Imagine a company using your financial information to make a profitable product and then preventing you from using it because doing so would be counterproductive to its long-term business plans. Oh, wait, you don’t have to imagine anything because the major credit bureaus have been playing such games with consumer data for years, wielding control of it to maximise profits instead of serving the best interests of the very consumers the data represents. Oddly enough, this flawed system is exactly why we must listen to Occupy Wall Street (at least to a certain extent).
The Occupy Wall Street (OWS) movement has been in the news so much for so long that by now it can be easy to tune out. However, by doing so, you might’ve missed the letter sent by the organisation’s Alternative Banking Group to Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB). While the details of this correspondence are essentially immaterial, the central message is both undeniable and important: The way credit scores are created and managed is broken and anti-consumer.
Perhaps no better example of this is the standoff between Experian and FICO. Experian obviously wants its in-house credit score, the Vantage Score, to supplant the FICO score, which is currently the most popular score among lenders. To promote this ultimate goal, the credit bureau stopped allowing FICO to sell FICO scores based on Experian credit report data to consumers. The thinking: Without the ability to obtain Experian-based FICO scores, consumers won’t be able to predict decisions made by lenders who use them and will therefore push for an attainable score to be used instead, thereby making the FICO score less relevant. In other words, Experian knows it can’t curtail the sale of its FICO score to big banks because they have too much clout but is perfectly willing to use our financial data (not to mention our ability to properly manage our finances) as a bargaining chip.
This example merely characterises the conflicts of interest that have become a systematic problem within the credit reporting industry. The question is how to fix the problem, and in my opinion, the answer is relatively simple.
The credit reporting industry needs an infusion of capitalistic principles. Regulators need to promote competition and the innovation that inevitably comes with it. They should therefore require that credit bureaus sell consumer financial data to any company that has permission to use it and do so at a uniform price. This would allow more entrants into the credit scoring space than is possible under the current system in which credit bureaus price out the competition or refuse to share what’s not really theirs to begin with. Consumers no longer view credit data as a luxury, but rather as a utility that affects their daily lives in a plethora of ways.
With more companies competing to develop the most accurate credit scores, underwriting accuracy would gradually improve, ensuring that only truly creditworthy individuals gain access to credit, thereby avoiding the dangerous overleveraging that we witnessed when the housing bubble burst a few years ago. This would also enable banks to offer better and better products. You see, underwriting inefficiency leads to unexpected defaults, which banks must account for in setting product pricing and terms. With a keener eye to the future, banks would be able to offer lower car loan rates, higher savings account rates, and more lucrative rewards credit cards, since they would have more robust profit margins.
Unleashing credit data would give consumers access to an array of products and services that would help them make better financial decisions across the board. A lot of these ideas are either being prevented from coming to market due to the suppressing influence of credit bureaus or have yet to be imagined given the lack of innovation currently permitted in the industry.
So, when you boil it down, increased competition in the credit scoring space equals enhanced financial control for consumers, more predictive credit scores, and better financial products.
Are you listening, Mr. Cordray?
Odysseas Papadimitriou is the founder and CEO of Card Hub, a leading website for credit card offers, news and deals.