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Germany: Credit Scoring in the Cross-hairs of Consumerism

„Will Ilse Aigner continue her populist attacks against consumer credit information companies?“ asks Dr. Willi Bredemeier, Publisher of Password Germany in his recent Pushdienst of Friday March 15th 2015.

According to German press reports Ilse Aigner, the German Federal Minister for Consumer affairs is once again asking for a comprehensive study of the scoring mechanisms of the German credit information industry in the consumer sector.   Perhaps the question should be raised what has changed in the consumer credit scoring science since June 2009 when a similar study was undertaken by the GP Forschungsgruppe München, on behalf of the ministry?

The purpose of the study is to provide answers to a number of key issues:

  • Whether the curtailment of creating consumer/customer profiles based on information obtained from social media or from Smart-phones usage data would be advisable.
  • To determine whether it is advisable to completely outlaw the use of private communications-data or the evaluation of such data.
  • To evaluate whether discriminatory scoring-elements are being used by the consumer credit information industry and whether the rights of the consumer concerning access to their data and the rights for filing a legal complaint should be extended.
  • To check whether the data protection law of 2010 is effective.

Dr. Bredemeier pointed out that the Federal minister Aigner had repeatedly attacked the consumer credit information industry about its practices.   In 2012 Aigner completely overshot her mark by attacking Schufa (the leading German credit bureau) for considering a research project to determine whether the use of data sourced from the Internet, amongst other things social media data was useful.  Her populist notion was rewarded by the silence of the general public and the media for failing to defend the legitimacy and freedom of conducting basic research, which would have improved the transparency in consumer information.  The result was that both Schufa and the research institute withdrew from the project.  This renewed initiative by the minister is tantamount to portraying the consumer credit information business as the ultimate villain in an imaginary plot to disadvantage the consumer.

BIIA Editorial Comment:

Based on the above observations it appears that the minister has not only a proverbial bee up her bonnet as far as her populist notions about the consumer credit information industry are concerned, but as the watchdog over the German flock of consumers she seems to be barking up the wrong tree.

  • Focusing on the consumer credit information industry alone assumes that the industry is the sole influencer in a credit decision.  This is really not the case.  Many credit grantors use their own credit scoring system based on internal customer data and external data.  Therefore the scope of the study should encompass all credit scoring systems used in evaluating the creditworthiness of consumers, not just those of the consumer credit information industry.
  • Profiling:  Why should anyone be concerned about the profiling of consumer behavior based on data which is openly posted on the Internet?  The data is in the public domain and has been placed there voluntarily.  The data seems to be of great relevance to the marketing profession for consumer marketing.  Whether it is of any relevance for credit information has yet to be determined.

Social media data and the consumer credit information industry:  When looking for apparent wrong-doings about the use of social media the consumer credit information industry it is not the place to look.   Social media and alternative sources of information such as smart phone usage data are already used by the financial services industry around the globe completely bypassing the consumer credit information industry.

The use of Smart-phone communications data (who calls whom) should be a matter of consumer consent.

  • The intention to evaluate whether discriminatory scoring-elements are being used by the consumer credit information industry could imply that the industry may be complicit in distorting facts and being the sole criteria for making a credit decision.

The consumer credit information industry goes to great lengths in providing facts and not opinions for the use in credit assessment.  The final decision for granting a loan lies with the lender and not with the consumer credit information industry. The consumer credit information industry processes data which is provided to the financial services sector by the consumer at the point of applying for credit.  Data on the performance of credit transactions (positive and negative) are forwarded to consumer credit information companies for aggregation.  All transactions are based on facts and not opinions.  These facts become the basis for credit scores.

Credit scores are often provided by the consumer credit information companies, but it should be recognized that creditors also tend to develop their own scoring models (in-house or through specialty firms).  Where credit information companies do not provide scores it is normally because the data needed to develop a predictive score is not available.

  • Credit scoring tools are developed by an ever growing number of suppliers. The technique is robust and has been in use for decades.  Improvements in methodology are a constant.   The use of credit scoring is widespread and not just confined to the consumer credit information industry.
  •  The future needs of the financial services industry have to be considered:  In a recent FICO/EFMA* survey about risk managers’ priorities for 2013, the majority of respondents said that return on capital (ROC) and cross-selling were the top priorities.  High on the list of priorities was analyzing ‘Big Data’ to understand customer needs and risks. 

Concentrating on capital and risk is one important aspect of complying with Basel III regulations; however risk managers must also look for opportunities for profitable growth.  This should be seen as a positive development, because the appetite for further growth should be helpful for consumers and small businesses to gain better access to credit.

To better understand the needs of customers and the inherited risk will require risk managers to ‘digging deeper’ into what customers want or desire.   Therefore risk managers will have to cast their net wider in terms of data sources and going beyond traditional consumer credit information sources.

Analytics combined with data provided by the consumer credit information industry will continue to be indispensable elements in risk prediction and fraud prevention, but the data is credit-centric and is not designed to extract what customers and prospects desire in the foreseeable future.   Consequently risk managers are already or will be tapping directly into other data sources such as social media.  

Maverick payday lenders use analytics combined with social media data and other public records sources as a basis for lending without the use of consumer credit information.  Kreditech, Hamburg, Germany** offers such a service and nobody appears to complain about the use of social media date in the company’s risk assessment.  The company claims to be in the market for credit scoring tools.

The consumer credit information industry has gone to great length in developing standards.  Recently the industry participated, through its associations, in a taskforce of the World Bank, the Bank for International Settlement and Central Banks to develop the General Principals for Credit Reporting.  In the document it is stated, amongst other recommendations, that credit reporting systems*** should effectively support the sound and fair extension of credit in an economy as the foundation for robust and competitive credit markets. To this end, credit reporting systems should be safe and efficient, and fully supportive of the data subject and consumer rights.  The overall legal and regulatory framework for credit reporting should be clear, predictable, non-discriminatory, proportionate and supportive of data subject and consumer rights.  The legal and regulatory framework should include effective judicial or extrajudicial dispute resolution mechanisms.

The consumer credit information industry is an integral and indispensable element in the financial infrastructure of a national economy.  The industry’s use of modern information technology, data management processes, analytics and decision systems are an enabler in providing an accurate, reliable and timely mechanism for providing consumers and small businesses with fast and efficient access to credit.  Modern analytics and decision tools, such as credit scoring were largely responsible for the successful migration from subjective (discriminatory) to objective lending for the benefit of consumers.

Based on the contribution to national economic growth and the financial wellbeing of consumers and small businesses, the consumer credit information industry should deserve more credence than it has been given.

Source:  German Press Reports, Pushdienst Password Germany

*FICO/EFMA Study
**Kreditech, Hamburg, Germany
***Credit reporting systems = consumer credit information systems

The author of this article is Joachim C Bartels, Managing Director and Editor-in-Chief of the BIIA. 
This article does not necessarily reflect the opinion of BIIA and its members. BIIA is not responsible for the use which might be made of the information contained in this article. Nothing in this article implies or expresses a warranty of any kind.

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