The EU Commission had invited a diverse group of experts ranging from credit rating, credit information, banking, alternate finance, and capital market participants to discuss whether regulating credit scoring would facilitate access to finance for SMEs i.e. as a tool to advance lending.
The workshop was well attended indicating intense interest in this topic. There were eight BIIA members at the meeting: Bisnode, Cerved, Creditsafe, CRIF, D&B, Equifax, Informa, and Schufa. In addition three directors of BIIA were in attendance: David Knowles of Creditsafe, Enrico Lodi, of CRIF and Joachim C Bartels, Managing Director BIIA.
In summary, BIIA and its members left a clear message that credit rating nor credit scoring were the problem. The cause for the lack of lending was a lack of reliable performance data (credit history) which could make credit scoring more effective. A more broad based data sharing of payment information (credit history) would lead to much greater transparency and greater effectiveness of credit scoring.
An entire morning was devoted to the subject of SME access to capital markets: The deleveraging of the banking sector is driving larger SMEs to capital markets. There is a lot of focus on funding, information asymmetries and regulations. In a nutshell it could be said that larger SMEs have access to capital markets and alternative finance, but at a higher price. Furthermore asymmetry of information is factor but there is now a growing SME rating sector in Europe providing the necessary transparency.
Mixing the terms credit rating and credit scoring in a single workshop could give the impression that both were interchangeable. This issue was put to rest by Enrico Lodi (CRIF) right at the beginning of the workshop who stated that credit rating was an opinion derived from an assessment of qualitative and quantitative factors involving quite a lot of human intervention, while credit scoring is an automated risk assessment process based on mathematical formulas. Credit rating is a capital markets instrument while credit scoring had its place in risk assessment of small businesses and individuals.
BIIA participated in the panel with the topic: “Need for future policy action”. BIIA’s message was credit rating was well regulated and needed no further policy action. The method of credit scoring was well established in commercial bank lending and trade credit assessment and was based on best demonstrated practices, guidelines and code of conducts. Credit management still plays a significant role in commercial credit decisions, thus credit managers are the ultimate decision makers using credit scoring as a guideline. Rather than focusing on the credit score per se the focus should be on lenders or trade credit grantors, who clearly need to be able to defend their credit decisions and underlying policies and processes (Slides 2 – 5/9).
Regulating credit scoring was not necessary, but guidelines and code of conducts should be revisited, from time to time, in industry sponsored forums (already a common practice).
BIIA pointed out that in Europe more than 92% of SMEs actually fall into the category of Micro enterprises where the majority of their credit history was found in consumer credit bureaus rather than in commercial credit databases. To provide such micro businesses with much access to finance one should look at the aspect of trade credit. Many small businesses trade on a cash or credit card basis, and making them trade credit worthy would provide short term capital. Nevertheless trade credit grantors do not have access to consumer credit information. Data sharing would be the answer to eliminating information asymmetries.
BIIA informed the audience of the work of the World Bank Committee for Credit Reporting. Having worked for three years on the development of the “General Principles on Credit Reporting” the committee is now working on the issue of facilitating SME financing though improved credit reporting. The committee has identified a number of impediments to lending / access to finance (slide 7). The committee is working on potential actions to eliminate information asymmetries (slide 8). One of the recommendations is to broaden data sharing to include all relevant parties granting credit (not just credit bureaus).
A final question dealt whether a European wide credit register was needed. The answer to that was no, delivered by the last speaker from Coface France. The private credit information sector was efficient throughout Europe to provide transparency, although more data should be made available through data sharing. That opinion was not shared by the spokesperson of the National Bank of France who felt the public sector was efficient enough to provide the necessary transparency.
In a closing statement Neil Munroe, President of ACCIS (European Association of Consumer Credit Information Services) stated that there was no need to further regulate the industry in regard to credit scoring.
BIIA’s presentation can be accessed by clicking on this link: EU Workshop Bartels BIIA Slides
To access BIIA’s director Enrico Lodi’s presentation click on this link: Scoring on SMEs EU Commission Workshop
Other presentations from the workshop can be accessed through the EU Commission website