Opinion | Big changes that will emerge in credit scoring
The move towards open banking will remove information asymmetry
Premium
Data is the new oil. This is an often-quoted adage in this digital age. Today, everything we do is tracked in one form or another. The new reality is that we use a multitude of free services in exchange for providing our data to companies who then attempt to use that data to help us make informed choices while making life decisions or while shopping for products or services.
Large data sets have long been built up by credit bureaus and financial institutions, but kept to themselves. These data sets have been used behind the scenes to evaluate consumers’ eligibility for financial products such as loans. Particularly in the case of credit bureaux, as consumers realized that their loan approvals hinged on this data, it was sold to consumers in the form of credit scores and reports in order to review for accuracy. This was so that consumers could make sure their data was in order before they applied for a loan and hence, avoid any unpleasant surprises (in the form of loan rejections) that may result from inaccurate data.
Fortunately, there has recently been an unprecedented move towards giving consumers more control over their data and what it is used for.
Before we discuss the future of credit scoring for India, let’s observe what is already underway in the west—the advent of ‘open banking’. This means that banks are required to share user data with approved third parties (financial companies) if they have received consent from the consumer.
This includes banking transactions, savings and investment information. Sharing happens via secure application programming interfaces (APIs)—think of them as protected pipes to transmit your data from bank to fintech. In a nutshell, you could go to a mobile application that provides open banking services, provide your personal details, submit your consent, and the open banking service provider will be able pull all your data, from multiple financial services that you use, into a single window for you to review.
The purpose of open banking is to drive innovation and competition in financial services and return control to the consumer over their data accuracy and use.
The next logical question is how does this benefit you, the consumer?
Currently, credit scores and reports are largely based on credit-related data sourced from credit bureaus Experian and CIBIL. This data is used to evaluate your credit eligibility. Depending on the maturity of the financial market, it can also be used to determine insurance premiums, employment screening, rental screening by landlords and telephone connection approvals.
Given finances usually include both sides of the balance sheet—assets (savings, investments and insurance) and liabilities (loans and credit cards), credit data is currently a one-dimensional view of a person’s finances.
For example, if your investment information and spending patterns were available to a bank—along with your credit report—prior to applying for a mortgage, they would be able to advise you beforehand on what size of down payment you should make, the kind of loan you would be able to secure and at what interest rate. This would also help the bank make a more balanced, complete decision as to whether to lend to you. Essentially, the move towards open banking will remove information asymmetry—the disparity of information between the consumer and the lender—and create a better outcome for both parties.
India is following this trend with two major changes: The Public Credit Registry and NBFC Account Aggregator.
The RBI recently announced their intention to set up a Public Credit Registry (PCR). This will be a single point snapshot of all financial liabilities of individuals and entities. Currently, information is held by the credit bureaux, the MCA, the CERSAI, the Income Tax Department and the GSTN, and sits in different repositories. The idea is to bring all of this into the fold of the PCR. This data will then be made available to stakeholders, to help them make better financial decisions with the consent of the person the data belongs to.
The NBFC Account Aggregator is a body that will be permitted to collect information from various regulated financial entities. This data will include almost all asset types: savings deposits, mutual funds, equity shares, NPS balances and so on. This will be permitted only after a consumer provides explicit consent that the entity can collect and use their details.
Thanks to the emergence of fintech companies, credit scores and reports are now free for consumers to monitor. As the Indian market evolves, gaining consent-based access to this additional data will enable these companies to give consumers a more holistic view of their financial situation, that can help them build more robust credit scores and generally improve their financial well-being.
The current growing trend of free credit scores and reports and loan market places is just the beginning.
Hrushikesh Mehta is Country Manager – India, ClearScore
"Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!" Click here!
