Reforms enabling the introduction and sharing of comprehensive credit reporting (CCR) data, and open banking data are reshaping credit origination and management in Australia. Alongside these reforms is a need for greater accountability in data use, as well as a need to ensure that the customer experience is enhanced by data, rather than impaired.
ARCA recently tackled these issues in a panel session run at the AICM conference, and with input provided by a team of data experts, including Chris Irwin from Bank of Queensland, Darren Tran from Moneyplace and Troy Mulder from Alinta Energy.
Impacts of different data on origination and management
There is a range of new data available for use in credit origination and management. CCR data has been a game-changer in the credit reporting space. Traditionally credit reports included only negative information, about payment defaults, credit enquiries and judgments. CCR data now means that a credit file includes an individuals' credit accounts (including those closed within the past 2 years) as well as repayment history for those accounts.
Open banking will expand the data available to lenders even further, with the consumer data right enabling lenders to access transaction records for customers, although only with consent.
While there is overlap between CCR data and open banking data, it is also important to understand the key differences between the two when using the data to assess a consumer's loan application, as set out in the following graphic:
In non-financial sectors, such as the utility sector, over the coming years there is the prospect of greater utilisation of both of these types of data. Utility providers can access CCR credit account data, although not the repayment history, and, with the extension of the consumer data right beyond financial services, it will also mean the sharing of consumer utility account data.
In the financial sector, lenders such as Moneyplace have already observed the positive impacts of CCR data on credit origination. For example, Moneyplace has seen examples of customer applications where, relying on a negative credit report, the customer scores highly. However, the information for that same customer from a CCR credit report reveals a completely different story; with CCR showing at least 3 credit card accounts all of which are seriously overdue.
Is all data useful?
In recent years focus has also been directed to the use of alternative data, and funnelling this data to aid credit management. In the United States, for instance, the use of alternative data such as rental payment data has aided financial inclusion, particularly for customers who would previously have been excluded from mainstream credit. In many Asian countries, the majority of the population is "unbanked", and hence alternative data is the only option for use in credit assessment.
However, not all data is necessarily useful. When collecting data, it is important not to lose sight of the fundamentals. Data collected should provide a direct insight into an individuals' creditworthiness, whilst also respecting an individual's right to privacy. For example, if obtaining transaction data for an individual, using this data to give an insight into broad categories of spending by the individual is appropriate and should provide an insight into whether there is any type of spending which may warrant further inquiry. However, analysing each individual transaction may prove resource intensive, an unnecessary incursion into the customers' privacy, and ultimately providing an outcome which could otherwise be obtained through less intrusive data analysis.
In the background, organisations must also be mindful that the legal framework in the Privacy Act for access to data imposes accountability for use of that data. If an organisation accesses data, then it must use that data.
Customer experience and engagement
To succeed in the use of data for credit origination and management organisations must keep customers front and centre. How can the use of data be something that is understood by customers? What steps can be taken to ensure that integrating data into credit management enhances rather than undermines the customer experience and engagement?
These are not necessarily easy issues to solve, as customer awareness of data has not matched pace with the reform. Research for ARCA by YouGov conducted in March 2019 has demonstrated that customer awareness of credit reporting remains low. Figures demonstrate:
Organisations such as Moneyplace have already observed that active efforts to educate and engage customers have improved the overall customer experience. Moreover, customers who have granted access to their data have done so on the basis that they expect, in return, a speedy and improved credit origination process.
Impact of data on an organisation and its competitiveness
For organisations embarking on the use of data for credit management, the key to success is to ensure the entire organisation is included in this initiative. While we may live in the age of data architects, scientists and even data wizards, there is risk that if knowledge of data is siloed and restricted to these data experts, then the organisation may not properly understand or integrate this data, or indeed, may not properly meet the regulatory requirements associated with its use.
The more an organisation can successfully integrate data into its credit origination and management, the more competitive the organisation becomes in the marketplace. Smaller players, particularly, will gain insights into customers that may once have been restricted to the larger incumbents. All this means customers will have greater choice for financial services, and other service providers.
Legal & Regulatory Affairs Manager
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March 2020 - FNSCRD503 - Promote understanding of the role and effective use of consumer credit - FNS51520 Diploma of credit management