The Head of the company says a positive credit register is needed for boosting the Estonian credit market.
Stefano Stoppani, Dubai-based Chairman of the Board of Creditinfo providing business information, solvency assessment and market analysis, intended to visit its offices in Estonia and the other Baltic countries in the beginning of March, but COVID-19 hampered with these plans. Europe is cautious in regulating both data protection and open banking. The aim of the PSD2 directive is to give third parties – licensed companies – access to a person’s bank account information. This is not done just because, but for providing better service, and obviously the account holder must authorize this. The third-party, for example, the creditor, can then see the income of the person and what the money is spent on. Information is needed to determine if the person is able to pay back the loan (s)he wants.
No positive register
Operating in 30+ countries, Creditinfo decided to establish the competence center for this service in Estonia. The know-how will be produced here and then exported to other countries. “We chose Estonia because it is easy to do business and start new companies here, and the PSD2 ecosystem for companies is already in place,” Stoppani explains.
He believes that among the countries Creditinfo operates in, Estonia is one of the most developed countries in innovation. Also, the Estonian market is displaying trends that might appear elsewhere in the coming years. There is an active ecosystem of financial technology businesses here and the economy is growing. There are lessons to be learned and new ideas to be drawn from the local market. Stoppani is surprised that despite this background Estonia is one of the few countries that does not have a positive credit register. We have a payment defaults register which means that creditors share only negative data: information about problems with loan payments. A positive register would enable a person to allow his/her data to be included and the creditor would get a clear overview of his/her loan obligations. “This affects responsible lending,” Stoppani assures. In Estonia, the obstructions come from the legislation. “This is the question that Estonia should focus on in order to improve the credit market,” he says.
Data leakage should not be feared
Is it only about the legislation or are people afraid their data might be misused? Having worked at World Bank, Stoppani admits that even there it took some time before countries started to amend their laws. Then, 15–20 years ago, caution was understandable, because the whole field of registers was new. “This should no longer be the case in 2020. All the information is available online, in social media. We share important data every day,” Stoppani acknowledges.
While 20 years ago 80% were negative registers and 20% positive, the tables have now turned, Stoppani assures. The regulation expands the scope of the available data. But the crucial condition is that this can only happen upon agreement; a person must be free to decide about his/her data. On the other hand, there must be a circle of licensed users, meaning the users of the data must meet certain conditions to ensure data security.
Stoppani assures there is no need to fear data leaks with international companies such as Creditinfo. “If I will have any problems with using data anywhere, for example in Estonia, it is certain that my reputation is ruined all over the world and nobody will trust me,” Stoppani says. That is why Creditinfo pays great attention to the security of data storage and processing, investing much money into this.
Stoppani keeps a positive mind and believes Estonia is also moving towards a national positive register. He has even visited the Ministry of Finance to share his World Bank experience.
New register is being developed
The Ministry of Finance confirms that the issue is being tackled. In 2018 the ministry ordered a survey about the data exchange models of the financial obligations of residents. Its aim was to determine whether making the information about individual loan and other financial obligations available to all banks and other creditors helps to avoid excessive lending and the problems it causes. The survey also identified various models for ensuring adequate control when viewing such information and analyzed ways for exchanging information concerning individuals’ financial obligations.
As a result, the ministry starts preparing a plan for developing the draft of the credit information law that was supposed to be disclosed in spring. Now other pressing matters have intervened due to the corona crisis and according to the ministry’s spokesman Siiri Suutre this topic will take some more time. “Based on the feedback received through consultation, we can then decide which specific legislation amendments are taken forward,” Suutre explains.
Tarmo Ulla, Head of Private Customer Division at Swedbank, affirms that representatives of the Banking Association, including Swedbank, are involved in preparing the draft bill of the state-regulated register. Ulla says we need such kind of a register. “Without governmental regulations concerning the operation of the register, the protection of data it includes and supervision of the activity of the parties – creditors and the registrar – is not adequately insured,” Ulla notes.
Limit on loan payments
Priit Rum, Communication Manager at LHV, says that ideally, the positive credit register would enable to move towards offering interest rates that depend more on their solvency and fulfilling their existing loan obligations. Swedbank predicts that sharing positive credit information among market participants alone might not be enough for a more efficient meeting of the requirements of responsible lending. Ulla thinks it would be reasonable to set a limit on consumer credit loan payments, just as the Bank of Estonia has set on housing loans. “Introduction of the loan payment limit would make it easier for the creditor to follow the principle of responsible lending and also for the supervisory authority to check that the requirements are met.”
There has been a prior attempt in Estonia to establish a positive credit register that would better protect a person from excess borrowing and taking unsustainable financial obligations, and the creditor from loan loss. This was not regulated on the state level, it was a private scheme.
The first positive credit register in Central and Eastern Europe was established in Estonia in 1993. But in 2000 it was decided to close it and establish the payment defaults register. On the initiative of Krediidiinfo, the register was reestablished in August of 2016. Data exchange was managed by Krediidiinfo, the register was founded by several small creditors and some banks: LHV, Bigbank, TF Bank and Inbank. Yet the register failed to start functioning.
Original of the article had been published in Estonian business news portal Delfi/Ärileht on May 12th, 2020 based on the interview made in March 2020.
You can read the original article here.
Author: Kaja Koovit
Data is the new oil, but quality is paramount
In 2017, The Economist ran a cover story portraying data as the new oil, (certainly not last week’s oil), calling it “the world’s most valuable resource”. Data is pervasive and is collected regarding virtually everything that happens. Essentially it comes down to one simple cycle, as described in that 2017 issue: “By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on…” Information is power (for credit bureaus, the power to enhance market lending effectiveness). But there is a catch; because not any kind of data will suffice. In the world of credit, for it to be valuable, data must be complete, high quality, regularly transmitted and verifiable. High-quality data has a deeper, more transformative power. In this industry, data quality and completeness are critical for the successful impact of credit bureaus, and Creditinfo has, since its founding, had a clear focus on this area to support banks, MFIs and other institutions for constant improvement.
Quantity is not a quality on its own
Simply possessing data is not enough for credit bureau success. Costs and indirect costs of incomplete and low-quality data have a substantial financial impact on credit grantors, these range from the granting of credit to high-risk persons, the turning away of low-risk persons, ineffective and wrongly targeted collection efforts (when directed using incorrect demographic data), loss of credibility with customers and regulators, and extra costs and delays related to its validation and cleaning. Data quality is much more than just having data. Data quality is a challenge for all credit bureaus globally and should be focused on from the start. Even in the United States, where “credit culture” is widespread and where credit bureaus are positive, large and mature, it is still an open-ended issue. Credit bureaus can deliver clear socio-economic benefits even when data has some weaknesses, but as data improves impact becomes greater. And weak data is harmful across the board: lenders receive less complete risk profiles, consumers are not assessed properly, and the full potential of the credit bureau’s predictive power is wasted. So, how to positively participate in the improvement of data?
In its General Principles for Credit Reporting, the World Bank underlines that “information quality is the basic building block of an effective credit reporting environment”. In 2018, Experian found that 57 per cent of organizations consider being data-driven a competitive advantage because it enables better decision-making practices.
Creditinfo invests considerably in data quality and is specifically committed to three areas: multiple phases of checks of loaded data, periodic reviews with institutions providing updates of changes and reporting to senior management, and finally ongoing feedback to the regulatory body.
Regular checks each time data is uploaded are a fundamental first step. It is a crucial stage which happens in multiple phases and aims in preventing significant disruption down the line. Data quality rules refer to logical restrictions on the data which are sent to the credit bureau system. They validate dependencies between two or more data fields, as well as the data’s consistency with available history. The goal of data quality rules (and preventative checks) is to avoid: Errors in data (e.g. negative amounts), mistypes (e.g. wrong formats of the IDs), logical errors caused by inconsistency of data in the subscriber’s database (e.g. start date of the contract is in the future), lack of essential information (e.g. missing contact information, identification numbers), extreme cases, (e.g. huge number of collaterals, which could cause problems with report generation), inconsistent data compared to other historical data, etc.
Reviews are the second essential pre-requisite to a robust, high-quality data ecosystem. Their aim is to support subscribers to maximize their data quality for their own and the collective benefit of the banks. Indicators like the quality of snapshots and their regularity are verified and checked, as well as the way in which they are captured and updated. They directly engage lending institutions and are critical stages for persuasion and trust-building; to win buy-in for data quality. Creditinfo is a partner of lending institutions in four continents, regularly engages in data reviews and consistently aims higher in terms of data quality.
Finally, a healthy and robust work relationship with regulators, as well as its implication, are key. Only the regulator possesses the hard tools and moral suasion necessary to nudge financial and non-financial institutions in the right direction. Creditinfo, as a licensed credit bureau, has been closely working with regulators around the world to “push” data quality, especially in markets where the concept of credit bureaus is new, and where data quality is usually at the bottom of the list of priorities of lending institutions. Regulator plays crucial roles in persuading institutions, like through a data quality ranking, and by enforcement of relevant legislation, like pertaining to data submission. Furthermore, data quality is also in the regulator’s interest: systemic risk control and other supervisory activities are inextricably linked to a vigorous data quality ecosystem.
If converting data into intelligence is Creditinfo’s core business, data quality is an essential element at the heart of it. It has been Creditinfo’s commitment for the past 20 years., and it will be so going forward.
Nelson Madeddu, Global Consultant, Creditinfo Group.