Banks eye more data from credit reporting reforms

Comprehensive reporting to uncover new customers.

Australian banks have welcomed a parliamentary proposal that could provide them with more data to determine the financial status of potential customers.

The Federal Government has proposed to introduce comprehensive credit reporting, which would allow financial services providers to share more information about customers’ good and bad credit habits.

Australia’s financial services sector currently uses a ‘negative’ credit reporting system, where credit reporting bureaus store information about customers who default on their loans.

Representatives of Westpac and ING Direct told the AB+F Retail Financial Services Forum this week that Australia’s larger institutions already stored comprehensive information about their own customers’ behaviour, although that data was not shared.

As such, they did not expect the proposed legislation to come with any major technical challenges, and welcomed the opportunity to use new, shared data to improve their risk calculations.

“With comprehensive reporting and the additional data we’re going to get, we already have those data fields for our own customers,” Westpac chief risk officer David Malcolm said in a panel discussion.

“[New comprehensive reporting data will be used] really just where we are making decisions on other customers, or what they hold with other institutions.

“I think we can handle a lot more data. It’s really not the size of the data that matters; it’s how do you use that in the best possible way.

“How do you make it accessible so that when you try and do an extraction layer from the data warehouse, [it’s not taking] months to get it and use it?

“It’s how quick do you have it; how do you use it on a real-time basis when you need to make a decision to approve a transaction … or on a monthly basis to update a regulatory report.”

Panellists hoped the additional data would lower the cost of risk assessments, reduce bad debt and potentially increase approval rates by providing more information about “credit invisibles”.

ING Direct chief risk officer Bart Hellemans highlighted New Zealand’s developing comprehensive credit reporting system that included organisations across several industry sectors.

“They didn’t just stay within that [financial services market] … they have chosen to include non-traditional credit providers,” Hellemans said, noting that such a provision had not yet been included in the proposed Australian reform.

“Those are services such as telecommunications, energy and power. Those data sets are very, very important [for] growing the pie; growing the market of available consumers.

“We can have these credit invisibles who don’t qualify [for loans] under the existing credit reporting regime by using that alternative data on how people are paying their mobile phone accounts, paying for energy services.”

Data integrity and privacy concerns

Panellists highlighted the importance of accurate data, with individuals’ credit reports likely to impact their business plans and ability to take out mortgages.

Steve Brown, director of consumer credit services at reporting bureau Dun & Bradstreet, described Australia’s current ‘negative’ reporting system as an ‘unforgiving’ one for any Australians emerging from difficult periods in their lives.

“Ultimately, that [new legislation] should allow us, by early 2014, to start sharing positive data – information about how customers are actually dealing with current commitments and what type of commitments they have,” he said.

“Obviously, there’s a lot of system changes and customer education that we need to put in place.”

ING’s Hellemans said greater transparency around the credit reporting process and the ability to improve comprehensive reports could encourage customers to more actively engage with credit reporting bureaus and improve data quality.

“We’re probably well advanced in our thinking about what our potential strategies might be with the greater information,” Hellemans told the forum.

“But there will be a time … when there will be some aberrations [in data]. Because it’s new information, I think we will find that we’ve got customers with a whole lot of debt that they didn’t tell us about.

“We’ll have to deal with that. Equally, we’ll find that there’s a new competitive dynamic as well.”

Brown noted that matching credit reports to individuals tended to be more challenging in Australia than overseas because of the nation’s aversion to “unique identifiers” for individuals.

Although he welcomed the legislative changes, he warned that proposed fines of “up to $1 million” per inaccurate report was a “big change” from existing privacy laws.

“It is a big issue in Australia; we don’t have a single identifier that we can use at the point of application that flows through the process to the bureau,” Brown said.

“When I describe the process in Australia where we have to use name and address and date of birth and other characteristics in order to try and find the right credit file, [international counterparts] find it absolutely extraordinary that we’re using a process that archaic.”