Taking stock together: a new dawn for Euro Credit Reporting

I was delighted to speak at the Association of Consumer Credit Information Suppliers annual conference last week (8th June 2018).

In 2017 responsible finance providers lent £235 million to nearly 62,000 customers across the UK (business, social enterprise and personal). The responsible finance industry is underpinned by the principles of fairness, transparency and a strong customer focus.

• We put people first
• We don’t lend to everyone
• Affordability of re-payment is key.

So accurate credit scoring is critical to everything we do.

In the UK the credit scoring market is dominated by a handful of players with a traditional approach to credit scoring.  Increasingly, this traditional approach excludes a large proportion of the population, defined as ‘unscorable’ or ‘invisible’. These people are then excluded from accessing mainstream credit meaning that, in many cases, they will have to rely on high cost credit, paying a poverty premium.  This fuels poverty and financial exclusion.

Testing of traditional credit scoring shows that these classifications do not necessarily relate to creditworthiness.  A 2013 report showed that 66 million Americans (25% of the adult population) were estimated to be ‘unscorable’ through traditional models.  But this ‘locking out’ was only loosely related to ability to ability to repay credit.  Out of this 66 million, 10 million where prime or near-prime lenders.

In a 2012 UK report, 57% of 2,000 consumers were at risk of being turned down for credit, including 33% in full time jobs and 33% earning more than £50,000.  In 2016 research by PWC estimated that between 10 – 14 million UK adults could be defined as ‘near prime’ credit consumers who might find it difficult to access mainstream credit due to ‘minor blemishes’ on their credit history or simply due to having a ‘thin’ credit file. Subsequent research by Aqua showed that this ‘near prime’ group had either never missed a payment in the last 3 years or only missed 1 or 2 payments.

Responsible finance providers are reliant on the main credit scoring companies to assess risk and ensure affordability when providing credit.  Our members play a critical role in supporting financial inclusion by providing affordable credit to consumers whose only other option is high cost credit and by providing support such as signposting to debt advice and encouraging people to save.  We believe the credit scoring companies could do more to support our work. 

For example, to create a product that tells a positive about a consumer rather than a negative one about missed payments.  At the moment, no one agency can provide holistic, accurate and real time scores for customers, so our members need to use 2 or 3 to get a comprehensive and reliable picture, which is expensive.  There is a narrow use of data and failure to share data between agencies, which financially excludes people.  And, our members are typically locked into long term contracts, which makes shopping around difficult, even given that lack of competition in the market.

If there is a new dawn for credit reporting, it should include:

• A move to inclusive credit scoring built on a positive assessment of consumers, using different data sources, alternative data sets and the wider use of financial and non-financial analyses to assess credit worthiness
• Real time credit reporting
• More sharing of data between agencies and between agencies and those tackling financial exclusion – we believe agencies have granular data on financial exclusion, which they could share with us
• More competitive pricing – our members believe they pay a heavy fee for data that often is not accurate and up to date.

We welcome ACCIS’s report ‘Our vision for the future’, which includes commitments to supporting financial inclusion, preventing over-indebtedness and supporting fairness in lending.  Working to support the responsible finance industry would help to achieve these goals.

Access to credit is an integral part of most people’s money management.  For many on low incomes it is critical for accessing the basic essentials in life.  This makes access to affordable, appropriate and responsible credit critical.  Credit scoring is key pillar of this.  Many more agencies need to accept their responsibilities in this area and act to support financial inclusion and fair and accurate credit scoring.

You can find Responsible Finance’s report ‘Scaling up affordable lending: credit scoring’ here.

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