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Financial inclusion is a significant issue all over the world, from the most mature economies to those that are earlier in their development. In all, the systems and processes that govern access to finance are the single biggest contributor to financial inclusivity. Some have argued that private credit bureaux should not be a part of that system, but that would only hold back progress. I’d argue that the only way we’re likely to achieve financial inclusion is through a combination of public and private credit information providers.
A paper recently published by the think tank Dēmos, which recommends the United States government establish a public credit registry that will eventually become the sole credit bureau, has inspired policy conversations from the Biden administration. Those conversations are predicated on perceived flaws in the current US credit ecosystem, including reporting errors, poor data, and racial bias, that are holding consumers back from accessing finance and becoming homeowners.
The problem with this administration’s well-intentioned proposal is that it does not solve any of the issues that it is trying to fix, it just centralises them.
The root cause of credit reporting errors is not generally found within the credit bureaux themselves, but rather with the banks, credit card issuers and credit agencies that supplied the data they have on file.
Issues of racial bias in credit information and decisioning is often found to be a result of outdated data from historic models that included geographical elements, such as zip codes. However, as private credit bureaus are constantly re-evaluating what data they hold and models they use, and how they can better serve the market, they have worked hard to remove inherently prejudicial data. Indeed, we moved away from this kind of flawed, geographic modelling long ago.
Especially in recent years, we also know all too well that the leadership of federal institutions can be volatile, especially when we transition between administrations and governing parties change. A public credit reporting agency (CRA) would therefore likely be exposed to political bias – the kind of bias that private credit bureaus have worked hard to eradicate.
Our current system is far from perfect, and we should address the problems we have to ensure that everyone can gain fair access to finance. However, we believe that we can do this best by working alongside the public credit bureaus that already exist to help provide the best service for lenders and improve regulations.
Private credit bureaus are far better positioned to improve financial inclusion than a public credit registry because the private sector has better access to a wider range of data. Today, we can leverage everything from check account data, utility data and even international credit bureaux for recent immigrants, to create usable risk assessments that enable our customers and partners to make well-informed credit decisions in fractions of seconds. These credit decisions have paved the way to many people entering the financial system who were previously excluded.
Much of the data we’re able to access and use in our decisioning draws on information many would prefer their governments not hold. However, by authorising private operators to use this data – either explicitly or through the terms involved with using a partners’ services – to inform credit decisioning, we can ensure a much wider range of people can access financing, even those who public registries would consider “thin file” and prevent from applying for a huge range of financial products and services.
That’s not to say public credit registries have no role to play. In fact, we believe they can provide a significant benefit to society and play a role in financial inclusion efforts, but
only primarily in a complementary supervisery function, which could also function for bureau supervision.
In many of the African countries, where we have a significant presence, public and private credit bureaus work in a very symbiotic way where both sides have a role to play in the system. In these markets, we work with governments because they have access to much of the important data needed to assess creditworthiness and lending affordability. However, if we were to use only that to inform decisioning, many people and businesses would still struggle to access the financing they needed to live and work in the way they wanted. It is this kind of close cooperation that allows us to de-risk transactions and facilitate access to finance, especially for those groups that have traditionally struggled to gain a foothold in the economy. And, this model is something we believe should be replicated all over the world.
When run well, with good data, and the right regulatory regime, a private credit bureau provides a net benefit to society and helps to create lasting positive change in our economy and society.
We can undoubtedly be doing more to eliminate bias and discrimination from the credit system, and hold all parties in the ecosystem accountable for their mistakes – but simply centralising existing issues is neither a panacea nor a workable solution. I’d ask the Biden administration to reflect on what is really in the best interests of the American people, and reconsider the best path towards true financial inclusion.
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