Technological changes are revolutionising how credit scores are assigned by credit bureaus. Traditional credit scoring used limited data, which results in only a snapshot of a person's entire credit profile (Freas, 2018). The big issue with traditional credit scoring is that it may provide an inaccurate representation of a customer’s credit due to a lack of data (Belyh, 2019). Now that more data is available, credit bureaus are seizing the opportunity to revolutionise how creditworthiness is evaluated
Credit bureaus are changing
Alternative data from a variety of sources, such as mobile providers and alternative finance companies, is being used to create specialised credit reports. Data is analysed and trends are followed over a period of time to reveal patterns that predict future consumer behaviour (Freas, 2018). These reports are providing valuable insights, expanding existing credit files and helping raise credit scores of lower-income individuals and others who typically cannot get traditional credit (Melendez, 2019).
Credit bureaus are also transforming into technology and software providers by gathering, analysing and processing data in ways other companies can’t (Nguyen, 2019). Credit bureaus are able to provide better data to businesses, which then can make better credit and lending decisions while also preventing fraud (Nguyen, 2019).
What is open banking?
Open banking is a banking practice that securely shares financial information, such as consumer banking transactions and other financial data, to third-party financial service providers (Estevez, 2020). Sharing data is done through the use of application programming interfaces (APIs) and only with the consent of customers (The Balance, 2020). Open banking is the driver behind both innovation and competition in the financial industry (Cahill, n.d.).
Why do credit bureaus use open banking?
Credit bureaus need to access and process customer information in order to accurately determine creditworthiness.
Open banking reduces administrative costs by eliminating manual document collection. Furthermore, open banking allows credit bureaus to analyse consumption patterns, such as overspending, to provide better credit scores (Julio, 2021). Additionally, open banking prevents fraud through authentication and verification of the validity of data (Julio, 2021).
Some credit bureaus companies you should know about
Experian is one of the three largest consumer credit reporting companies. The company is using open banking to increase the credit scores of millions of people, in order to help them borrow at a cheaper rate (Reynolds, 2020).
Asiakastieto is one of the leading providers of digital business and consumer information services in the Nordic countries. The company uses open banking to offer the means to calculate the payment ability of consumers even more reliably than before (Asiakastieto, 2019).
Equifax is one of the three largest consumer credit reporting agencies. In 2021, Equifax acquired AccountScore in order to improve their open banking strategy. The collaboration enhances their product offering by combining traditional credit bureau data with bank transaction data from AccountScore (Lanyon, 2021).
Schufa is a German credit bureau that aims to protect clients from credit risk, as well as from the insolvency to borrowers. In 2018, the bureau acquired a major stake in finAPI Gmbh. The collaboration enabled access to 58 million end customer accounts at the time (Schufa, 2018).
What’s to come?
The future of credit bureaus and credit reporting will include further closing the gap between actual creditworthiness and what the creditor is able to determine. This gap, known as information asymmetry, will be closed through even more data being created and collected, as well as emerging technologies that can draw deeper insights (Belyh, 2019).
The future of consumer credit management is dependent on the tug of war between data protection regulations and the move by lenders towards using alternative data. The regulatory environment is becoming increasingly complex, so lenders are increasingly depending on RegTech solutions to help them comply with regulations (Belyh, 2019).
Asiakastieto. (2019, March 14). The new service of Asiakastieto offers access to bank data – reducing the risk of overindebtedness. Asiakastieto. https://www.asiakastieto.fi/web/fi/asiakastieto-media/the-new-service-of-asiakastieto-offers-access-to-bank-data-reducing-the-risk-of-overindebtedness.html
The Balance. (2020, October 11). What Open Banking Is and How It Will Affect You. https://www.thebalance.com/what-is-open-banking-and-how-will-it-affect-you-4173727
Belyh, A. (2019, Novermber 3). The Future of Consumer Credit Management (incl. Credit Reports & Credit Scoring). Cleverism. https://www.cleverism.com/the-future-of-consumer-credit-management/
Cahill, H. (n.d.). InvoiceFair. The Evolution of Open Banking: Connectivity breeds digital competition. https://invoicefair.com/the-evolution-of-open-banking-connectivity-breeds-digital-competition-081118/
Clemans, T. W. (2020, June 12). The COVID-19 Crisis And Credit Reporting. National Mortgage Professional. https://nationalmortgageprofessional.com/news/75222/covid-crisis-credit-reporting
Estevez, E. (2020, August 27). Open Banking. Investopedia. https://www.investopedia.com/terms/o/open-banking.asp
Freas, T. (2018, May 2). Credit Through the Ages: How Technology is Revolutionizing the Way We Assess Consumer Financial Behavior. Equifax. https://insight.equifax.com/credit-ages-technology/
Julio. (2021, April 23). Open Banking: the perfect ally to improve credit scoring. Belvo. https://belvo.com/blog/open-banking-the-perfect-ally-improve-credit-scoring/
Lanyon, D. (2021, Febuary 9). Equifax scoops up open banking fintech Accountscore. Altfi. https://www.altfi.com/article/7558_equifax-scoops-up-open-banking-fintech-accoutscore
Melendez, S. (2019, June 4). Now wanted by big credit bureaus like Equifax: Your ‘alternative’ data. Fast Company. https://www.fastcompany.com/90318224/now-wanted-by-equifax-and-other-credit-bureaus-your-alternative-data
Nguyen, D. (2019, September 13). Experian: From credit bureau to technology company with APIs. Google Cloud. https://cloud.google.com/blog/products/api-management/experian-from-credit-bureau-to-technology-company-with-apis
Reynolds, J. (2020, November 10). Experian leverages Open Banking to factor Spotify and Netflix subscriptions into credit scores. Altfi. https://www.altfi.com/article/7246_experian-leverages-open-banking-to-factor-spotify-and-netflix-subscriptions-into-credit-scores
Schufa. (2018, December 21). Fit für die Zukunft: SCHUFA erwirbt Mehrheitsanteil an der finAPI GmbH. Schufa. https://www.schufa.de/themenportal/detailseite/themenportal-detailseite.12673.jsp