According to a new report from the Australian Retail Credit Association (ARCA), 62% of Australians fully support the country's newly introduced credit reporting system—which, for the first time, will consider positive credit behavior.
The favorable reaction by Australians is hardly surprising. The previous negative-only reporting system often punished consumers. It meant that their credit reports were assessed based only on bankruptcy or loan defaults, even if a blemish occurred many years ago or involved a minor sum of money. The policy was very much at odds with the Australian ethic of a “fair go”—an ethic I learned about late last year when I spoke at the ARCA conference.
The latest reforms change privacy legislation to give Australian lenders a more complete picture of a borrower's credit history and ability to pay. Additional information being reported will include an individual's credit account types, status, limits and up to 24 months of repayment history. This will allow lenders to make more informed decisions that reward good repayment behavior, and it will give consumers a better chance to improve their credit scores and borrowing prospects.
Australia is one of the last developed markets to transition to sharing positive credit data, and thus a lot can be learned from similar experiences in other countries. FICO has worked with clients in such transitioning markets, and we often see increases in lending activity and lower interest rates, creating greater market segmentation and fairer treatment of consumers. Some Australian analysts estimate a 27% increase in credit approvals and a fall in defaults by as much as 45%.
At the ARCA conference, I shared some of FICO’s experience on how to make the most of the positive credit data. More comprehensive reporting will provide:
- Increased predictive power and understanding of consumer behavior, leading to better credit decisions.
- More insight into new-to-bank customers and those with a limited relationship with the bank.
- Greater opportunity to engage customers, increase loyalty and encourage desired behaviors.
- More advanced use of credit bureau data in areas beyond traditional risk scores or knock-out rules.
I also recommended that attendees:
- Prepare for the evolution of data, including having a feedback loop to manage information and adapt as needed.
- Have a longer-term plan to get to a more detailed view of the customer’s credit profile such as outstanding debts (balances) on existing obligations.
The transition to comprehensive reporting will start in earnest in the middle of this year, and the volume of available data will grow in 2015 using data from between 20 and 30 companies.
Positive bureau records will lead to other benefits for Australians. Loan application times are likely to be reduced, along with the amount of paperwork needing to be filed. With more consumer information reliably captured at the credit reporting agencies, fraud is also likely to be reduced, which could help lower the cost of credit.
Small businesses will also be big winners from the reforms. The additional information that becomes available on business owners can turn them from credit “invisible” to credit worthy.
It will be interesting to see how the market changes in the coming years. Already some industry bodies are pushing for further changes to include positive reporting of telco and utility information. The advance of Australia’s fair lending sounds like an industry anthem that has only just begun.