By Bernd Richter, Partner, Banking, Capital Markets, Wealth & Investment Management, Capco. Reprinted from original post with permission 5 December 2016.
Everyone has probably had some sort of contact with a credit agency like Experian, Schufa, Creditreform, or Equifax. This is where banks, insurance companies, telcos, and merchants check consumer creditworthiness as part of signing a lease for an apartment, instalment loan, car lease or even a simple contract with a new iPhone 7.
How do they get the data? Very simple: reciprocity. When a company requests a credit score they recognize this request and enrich their data pool with relevant data of the request. All credit agencies in Europe organized themselves in the early 90’s under the ACCIS.eu to organize their common interests and liaise with global agencies. These agencies collect data from consumers – of course – in order to create, manage and maintain a credit score.
But these collected data points are rather static, just like the contracts you have signed, and so rarely change. Data points are typically simply a list of your bank accounts, your credit cards, your leases, telecommunication accounts, mail accounts/addresses, instalment transactions, loans and guarantees and so on. They also note if you shortfall on any of your contracts or obligations (e.g., a payment had been missed, a debit had been rejected due to an unfunded account, and so on).
Source: Quizzle.com VantageScore service
But the actual details of your bank account (e.g., movements, current liquidity, investments) – or how much you earn and can actually afford – are not visible to them. That’s their blindsight. In fact in 2015 ACCIS conducted a member survey on credit reporting across Europe and one major finding/obstacle noted was that “legislative barriers restricting the sharing of consumer accounts and the depth of data from those accounts still exists in 69 percent of cases.”
So with the ability to API into your bank/brokerage/investment management account(s) and obtain transactional data and liquidity information, one could provide a very dynamic view of creditworthiness – how one actually behaves with their money. In Germany this is actually quite old news as Bank APIs have been there since the 90’s when home banking was incepted through a system called BTX, later transferred into HBCI and now run under FinTS. With PSD2, hopefully access to bank account information (movements, liquidity, etc.) will become standardized across Europe and this information can be put to use helping transform banking products and services as we know them today.
So new startups (aka FinTechs) such as bonify.de in Germany (founded in 2015 by former executives of McKinsey & Zalando) have commenced along this path and are using transactional data (your debit and credit movements on your accounts, liquidity levels and historical changes aka events, habits, etc.) to create a creditworthiness score which is quite different from the old style. Instead of looking at long term statistical means they maintain an always up-to-date score based on “real” data – on your transaction history. It opens the door to many new things: many new services, many new products, many new business model opportunities.
But many of these new kids on the block just play broker in the middle to obtain fees/commissions from referrals (for loans, mortgages, etc.). This is so short term. Why not think further – think long term and build new financial products (contracts) that would use a dynamic underlying of this “real” data feed and dynamically derived scoring to also impact the pricing and risk-taking by both parties? Build it right into product design and contracts.
With this increased transparency the whole approach to pricing in risk could change as well. It doesn’t mean one needs to “strip naked” and hand over all past transactional data to see past transactions and predict future affordability. A simple solution could be that the consumer grants temporary (or even repetitive) access to his aggregated transactional data sets (e.g. current accounts, investment holdings, deposits, etc.), then an algorithm is executed against the data set to derive a score which is reported back to the contract or bank product party/provider. This score can then inform changes in risk/pricing/duration, it being the only output from the query the end user actually sees.
This could also be a nice use case for distributed ledger technology “smart contracts” that may become the executional layer to cater for such new products and services in the future.
So what is the impact for traditional credit agencies in Europe? It’s hard to say but ACCIS’s 2015 member survey states that PSD2 is simply not (or has not been so far) on their agenda. Time for FinTechs to step in? Of course. And they are. Bonify.de may be the first out there utilizing an existing API, and gives us a hint about what to expect in the near future in regards to consumer credit rating – in a post-PSD2 environment when more non-banks develop new or attack existing business models on the back of PSD2 regulations.