Ever wondered how banks decide whether to approve your loan? If a friend asked to borrow money, you might want to know how likely they are to pay you back. You’d want to know if they also borrowed money off someone else and failed to pay it back.
Banks find this out by checking a ‘credit registry’ - a database of mortgages, loans, credit card and overdrafts, and how good people are at repaying them. This is a fine idea in practice but they often don’t work well. And that means consumers are denied loans they should be offered, or offered loans they can’t repay.
A fragmented market
In many countries your credit score decides whether you can take out a loan for a big project, a mortgage to buy a house or even buy a high-ticket item on instalments. Building a positive credit score is like telling financial providers you handle your money well. It allows you to participate in the financial system, rather than being excluded.
Credit or debt registries come in different forms and shapes. Some are managed as private, for-profit businesses, others are run by governments. Some countries only have positive credit registries (where all outstanding loans are reported), while others only have negative databases where overdue debts are registered. And sometimes, they don’t exist at all.
Regardless of how they are run, they are often unfit for purpose and slow to keep pace with new and better forms of credit - such as Klarna’s interest-free BNPL.
Stable markets and financial inclusion
But there’s more. Effective credit reporting institutions can support financial stability and solve excessive indebtedness, creating ripple effects for the rest of society.
👉Consumers get better terms and rates on their loan thanks to increased competition.
👉Credit providers benefit from more information to make better lending decisions.
👉Regulators get access to a centralised source of national credit trends.
👉Retailers get more customers that pay on time.
That’s why governments around the world (in the US, the UK, Europe or Sweden) are starting to ask credit providers to report loan data into centralised debt registries - the problem is these databases are in need of reforms.
Make it public!
We believe credit registries play a vital role in a well-functioning credit market, but the system is based on old practices and technology such as inconsistent reporting approaches, absence of real-time data or no distinction between types of credit.
Governments should accelerate the development of public and centralised debt registries to facilitate more complete credit information sharing across all credit products (look at Norway’s 8% debt level drop since the introduction of their central debt registry in 2019), and not rely on private organisations with commercial motivations.
How?
- Push for public and centralised credit registries working in the consumers’ best interest.
- Make sure data is real time to reflect a consumer’s actual financial profile.
- Develop industry guidelines, standardised reporting frameworks and seamless integration for all credit products.
- Establish minimum thresholds for loan amounts to be reported to ensure credit information is relevant and doesn’t get cluttered.
💡As to BNPL, reforms should also allow short-term interest-free credit to be accurately accounted for so that consumers don’t get negatively impacted. Using BNPL responsibly and paying it off on time, or even early, should be reflected in a consumers’ credit score (which we’ve started doing in the UK).
Finally, if we’re actually serious about solving indebtedness, governments should adopt new sources of data facilitated by Open Banking or Open Finance initiatives as well. These will provide lenders with real-time and dynamic credit information, far more accurate than any registry.
Until then, we need to promote the development of public credit registries to expose the damage done by irresponsible lenders and ensure you’re empowered and get access to fair credit options.