CCR – The Reality One Year On
MARCH MARKED 12 months since Comprehensive Credit Reporting (CCR) became a reality in Australia. Over the past year, we’ve seen the market begin to change and our predictions about CCR put to the test. Veda is in a unique position to report back on the overall industry changes brought about by CCR. In the August 2014 edition of AB+F, we theorised about who would be the first to participate and how they would approach their implementation. Now we can test those theories against what has actually transpired in Australia.
Current participation We expected early movers to primarily be international banks and monoline businesses that offer only one type of financial product, such as credit cards or auto loans. Now at the 12 month mark, we are beginning to see lenders’ strategies for CCR emerge. In Australia, 15 brand name lenders are pressing ahead with CCR implementation and, as anticipated, this group is made up mainly of internationals and monolines. These lenders represent close to 30 per cent of credit accounts in the industry. Contrary to our previous view, one of the big four banks has already expressed interest in sharing positive data.
Current implementation Due to the time, complexity and cost of updating deeply integrated operating systems, we envisaged business would reap the early benefits of CCR through account management practices rather than through originations. In reality, participants are investing heavily in technology on many fronts. Their first focus has been on CCR data extraction and data supply – a process that is brand new for the industry, is a common requirement for all and is a precursor to any benefits. Their second focus is on CCR data consumption. We have seen that each lender has a unique consumption strategy based on its product set, technology capabilities and credit policies. This means that each lender is considering the business case for CCR with a different perspective, looking at both originations and account management. We have also observed an unprecedented level of new market entrants and movement from innovative lenders to offer consumers better deals. SocietyOne and Citibank have both started using credit scores to put risk-based pricing offers to the market for personal loans. These products empower customers with higher risk scores to negotiate better rates.
Future participation However, it is still early days and Australia has a long way to go to reach the standards of international markets. CCR is still evolving here and in the near future, we expect early movers to finalise their data supply projects and start realising some operational and business benefits. These benefits are likely to be seen in reduced bad debts, in growth opportunities as more applicants are approved and in process improvements, such as increasingly automated decisions based on more complete data sets. We expect Australia to track the experience in the New Zealand market where CCR has been permissible since 2012. In New Zealand, initial observations show CCR decision changes resulted in more people being approved than declined. A subset of larger players may end up being late contributors, but we believe every major lender, representing around 70 per cent of accounts, will transition to CCR eventually. Those who lag behind face potential losses through lending to higher risk customers and decreased market share due to adverse customer selection. Overall, we expect the transition to take the best part of the next three years. The Financial System Inquiry report, released last December, suggested a review of the credit reporting system in 2017. If not enough lenders are participating voluntarily, the report recommends considering mandating participation or offering regulatory incentives. At this point, we would be surprised if additional regulation is required given the benefits of voluntary participation.
- Early movers represent close to 30 per cent of the market.
- 70 per cent participation expected over time
- Industry transition will take another tow to three eyars.
- CCR decision changes result in more approvals
- Financial System Inquiry checkpoint scheduled for 2017.
Ongoing education One issue the industry will face as the transition continues is the public’s lack of knowledge about CCR and credit reports in general. Despite initiatives from lenders like SocietyOne and Citibank and efforts by the Australian Retail Credit Association (ARCA) to increase financial literacy through its CreditSmart campaign, there is still a significant lack of consumer education on how CCR affects each individual and how consumers can leverage the system to get a better deal. The Australian market is well behind international markets in this respect. Average Australians still don’t fully understand credit scores, let alone the effect they could have on their cost of credit. There is no denying we have an awareness vacuum that needs to be addressed by both government and industry. The transition to CCR is significant and will require the reworking of lenders’ existing technology, preparation of data to industry standards and a shake-up of internal processes and policies. Veda is working closely with customers across the industry to customise and smooth their CCR implementation. The next 12 months are primed to be a period of industry transition, with more and more lenders participating. As financial institutions get more comfortable with CCR, gain a better understanding of the wealth of data they can now access and finalise their data supply projects, operational and business benefits will become increasingly clear.