditional data or work alongside it?
There is no doubt that traditional data sources and risk models may not be fully updated and well-calibrated to provide an accurate assessment of an individuals or businesses capacity to repay in the post-pandemic reality. Traditional risk models, whether offered by credit information providers or built in house by credit providers, will need to be adapted.
As the same time new analytical tools will be required to analyse the new alternative data that is available and incorporate it with traditional data to optimise the credit risk assessment. With the volume and velocity that the new data brings there is a need for new technology to be able to process and analyse it. Hence the interest in the industry in Artificial Intelligence (AI) and Machine Learning (ML) applications.
Credit information providers are already undertaking a lot of work on how these new technologies can be utilised internally and externally for clients and credit providers should expect to see new products and services being developed using these tools.
In any application, the key to their acceptance will be the transparency and explain ability of the decision that is made. The openness of the process is probably not an issue when the ‘computer says YES’ but it will be an issue when the ‘computer says NO’. These concerns have already been picked up by regulators who are keen to ensure that there is transparency about what data is being collected on individuals and businesses and how it is being used. Governments and regulators have been struggling to catch up with the fast paced developments in AI and ML but are now starting to look to take action. For example the EU has recently laid out its proposals for regulation of AI which could have far reaching consequences on its use. Discussions are also starting in the US on the subject.
The move to digital services spurred on by the pandemic can provide significant benefits to individuals and businesses but it can also lead to an increase in financial crime such as cyberattacks, fraud, data breaches and money laundering. For credit information providers these risks provide an opportunity, using their data and analytical capabilities, to offer services to credit providers to help identify and limit the risks. They have also highlighted their own vulnerability being such a key part of the financial ecosystem – recent high profile data breaches have highlighted this.
At the Business Information Industry Association (BIIA – www.biia.com) we have seen significant investment over the last couple of years by the credit information industry in both securing their own infrastructure and acquiring businesses to support credit providers in combating the growth in financial crime and it is likely that we will see continued investment going forward.
With the growing availability of data and the use of new technology there are growing concern from governments and regulators about how individuals can maintain control over the use of their data and how their privacy can be protected. As a result privacy regulations based on the EU General Data Protection Regulation (GDPR) have been implemented in a number of countries around the world. In some cases where the GDPR has been ‘cut and pasted’ into the new regulation it has resulted in some unfortunate unintended consequences such as limitations on the access to the data from outside the country and specific requirement on consent which have in turn had an impact on the development of the credit information infrastructure. In Europe we are also starting to see as anticipated further clarification on the interpretation of the GDPR. Some of this interpretation could have an impact on the availability of data to credit information providers at a time when it could be argued that more data is required.
It is clear with all that is happening that the world is going to be a very different place for credit information providers as we exit the pandemic. The changing data landscape and new technology will change the focus of the credit information industry from one of data providers to value added service providers using their analytical and technology capabilities to deliver the services that credit providers will need to deliver their services in a digital world.
About the Author: Neil Munroe, CICM, is Managing Director of CRS Insights Ltd, Deputy Managing Director, BIIA – Business Information Industry Association, and Deputy Chair of the International Committee on Credit Reporting, World Bank Group.
This article was recently published in the July/August edition of the UK Chartered Institute of Credit Management (CICM) magazine.