In my previous two posts, we’ve looked at the history of Comprehensive Credit Reporting (CCR) in Australia as well as how a CCR mandate may affect consumers. In this third and final post in the series, I want to take a look at how mandatory CCR will impact lenders.
While CCR is the norm in the US, the UK, and many other countries, it is a relatively new method in Australia. Changes to Australia’s Privacy Act in 2014 made CCR possible, but up until now it has been voluntary. It has not been fully embraced by many lending institutions, and the reluctant adoption of the practice resulted in the recent announcement that by mid-2018, CCR will be mandatory.
Figuring out how CCR will affect lenders depends in large part on what kind of lender you’re talking about. It is clear that positive reporting will provide a much more comprehensive picture of borrowers. This will allow lenders to conduct more accurate risk assessments of potential borrowers. Once the major banks are required to share their customer information, smaller lenders and fintechs will be able to compete on a more level playing field with the bigger banks.
There’s a great example of the perils of negative-only credit reporting from Hong Kong. There was an individual who became known as the “King of Credit.” He opened 72 lines of credit over just a two-year period. He made his payments on time, paying the minimum payments required using monies received from opening new lines of credit.
Clearly there were some major red flags here, but under Hong Kong’s negative-only credit reporting system, none of them could be seen by lenders. It wasn’t until after his 72nd line of credit was opened that a negative item was reported, which allowed credit bureaus to see all of his accounts.
While CCR means that Australia won’t be in danger of running into a “King of Credit” scenario, clearly all lenders are not embracing the idea, or a mandate wouldn’t be necessary in the first place. Right now 80 percent of lending to households is done by only four banks, and they don’t have much impetus to share their customer credit data.
When these banks and other lenders are mandated to share their information, it will be a game changer for new and small lenders, including fintechs. The more complete picture provided by CCR will allow these smaller players to better assess risk and offer lower interest rates to low-risk borrowers.
Fintechs have been pushing for more transparent data sharing for some time. These startups really need access to repayment histories and a breakdown of the customer’s outstanding lending obligations in order to compete with bigger financial institutions. CCR will allow them to get all of the information they need.
Scott Morrison, Treasurer of Australia, has stated that banks will need to have 50% of their credit data ready to report by July 2018. This number will need to increase to 100% a year later. In other words, we will soon be able to tell if the predictions pan out regarding who is helped and who is hurt.