Analytics over Collection - Our Response to the FCA’s Credit Information Market Study Interim Report
- The CIMS Interim Report invited debate over how to improve consumer outcomes in the credit information market. We argue four things:
- Competition in the market should be over the analysis of credit data, not the quality and quantity of data.
- Increase representation of challenger CRAs, to ensure regulation doesn’t favour incumbent CRAs.
- Commoditise credit file data, to shift the competition towards data analytics. This should improve the price of data and integration for challenger CRAs.
- There is power to alternative data in creating innovation and value. This improves the market for the consumer.
What is CIMS
The Credit Information Market Study (CIMS) Interim Report was released by the Financial Conduct Authority (FCA) at the end of 2022. Within it, the FCA outlined the dynamics of the credit information market (CIM), including stakeholders of credit rating agencies (CRAs), credit information users (CIUs), and credit information service providers (CISPs).
The findings invoke debate on what the next steps to improving the market should be. The FCA gives some praise to the UK CIM:
- In the UK, there is a “relatively advanced credit information sector”, in both the depth and coverage of credit information.
- The market works particularly well, in that incumbent CRAs meet CIUs needs and are investing in cloud-based services. Furthermore, consumers are largely aware of credit information and credit scores’ existence.
- There is innovation from smaller challenger CRAs who utilise alternative data, e.g., Open Banking transaction data.
But, they also acknowledge the shortcomings in the market:
- The market is highly concentrated, and there are high barriers to entry.
- Incumbent CRAs can be slow and difficult to switch between.
- There are market failures in the over-supply or limitation of credit. This happens in cases where individuals’ credit risk is incorrectly stated.
- Credit reporting is slow and outdated.
- Consumer’s have low understanding of credit information, despite awareness.
At Fuse, we are a credit information user (CIU), a credit information service provider (CISP) via the Pave app, and a challenger CRA. It comes as little surprise then that we care about the findings of this report.
Our Response: Shifting Competition away from Data Ownership and towards Data Analytics
We welcome the direction the FCA is taking. In CIMS and the Consumer Duty, the FCA are focussed on improving outcomes for consumers.
Our thesis is:
Competition in the CIM should be over the analytics provided from credit data, and not over the mere quality and quantity of such data
In order to achieve this, we identified three levers through which competition could improve:
- Increasing the representation of challenger CRAs, in the market and to the FCA. This will dilute the market share of the major CRAs and guide regulation.
- Commoditising credit information data. By doing this, we remove data collection as a method for competition.
- Encouraging further innovation via alternative data. This pushes for greater competition over data analytics.
Increasing representation of challenger CRAs
The market is highly concentrated, with three dominant CRAs - Experian, Equifax, and Transunion. They hold significant benefits from this, through economies of scale and data network effects.
This makes the situation difficult for challenger CRAs. First, challenger CRAs will struggle to have access to the same amount of data that the major CRAs have. This means their offering cannot compete on coverage. Second, it makes challenger CRA voices less likely to be heard in regulation conversations, meaning change can be slower.
The current status of challenger CRAs must be improved. A lack of representation in the market may lead to lower innovation, in particular in the applications of credit file data. This is what will lead to developments in the CIM to help consumers most. The FCA must give challenger CRAs louder voices, to guide regulation towards wider access to credit information data, and discourage competition over mere ownership of data.
Commoditising credit information data
The competition between major CRAs is currently fought on coverage of data (quantity), ‘form’ of data (how does it reach CIUs), and ease of integration. The CIMS pushed in the right direction on all three of these. It suggested coverage and form of data should be universal, and said integration with major CRAs can be slow.
Our response is to push this even further by commoditising credit information data. Commoditisation would see all data becoming the exact same format, and major CRAs having the same coverage. CRAs would no longer be able to compete on data ownership.
Commoditising credit information data has many positive knock-on effects
Commoditising credit information data has many positive knock-on effects, and a welcome negative. The first effect is that it encourages major CRAs to improve on one of their existing factors of competition - ease of integration. This may need less investment, so there ought to be improvements on this quickly. This benefits challenger CRAs and CIUs by removing barriers to switching providers. It also allows firms with shorter runways to access data earlier, encouraging innovation.
The second positive effect could be cheaper access to credit data for challenger CRAs. Price is another area the major CRAs could compete upon if the data is the same across all three. Hence, the price of data will likely fall (assuming no collaboration), granting better access for challenger CRAs.
Third, there will be an increase in innovation into credit data analytics. This will cause the biggest shift towards good outcomes for consumers. In the CIM we shouldn’t be competing over the data itself, but what we are doing with this data, and the benefits this brings to consumers. Commoditising the data will be a step in the right direction, here.
The negative effect? As a CIU and challenger CRA, we compete against the major CRAs. We are inviting the largest players in the market to invest in credit analytics and compete more directly with us at Fuse! However, we invite this challenge and competition. We believe wholeheartedly in our mission to bring about financial equality and improve outcomes for consumers. Even if it might come at our own detriment, we welcome all innovation in the credit information space.
Going Further: The Power of Alternative Data
It is no secret that alternative data, such as Open Banking transaction data, is a tool with a lot of potential in the credit space. By using transaction data, by itself or to supplement credit file data, CIUs and challenger CRAs have been able to improve credit offerings. Examples include improved risk management, better credit decisioning, and better background checks. At Fuse, we have been able to build credit models that outperform traditional credit file based models.
To utilise this potential, we need to ensure that there is wide access to such data. Open Banking is one example which is already quite accessible. Other emerging technologies, such as CATO (Current Account Turnover), must be accessible to enable innovation and competition.
If alternative data is only available to the major CRAs, then this will only solidify their position in the market further. In turn, this will hinder innovation and silence the voices of challenger CRAs and CIUs. The FCA should encourage new actors to innovate in this space, by giving as wide as possible access to new data. This may need greater representation in regulatory conversations for challenger CRAs. It will also include improving access to all data, as discussed above.
A bold suggestion that we support in principle would be an “Open Credit” system. Where Open Banking provides data on transactions by connecting to a customer’s bank account(s), so-called Open Credit could provide data on a customer’s credit history. This may further encourage innovation, and remove the incumbent CRAs’ competitive edge of quantity and quality of data. It will also help consumers take control of their data, which we may say is rightfully theirs.