Empowering consumers through distributed credit chains
It has been almost a year since the massive Equifax breach, where over 150 million consumers had their personal data compromised when hackers accessed the credit record company’s systems. The data stolen included sensitive information like social security numbers, dates of birth and full names of mostly American consumers, and a small number of individuals in the United Kingdom and Canada. What’s worse, Equifax first knew of the breach in about July 2017, but did not begin informing affected consumers until September 2017. This vulnerability to identity theft and the ensuing corporate opacity disempowers consumers.
When it comes to your credit rating, you have very little control over what transactions are put through in your name, nor do you have clear visibility on how the rating is computed. What if there was a better way? Blockchain technology enables a better approach to collecting, accessing and using credit reporting information. Leveraging the key features of blockchain we can move to a Distributed Credit Chain (DCC). This is a decentralised ecosystem in which all participants, credit providers and borrowers, can access and add credit records and transactions from anywhere in the world and in real time.
Today, the global credit reporting industry is dominated by the so called “Big Three” of Equifax, Experian and TransUnion. Together, these companies aggregate data and control the credit rating for over 800 million customers globally. Whenever an individual applies for credit whether it is a bank loan, a credit card, or post paid services such as a mobile phone contract, the credit provider purchases your credit record from one of these credit reporting companies. The information contained in your credit record is used to make a lending decision, and the determination that a particular credit provider makes, i.e. whether or not they approve your application, is added to your credit record.
Below I outline three reasons why a Distributed Credit Chain (DCC) is the way to go to increase access to credit and empower consumers in how their data is used and managed in the credit rating process.
1. Maximise privacy, minimise fraud
Companies like Equifax have sizeable records on hundreds of millions of users making them significant targets for hackers. With a decentralised system, no one player holds masses of information, thus, even if one system is hacked, it does not compromise the entire ecosystem. With DCC, there is a real time log of transactions, such that if your identity has been stolen, you will know sooner rather than later because you will have visibility on all the credit applications made using your profile as they happen. Today, it can be weeks or months before you know if you have been the victim of identity theft.
2. Prevent incomplete or wrongful credit reporting
A friend of mine who is a product manager in the tech sector moved from London to San Francisco and had a tough time getting a mobile phone contract in her new city. This is because, having lived her entire life in the United Kingdom, she did not have a sufficient credit record in the United States to get a phone line of her own. Her work around was to borrow a friend’s spare mobile phone for three months while she built a credit history of her own in the United States, her access to basic credit was significantly curtailed because American lenders were not able to access her complete records.
While companies like Equifax are global players, and yet international data protection and banking regulations prohibit the transmutation of consumer records across countries. This means, if you are an individual who moves countries or a company seeking to raise capital, your access to credit is geographically constrained. If you think about the dynamics of globalisation and how integrated the world is today, this is an artificial constraint. Because blockchain is a distributed ledger, credit providers and borrowers can interact from anywhere in the world and transaction data is available to every member of the ecosystem regardless of their location.
3. Break the monopoly of large financial institutions
Block chain enables distributed banking by supporting an ecosystem of interlinked buy separate financial. No one monolithic entity holds all the data in a blockchain system and all players can see complete transaction records. Presently, each of the Big Three and other credit bureaus are separate privately held companies with disparate closed systems. They do not share data and have different methodologies for computing individual credit scores. Additionally, as an individual consumer you do not have direct, real time access to your own information. Blockchain technology enables an effective disintermediation of credit scoring that results in lower transaction costs to businesses and individuals alike.
Disintermediation does not mean chaos, on the contrary, business standards can still be set and maintained by public chains like DCC. Participants commit to abiding by the rules and they are incentivised to keep using the ecosystem because they receive a share of the earnings.
Block chain applications in financial services are truly exciting. They present an opportunity to provide debt registration, credit reporting and other financial services globally in a more convenient and customer centric way. Decentralised credit chains also minimise fraud and the risk of identity theft. In the current framework, individual job seekers, credit applicants and prospective homeowners are left at the mercy of a flawed model in the credit reporting industry. A critical first step would be to give consumers visibility, in real time, on how their data is collected and used. Distributed credit chains address this.
*I am an MLG contributor, writing educational content on the blockchain industry. Opinions expressed are entirely my own and in no way an endorsement of the companies or products referenced.