Open Banking is a Great Opportunity for the Credit Industry in France and Elsewhere
Credit Bureaus and the situation in France
A credit bureau is an agency that collects and researches individual credit information and provides it to creditors (in the form of credit reports and credit scores) so they can assess the credit risk linked to each application and take informed decisions.
Credit bureaus acquire their information from data providers, which can be creditors, debtors, debt collection agencies or offices with public records (court records, for example, are publicly available). Some of the leading credit bureaus in the UK but also in the USA include TransUnion, Equifax and Experian.
Credit bureaus are also called Consumer Reporting Agencies (in the USA) or Credit Reference Agencies (in the UK)
In France, credit bureaus don’t exist. The topic of introducing a positive credit reporting system is controversial mainly because of a strong conception of privacy in France. There was an initiative to introduce a ‘positive file’ as part of the 2014 French law on Consumer protection (Loi Hamon). However, the relevant sections were struck down by the Constitutional Council (Conseil Constitutionel) considering these sections as a disproportionate intrusion on the constitutional right of privacy which was not outweighed by benefits related to credit decision-making.
The Bank of France administers ‘negative’ credit reporting systems which contain information on whether individuals have made applications to the over-Indebtedness commissions or are in arrears on repayment. They do not include ‘positive’ information on loans taken out and payment records, a characteristic of the UK and the US credit bureaus. The 2010 Lagarde law was designed to protect consumers (in the context of consumer loans). It also made credit institutions more accountable for their practices and increased their obligations vis-à-vis consumers. For instance, lenders in France have to check the ‘negative file’ maintained by The Bank of France called FICP (Fichier national des Incidents de remboursement des Crédits aux Particuliers | The National Register of Household Credit Repayment Incidents) that allows lenders to verify if an individual who is applying for a loan is in default. Individuals are considered to be in default if:
- they missed two or more scheduled repayments, for loans repayable on a monthly basis
- they are more than 60 days late on a repayment for loans repayable at a frequency other than monthly
- they still owe at least 500 euro, 60 days after receiving notice to pay for loans not repayable in instalments (e.g. an overdraft)
- a credit institution has begun legal proceedings against the individuals regarding the loans
It’s possible to get your name removed from the FICP if:
- you make good on all late payments
- If the loan has matured, you should repay the full amount owed
In the absence of credit bureaus in France, financial institutions have to manage a bigger credit risk (compared with their counterparts in other countries such as the UK or the US), which means it’s more difficult to assess creditworthiness of individuals applying for loans. This leads these financial institutions to assess people’s creditworthiness based on socio-demographic information (salary, type of work contract, work seniority, age, etc.). This leads to the exclusion of many categories from access to credit such as students, people with fixed-term contracts, people who just started working even when they have a permanent contract, young people, etc.
Why is Open Banking a game changer (especially in France)
Open Banking is a banking practice that provides third-party financial service providers, with the user’s consent, open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of APIs. Open Banking adoption was accelerated by the application of the PSD2 (The Revised Payment Services Directive) starting in 2018.
In the absence of positive credit information about individuals or at least a centralized and shared file between lenders, Open Banking is the only way to access up-to-date banking information about individuals, which allows financial institutions to assess individuals’ affordability and creditworthiness based on up-to-date data.
Risk models that are based on socio-demographic information don’t perform well and lead to financial exclusion.
Even in countries where credit bureaus coverage is high, Open Banking data is very valuable and complementary to what lenders can get from credit bureaus.
Algoan is leading the way in Open Banking-based Credit Decisioning in France
Since its foundation in 2018, Algoan focuses on helping financial institutions better manage credit risk throughout the whole credit lifecycle and based on Open Banking data.
Algoan offers 2 products that help lenders in the process of assessing affordability and creditworthiness:
Algoan Credit Insights: a product that categorizes and enriches Open Banking raw transactional data. It is tailor-made for credit use cases and it gets financial institutions main information they need to assess a person’s financial situation. Algoan Credit Insights:
- Categorizes all banking transactions into meaningful categories (Income, expenses, rent, gambling, etc.) that matter in the process of assessing affordability
- Automatically calculates budget-related metrics such as the monthly regular income, the monthly regular expenses, the residual income, the debt-to-income ratio, etc.
- Automatically detects and calculates risk indicators related to a person’s payment and credit history as well as its financial behavior such as the overdraft, seizures on salary or bank accounts, recent credit line drawdown, gambling habits and many more.
More information about Algoan Credit Insights can be found here.
Algoan Score: a behavioral scoring model exclusively based on Open Banking data that helps lenders assess the creditworthiness of a person based on its financial behavior. This scoring is way more efficient than actual scoring models as it takes into consideration the financial behavior of a person and it leverages up-to-date transactional data directly retrieved from the person’s bank accounts. Algoan Score helps lenders better manage credit risk while expanding the customer base.
Algoan Score has a Gini coefficient above 72% compared to a Gini coefficient ranging between 20% and 45% for the socio-demographic credit score models used by financial institutions in France — Gini is the most popular metric used by the financial industry for evaluating the performance of credit score models.
More information about Algoan Score can be found here.
Algoan’s technology is also beneficial to consumers
Algoan’s technology makes access to loans more inclusive. Therefore, young people, students and workers who have fixed-term contracts are considered in the same way other people with a more robust socio-professional situation when it comes to granting loans. What matters and what is leveraged in Algoan’s Credit Decisioning solutions is the financial behavior of an individual. Sometimes:
- students can be more creditworthy than workers with 10 years of seniority, and
- workers with fixed-term contracts can also be more creditworthy than workers with permanent contracts and higher salaries.
Algoan’s solutions also help financial institutions with the prevention of cases of excessive household debt, and on the factors leading to over-indebtedness. Today, some over-indebted people are able to bypass the process and get additional loans, which doesn’t help in their situation. Algoan’s solutions are able to detect people who are over-indebted as it leverages up-to-date transactional data directly retrieved from individuals’ bank accounts, especially in the current context of COVID-19.
If you are interested in Open Banking Credit Decisioning, feel free to download our last White Paper entitled ‘Open Banking Credit Decisioning: An essential development for credit risk management’ here.
Interested in building the future of Credit Decisioning? Check out our open roles at Algoan.
