Credit Reporting: What’s the role for the state? Fredes Montes Financial Infrastructure The World Bank

Objective SAFE, RELIABLE AND EFFICIENT CREDIT REPORTING SYSTEMS Nature of the service provider does not preclude the state from pursuing those objectives Different functions of CRS Support banking supervision Shape prudential regulation – (provisioning and capital requirements are properly calibrated to cover expected and unexpected losses) Discipline the credit market Investigation Dissemination of information

Support Bank Supervision Databases with information on borrowers of the financial system ; Used for banking supervision; Also used for prudential regulation; statistical purposes; macroeconomic policy Market discipline Access is limited to banking supervisors and financial institutions. Data Distribution among creditors and others Databases with information on borrowers from financial sector and other sectors (e.g. insurance, housing, retail payments, other public sources) ; Used for pre-screening purposes, credit rationing and marketing; Access is not limited; Different systems coexist; Functionality of the system

Market Failures not captured through DB data Support Bank Supervision Data quality; Timeliness of data; Incompleteness of data; Consumer rights. Data Distribution among creditors and others Data quality and data availability (sources and positive-negative); Data Fragmentation; Closed User Groups; Governance; Data usage; Consumer Rights;

Promote efficient, safe and reliable credit reporting systems Data processing is secure Ensure quality of services (e.g. data and VAS) Meet needs of users Support Consumer Rights Frequently data protection or privacy Ensure competition in the credit market Avoid anticompetitive practices regarding information exchange Ensure fair access to credit information to all relevant participants Role of Authorities (current) 5

New Standards: Objective and Key considerations Credit reporting systems should be safe and efficient, and fully supportive of consumer rights and (i) effectively support the sound and fair extension of credit in an economy; (ii) serve as the foundation for robust and competitive credit markets.. Information quality Security risks involving credit data collection processing and distribution Operational legal and reputational risks involved in information sharing networks Tensions between information sharing and privacy and proper distribution of participants obligations and rights Globalization and access to credit across borders

The principles Data Credit reporting systems should have accurate, timely and sufficient data - including positive - collected on a systematic basis from all relevant and available sources, and should retain this information for a sufficient amount of time. Security Credit reporting systems should have rigorous standards of security and reliability, and be efficient. Governance The governance arrangements of sp’s and dp’s and should ensure accountability, transparency and effectiveness in managing the risks associated with the business and fair access to the information by users Legal framework 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 Cross- border Cross-border credit data transfers should be facilitated where appropriate, provided that adequate requirements are in place

PPP Banks Telecoms Financial Ins MFIs Banks Other Regulated Financial Institutions Central Bank CB1 CB2 CB3 Other creditors Consumers CB4 Telecoms/utilities Other creditors UsersData ProvidersProducts Service Providers Report Credit Scoring Anti fraud Portfolio monitoring Central Bank Consumers

Case Study: Mexico- Competition LACK OF TRUST BETWEEN BANKS BARRIERS OF ENTRY TO SMALL PLAYERS CLOSED USER GROUPS SYSTEM OPERATED BY BANKS DATA IS STORED IN TWO DIFFERENT DATABASES OPERATED BY DIFFERENT BANKS NO STANDARDS IN THE INDUSTRY (ID, CONSENT, FORMAT) DATA FRAGMENTATION DATA IS AVAILABLE BOTH POSITIVE AN DNEGATIVE SINCE RECENTLY THEY STARTED TO DEVELOP CREDIT SCORING MODELS AND OTHER VAS- NO DEMAND OR NO COMPETITION LACK OF INNOVATION

Difficult to gather positive information on a voluntary basis from the creditors. Difficult to gather information on all existing creditors. Data Collection Existing bureaus are not subject to oversight; There are no standards on consent, format and data contribution; Potential data fragmentation. Data Quality Case Study: Kenya- Data availability (completeness)