April 20, 2018

In part 1, I talked about how the Senate Banking Bill will break up the FICO monopoly over the government mortgage market. Part 2 discussed the size of the credit scoring/financial monitoring market, and the perverse incentives of the credit scoring models.

Today, I’ll start to lay out the broader landscape for financial data collection, including the trade-offs we consumers are making in the current model. This ended up being longer than expected, so next issue we’ll pick up on what a new model could look like (if you aren’t happy with the current model described below).

What’s debt got to do, got to do with it?
As I mentioned last week, if we question the fundamental premise of a credit score, we are really saying we can measure a person’s level of financial responsibility by their ability to accumulate debt and pledge their future cash flow to someone else. Maybe it’s just me, but there may be a better way to assess financial responsibility.

While some lenders (like mortgage lenders who want to see 2 years of employment at the same firm) do some deeper underwriting, the vast majority of credit products such as auto loans and credit cards don’t look this deeply into your finances. They just “check the score”. This approach is what can harm or disadvantage the 60 million adults who don’t want or don’t have a credit history. With the proliferation of data and ease of access, there is opportunity for startups to connect disparate data sources to pull together non-credit financial profiles/scores.

Who Are You?
Image
The current credit reporting model relies on the lenders to report the data to each credit bureau, which can be somewhat inconsistent and inaccurate, but easy for the consumer.

Let’s call this model the legacy model. This model can be replicated with non-credit financial data. The benefit of this model is how quickly it could reach scale. It has never been easier to collect consumer data, and we now have more data to ingest and machine learning to help draw insights from the massive amounts of data available.

One hurdle with the legacy model is establishing the incentive model for data providers. With a credit report, lenders are incentivized to contribute data and play nice in the system so that the industry as a whole can be stronger (though some lenders may not fully report data for competitive reasons and scammy lenders just don’t care). After solving the incentive structure or paying enough in fees to buy data, and it would be simple to create a non-credit profile. You could track and verify someone’s salary, employment status, property tax records, utility payments, etc.

However, as I hear myself describing a massive database that collects and tracks your financial data, it sounds scary – and it is!  This is why there was so much legitimate concern over the Equifax data breach last year. Equifax collects information on most of your financial life, despite the fact that you never signed up or opted in, and you have to pay them money to freeze your own personal data (here’s why and how to freeze your credit report if you want to limit the damage).

The vast majority of consumers have no idea how much of their personal information is shared and sold without their knowledge. For example, about 33% of all employees in the US have their employment and salary records shared each week with Equifax through its Workforce Solutions division. Data contributors include 75% of Fortune 500 companies such as Facebook, Amazon, Microsoft, and Wal-mart, 85% of the federal government workforce, and thousands of small businesses nationwide. These companies actually pay Equifax to collect, organize, and re-sell their employee’s income information and work history.

This only scratches the surface of what these firms collect, and when it is revealed that these companies know exactly who you are, how much you make, and other personal data, consumers freak out.

This is fine…

Image
But not really… like the recent privacy controversy at Facebook. Despite having neglected personal data privacy for Facebook’s entire corporate life, people were surprised when the Cambridge Analytica story hit the news. Zuckerberg got beat up in the press and in front of Congress for two days for Facebook’s collection and selling of data and the privacy concerns around that, but there was really no material impact to the company. The stock price dropped from $170 to $152 the following week, but is now back up to nearly $170 – essentially unchanged over the last month. No one cared enough.

The same thing happened with Equifax – more than once. The company’s CEO was summoned to Congress in 1970 after years of criticism regarding its collection of  “…facts, statistics, inaccuracies and rumors… about virtually every phase of a person’s life; his marital troubles, jobs, school history, childhood… and political activities.”

It got bad enough that Congress passed the Fair Credit Reporting Act in 1970. The company changed its name from Retail Credit to Equifax in 1975 and kept doing business. Here is a great Planet Money episode about Equifax scandals and the recent data breach. While some rough edges may have been smoothed out, the major credit bureaus still see consumers as the product and are not consumer friendly.

Ultimately, the scale and scope of our personal data collection seems overwhelming for consumers to fight, so most just don’t and are fine accepting the daily convenience they get in exchange for their personal data being on sale to the highest bidder. But there is another way for consumers to take back some control…

Next issue, I’ll discuss an alternative to this model, including some startups who are working on tangential models that could be applied to this non-credit financial score idea.