What does the FCA credit information interim report mean for fintechs?

The FCA wants to see a higher quality of credit information and is taking steps to improve the sector. In light of this, the FCA recently published the long-awaited interim findings from its credit information market study. 

But is the report addressing the key challenges originally identified? What’s fallen through the cracks so far? And is the future of bureau data as transparent as it could be? 

The FCA are inviting comments in order to help guide the current thinking in terms of the issues and suggested solutions.

In this article, we weigh-in on the findings from the interim report, and share our views. 

Head’s up: We have strong views on this. 

But first, a quick recap.👇

What is the credit information market study?

The FCA’s credit information market study is an initiative first launched in 2019 after concerns were identified about the coverage and quality of credit information. The report is part of the FCA’s strategy to promote competition and positive change in the UK’s world leading financial services industry. 

The interim report should be of great interest to new and existing credit reference agencies, credit information service providers, and lenders and credit providers.

The Woolard Review: December 2021.

We first talked about the FCAs credit information review back in December 2021. 

In summary, our view was:

• Through our experience, we were aware of a number of issues linked to a lack of transparency when it comes to credit data pricing, quality, and accuracy.

• Fintechs have been locked into contracts that are expensive to move from and some data bureaux have taken advantage of it.

• Some fintechs are being charged vastly different rates for the same footprint of services from the same Bureau.

• The difference in onboarding costs, including soft or quotation searches, is giving one competitor an unfair advantage over another, enabling more extensive marketing and lead generation from the aggregators. This could end up with consumers not being offered a competitive product in some of the channels. 

As you can see, there have been significant differences in how credit information is bought, shared, used, and regulated – and a clear path to remedying this needs to be drawn.

Enter the 2022 credit information market study interim report.👇 

The FCAs key findings: November 2022

In short, the FCA says that the credit information sector needs to work better to support retail lending and to make sure credit is offered where appropriate and at a fair price. 

While there are a few ways the sector works well, there are also aspects that need urgent attention and improvement.

Here are the top three most pressing issues, we believe require attention:

1. Data buying and negotiation

💼The FCA says: Credit reference agencies (or bureaux) offer a range of products and services to meet client needs, and many fintechs that use credit information appear to be sophisticated buyers able to negotiate with agencies. 

🟣Our view: There is a significant lack of bureau data transparency and although buyers are sophisticated, the fact is, they don’t know they are being overcharged compared to others. 

Likewise, key differences in CRA products make it very complicated to make comparisons with competitors or with other customers – unless you have the specialist knowledge. 

This has led to clear discrepancies:

• Over 80% of credit providers are overcharged for their spend footprint. 

• Up to 90% of high spend and long-term customers (either due to high cost of change or being unaware of the inflated pricing) are being overcharged by up to 300% compared to others in the same vertical that are spending 10 times less. 

• Value of spend is not driving price and some finance providers cannot compete with other peers that have standard or preferential pricing. 

• On boarding costs are so varied some cannot utilise marketing channels widely like aggregators, due to the costs, whilst others are getting a fairer share. In addition, we believe soft searches and lead generation need to be included in the review.

All the above translates into the consumer not being offered a full range of competitive financial products due to inflated pricing for Bureau customers.

What’s more, some customers are not receiving usage statements for products utilised. This means they cannot tie up usage with spend. And as purchasing teams are not always aligned to risk operations (or have the knowledge to question) –  this all means the supplier manager is likely to be happy to keep overcharging, and be paid commission on revenue growth.

But how exactly do the bureaus differ when it comes to pricing? 

2. Data pricing discrepancies

💼The FCA says: The three large CRAs compete on data quality and price and are typically involved in the same tender processes. Larger lenders are able to exercise some bargaining power given their volume of business, volume of data they contribute, and through using multiple CRAs (to strengthen the perception of switching to another CRA). Many CIUs we spoke to said they recently felt able to secure price freezes or reductions from CRAs. 

🟣Our view: Whilst CIU’s (credit information users) may feel able to secure freezes or reductions, in reality this is not happening. They are also unaware of the overcharging, including being levied RPI increases unnecessarily…cost and time to change is the biggest barrier for a CIU and the majority do not have the ability to go multi Bureau unless they are utilising an agnostic platform. 

Interestingly, some of the Bureaux are aware of this cost of change and may well take advantage of it. If reductions are given this is usually a sign that the customer is being overcharged, but only a small portion of this overcharge is usually reduced if the customer does not have evidence on the extent of the price inflation.

Pause for thought: It’s worth taking a pause here to consider if you are with the right Bureau? And how you might move to a multi bureau position without increasing costs – some Bureaux will put pricing up if volumes drop to avoid losing primary supplier status. More to come on this. 

Asides from pricing differences, the FCA also identified significant differences in the underlying data.

3. Significant differences in the underlying data 

💼The FCA says: There are significant differences in the credit information held on individuals across the three large credit reference agencies. This includes the number of defaults and number of accounts in arrears. For example, the three CRAs only hold consistent information on the number of defaults for around 30% of matched individuals who have had a default recorded with at least 1 CRA. Given the significance of defaults to a lender, this is highly likely to affect outcomes for individual consumers.

🟣Our view: In a decent sample size taken on consumers …the bureau providers Experian, Equifax, and TransUnion, there are 14% of the cases where only one of the Bureaux has the relevant default data and only 66% of cases where only 2 out of the 3 Bureaux agree on the data.

In light of all this, how does the credit industry move forward and what key areas need more thought and discussion?

Moving forwards: Key credit data issues 

We believe the findings from the FCA’s credit information report leads to many areas of discussion:

1. There is a lack of consistency in the data, so you may be turning away business unnecessarily or taking on risk unnecessarily.

2. The importance of doing retros.

3. Should you have a Multi Bureau supplier strategy? 

4. How can you optimise your supplier if you can’t multi-bureau? And how do you get there?

5. What waterfall of data and suppliers should you use?

6. How can you negotiate Multi Bureau pricing without increasing costs?

Have your say 

It’s quite a tight timeframe to respond, but stakeholder feedback has been requested by 24 February 2023 on the interim findings and potential measures to:

• Reform industry governance arrangements and agree a set of priorities for the industry over the next three years;

• Improve the quality and coverage of credit information;

• Enable greater competition and innovation through potential changes to data access arrangements and more timely reporting of key metrics; and

• Support consumers to access and dispute credit information.

The remedies are designed to work together, but the FCA says it needs to consider the importance of each one and the extent of the interdependencies between them. 

It also recognises that the final approach will need to be considered in the context of developments such as: the challenging lending environment; the new Consumer Duty; and the Financial Services and Markets Bill.

A final report is expected in Q3 of 2023. This will set out the FCA’s final findings and report on progress made towards the revised governance arrangements.