Impact of Private Credit Bureaus and Comprehensive Reporting on Consumer Credit Market Structure

Impact of Private Credit Bureaus and Comprehensive Reporting on Consumer Credit Market Structure

Michael TurnerPresident

PERC

Title

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Whois ?

•A non-partisan, non-profit

policy research and development institute devoted to increasing financial inclusion using information solutions.

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About PERC

Most economies share data

• To share, or not to share credit information is no longer the question – Nearly three-quarters surveyed in the World Bank’s Doing Business 2012, have

either one or more private credit bureaus or a public credit registry– Natural response to evidence of importance of credit information sharing– Credit sharing institutions seen as key part of a nation’s financial infrastructure

• There has been an increasing trend toward establishment of private credit bureaus– Most private bureaus have been established in the last two decades– Evidence that Private Credit Bureaus increase private credit extension more

than public credit registries: Jappelli, Tullio Pagano (2002), PERC (2014)

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Pre 1970 1970-79 1980-89 1990-99 2000-09 0

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15

20

25

30

35

40

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58

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Establishment of First Private Credit Bureau in a Nation

Private Credit Bureau Establishment

Source: GFDR 2013: Credit Reporting Database

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Increasingly hurdles come from lender fears:

• How might full-file reporting impact bank concentration?

• What are the impacts of private credit bureau competition?

• How might the ownership structure of private credit bureaus impact credit reporting?

• What are the impacts of particular regulations or regulatory environments on private credit bureaus and data sharing?

Private Credit Bureau Establishment

Source: GFDR 2013: Credit Reporting Database

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New PERC Study

The Impacts of Information Sharing on Competition in Lending Markets

Released: October 2014

Examines impacts of shifts to full-file credit reporting on banking concentration

Re-examines credit reporting impacts on lending

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New PERC Study Motivation

Motivation for Research• Lenders are comfortable with sharing negative information• Lenders have expressed concern that sharing positive data

Lenders concerns/fears from sharing positive data:• Crème skimming by competitors• Loss of monopoly over their customers’ data• Increased competition resulting in reduced shares and profits• Other lenders / foreign lenders can make better use of full-file data

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New PERC Study Motivation

Given that hurdle to credit reporting is increasingly the fear of lenders, we decided to look at their preconceptions through the following:

The Impacts of Information Sharing on Competition in Lending Markets

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• Data – Compiled data from several sources, such as Global Financial Development Database

(World Bank), World Development Indicators (World Bank), and Doing Business– Used C3 (share of assets held by the largest three banks), C5 (share of assets held by the

largest five banks), and the Lerner Index (a measure of market power in the banking market) created from Bankscope data to measure banking concentration and market power.

– Indicator of transition to full-file reporting created using Doing Business, GFDD data– Period covered: 1997-2011

• Methodology– Average and Median Changes of Banking Concentration / Market Power– Linear regressions– Panel Regressions (with and without country fixed effects)

Key Results

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Shifts to full-file credit reporting are not associated with meaningful changes in bank concentration/market power

• No large or statistically significant changes in bank concentration or market power were found during or following credit-sharing reform for countries that shifted to full-file credit sharing.

• This is true controlling for per capita income, market entry barriers, in a linear regression or in panel regression framework (with and without country fixed effects)

Key Results

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Shifts to full-file credit reporting are not associated with meaningful changes in bank concentration/market power

• The shifts we saw 1 to 5 years out were slight, and the direction wasn't at all discernible. Nor did we see any pattern if we take barriers to foreign entry into account.

• Why didn't we see any real shifts? One reason may be that the market for lending expands, reducing the need to 'poach'. In short, the game isn't zero-sum

Key Results

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4 years past change

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-4.0%

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Average Change in Bank Concentration Following Full-file Change

Key Results

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Change in Bank Concentration by degree of Entry BarriersA

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1 year past change

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4 years past change

5 years past change

-6%-2%2%6%

10%

High Entry Barriers Low Barriers to Entry

Key Results

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Consistent with past findings, greater information sharing is associated with increased private sector lending • Private credit bureau are associated with higher rates of private sector

lending as a share of GDP, by 24 to 40 percentage points.• For economies that shift to full-file sharing, the boost to private sector

lending is 16 percentage points from Year 5 following the transition onward.

Drivers of this may be improved and more efficient underwriting and risk management made possible with richer data and the opening up of new market segments.

Key Results

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Interpretations / Implications

• Credit sharing rules/agreements may exclude prescreening or prospective marketing. This helps reduce the possibility of poaching.

• Credit sharing is a two-way street. A bank can also use the full-file credit information for its own customer acquisition purposes.

• Lenders may all adapt to the new environment helping keep their relative shares of the market. The transition to full-file data sharing usually takes years, consequently, there is time to acclimate during the transition and the transition itself may not be as radical as feared by lenders.

• As consumer credit markets grow, lenders expand their base by lending more to new clients more efficiently.

A growing pie with little reduction in shares

Key Results

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Other Findings…There has been a global trend to overall banking concentration. However,

such market concentration changes result from a long list of factors.

To the extent that private credit bureaus and comprehensive/full-file credit reporting might be one component in changing bank concentrations, it appears it would be small and overwhelmed by other factors.

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New PERC Study

Credit Bureaus in Emerging Markets:Overview of Ownership & Regulatory Frameworks

Released: September 2014

Examines impacts of private credit bureau ownership structures

Examines Credit Reporting Regulatory Frameworks

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Ownership

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Stage Examples of Services

Stage 1 Database, Provision of Basic Data

Stage 2 Credit Reports, Alerts and Some Add-On services

Stage 3 Initial Score and Decision Tools, Initial Custom Analytics

Stage 4 Fraud & Identity Management, Marketing Services & Collections Management, Commercial Credit Report

Stage 5 Consumer Reports, Consumer Scores Credit MonitoringConsumer Education

Stage 6Auto, Utility, Telco Solutions, Rental Screening, Employment ScreeningHealthcare, Small Business Insurance, Government SolutionsVery mature scoring, Decision Tools, and Custom Analytics

Stage 7Big Data Solutions, Peer to peer lending, Equity FinancingEquity valuation, Secondary Market, and Macro Factors Based Models

Stages of Credit Bureau Development

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Phase Description

Early / Initial Build Phase

Bank/Data furnisher ownership can be used to develop data sharing, as well as revenues

Middle / Scale PhaseTransitions away from core data of owners, benefit of bank ownership decreases and becomes a drag on development, begins to focus more on new data sources and value added services

Mature / Optimal Phase

Independent credit bureau(s) are optimal, proper incentives to serve all users, has data furnishers and customers across many segments, most revenue comes from value added services

Ideal Transition for Bureaus that Begin as Furnisher Owned

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Private bureau ownership by independent third parties (not data furnishers or data users) is seen as the optimal ownership structure to enable long-term bureau and credit information sharing development.

However, many different private bureau ownership structures and not all perform as well over time.

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3rd-Party (Independent)

Some Degree of Data Furnisher Ownership

General Type of Data Furnisher Ownership

No direct or little practical

ownership

Minority Data User-

Furnisher Ownership

Association (Majority) Ownership

Majority Diffuse Data

User-Furnisher Ownership

Majority Concentrated

Data User-Furnisher

Ownership

Example(s) Equifax (USA)Veda (Australia)

Experian(Australia)

Credit Bureau Singapore

CIBILprior to 2014

(India)

Buro de Credito (Mexico)

Advantages

Decisions focused on earnings, bureau business and serving users

Ease of acquiring data from data furnishers that are owners

Disadvantages

May be challenging enlisting data furnishers

Bureau decisions may skew to serve interests of the data furnisher owners, which are likely a subset of all potential users. Data furnisher owners may be less willing to report to other bureaus, reducing competition and segmenting data

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Regulationand

Oversight

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 Domain of Activity

Regulated by…Government

AgencyIndustry

Code BothData Accuracy/Integrity 16 2 5

Data Security 14 3 6

Consumer Dispute Process 17 1 5

Data User Credentialing 13 2 4

Permissible Use/Data Access 16 1 6

Domain of Regulation by Mode of Regulation

PERC Survey, N=23

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Weekly

Monthly

3-4 Times per year

1-2 Times per year

Yearly

Less than Yearly

Other

0% 5% 10%15%20%25%30%35%40%

9%

5%

5%

5%

23%

18%

36%

Frequency of government/regulator examination

PERC Survey, N=23

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Responsiveness of oversight agencies to appeals

PERC Survey, N=23

Very Responsiv

e

Moderately Responsiv

e

Minimall

y Responsiv

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Unresponsiv

e0%

10%20%30%40%50%60%

13%

56%

26%

4%

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Very costly/cumbersome

Moderately costly/cumbersome

Costly/cumbersome to a minor extent

Not costly/cumbersome at all

0% 20% 40% 60%

4%

48%

30%

17%

PERC Survey, N=23

How costly/cumbersome is the oversight and audit process

• The regulator could socialize changes in regulation as they pertain to the impact on the operation of the company with the credit bureaus.

• The laws are not sufficiently clear nor are its rules. Clarification upon request would be helpful.

• The regulations should be based on business standards and self-regulation.

• Regular reviews and upgrades of code in the light of technological developments.

• Better understanding of the Credit Reference Agencies practices.

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How to improve the audit process and/or make regulations more

effective

PERC Survey, N=23

Survey Says…

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Variance in regulatory approaches suggests:

Policymakers and regulators in emerging markets (while surveying global practices) are developing models of regulatory implementation and oversight based on their specific concerns, needs, and capacities.

…which seems entirely appropriate

Finding

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Variance in regulatory approaches also suggests:

• What works well in one market may not be ideally suited for another market;

• Regulatory frameworks are organic and evolutionary; • Abundant opportunities to improve and customize

rules given particular market circumstances:• APFF “Pathfinder” market; and,• WBG.

Finding

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New PERC Study

The Consequences of Heterogeneity In CRA Data

Expected Release: Q1 2015

Examines impacts of data fragmentation across CRAs for lenders and consumers

Forthcoming

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Forthcoming PERC Study

• Data Fragmentation– Across financial sectors

• Japan

– Within financial sectors• Russia, maybe Mexico• Usually furnisher owned CRAs

– Across types of data (financial vs non-financial)• NCTUE in US• Growing trend of mobile operators across world

• Data Fiefdoms– Ebay, Alibaba using their own transaction data, MNOs– Regional differences in US (legacy) and voluntary reporting (big providers

considering exclusive arrangements)– Can result result from lender market power, bad regulations, CRA data

monopoly, desire to leverage own data (era of “Big Data”)

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