Future scenarios of the Credit Information Market

Researchers identified four plausible scenarios of how the credit information market might develop in five to ten years’ time, as well as five key drivers of change.

What is the issue?

Credit information is most commonly used by lenders to assess the financial standing of an individual and whether to lend them funds and on what terms. The credit information market is a diverse ecosystem of stakeholder groups that extends beyond the relationship of financial institutions with their customers.

In the UK, the Financial Conduct Authority (FCA) is a central node in this ecosystem, while the Information Commissioner’s Office (ICO) also plays a key role in regulating the sector in relation to people’s data privacy.

How did we help?

RAND Europe was commissioned by the Financial Conduct Authority to conduct a piece of forward-looking research to understand how the credit information market might evolve in the future. The project identified key drivers of change as well as four plausible scenarios of how the credit information market might develop in five to ten years’ time.

The study forms part of a wider credit information market study being undertaken by the FCA. Its findings will support the identification and prioritisation of relevant interventions for the FCA to mitigate emerging risks and exploit new opportunities.

What did we find?

Four possible future scenarios were identified for the credit information market:

1. Widening credit gap
   Innovation in new data sources and advanced analytics has slowed, meaning credit information has not continued to become cheaper and consumers have little or no information held about them at the Credit Reference Agencies (CRAs). As a result, they struggle to access credit on terms which reflect their risk.

2. Consumer clout
   Consumers are empowered to choose which data they share and with whom. Being a trusted brand is important for CRAs and lenders to access data, however concerns arise that big brands new to the market could enter and bring potentially valuable proprietary data from other sectors with them.

3. Big data driven
   CRAs have become more sophisticated in using Big Data and advanced analytics to provide insights on customers, however as credit is increasingly offered on personalised terms, some higher-risk individuals face significantly higher costs and fewer options for credit.

4. Lenders lead
   Lenders have taken the lead in using credit information from a wider range of sources, generating greater competition. However, confusion from consumers over how their data is collected has led to an increased focus within industry on developing a code for data collection and use, including factors like ethics and transparency.

Key lessons drawn from the scenarios:

• Competition in both the credit information and credit lending markets is a key driver in reducing the cost of credit to consumers.

• While the use of a wider variety of data can improve financial inclusion for those with ‘thin’ files, it could also lead to consumers being targeted with inappropriate products and increase the potential for errors.

• The use of better quality of data in decision making should ultimately benefit consumers as lenders are able to better price risk and offer consumers the most appropriate products.

• Consumers are more likely to benefit from better priced credit based on higher quality data in scenarios where they have a higher level of confidence in CRAs and lenders.

• Technology is a key enabler but also a potential barrier to development in the credit information market ecosystem.