With its traditional business models under threat, it’s all change for Australia’s credit checking regime. However, as credit and risk consultant Andrew Tierney says, credit bureaux can thrive if they rethink pricing and embrace open banking
The Australian credit checking regime is facing a wake-up call.
Open banking and the availability of relatively cheap real-time statement data is set to test the viability of the business model that credit bureaux have used in Australia for some time.
Unlike in the US and UK, in Australia individual credit searches have always been pricey. While you may get away with paying as little as 50 cents in the US, or under a pound in the UK, the cost of a credit report here typically falls between the $3 and $6 price point. For the full cost of acquisition, this can rise to $10 to $15.
This situation has prevailed for many years but is unlikely to continue unchanged for much longer. The advent of open banking means that finance providers could soon get inexpensive statement data from a consumer’s bank account at the touch of a button. For the first time, real-time access to a borrower’s account is possible.
Unlike a credit score, which by its very nature is ‘historic’, open banking data is far less likely to present a false picture of someone’s financial status. It gives an up-to-the-minute insight into what is happening in a person’s life right now. It’s a very handy tool that is more fit for purpose when checking issues such as affordability and product suitability.
With opening banking, a finance provider can get a deep transactional history from the client’s bank, perform modelling around it, and then determine whether a loan product can be afforded. And because bank statements direct from the bank do not lie, fraud risks are reduced dramatically.
Furthermore, open banking data is relatively cheap. Depending on the technology provider used, its marginal cost could be close to zero.
So, it is little wonder that many are doing the maths and working out that they can reduce, or even remove, credit search costs by opting for open banking data. Not having a credit file may mean some cases are turned down, but given the comparatively high per-case cost of credit reports, overall savings are likely to be much greater.
And with everyone having to set aside ever larger amounts of money for compliance as a consequence of the royal commission, any area of saving is likely to be leapt upon by CEOs looking to boost return on investment.
The landscape is therefore changing fast for the big Australian credit bureaux, and they are going to have to adapt.
The signs are already there that the status quo is being challenged, with some of the bureaux having to cut costs and manage margins. The big Australian credit bureaux must be asking themselves how much longer their current client base will habitually continue to accept the existing terms of business.
My answer to this question is: not long, if the bureaux continue as they are.
However, there is a way through this challenging landscape if the credit bureaux are willing to adapt swiftly. It involves rethinking pricing and widening their customer appeal.
They should accept that the model that sees customers paying up to $15 for the cost of acquisition will soon be unviable. The availability of real-time transaction data basically means that the perceived value of credit reports has been diminished. The finance providers still paying for them at the current price are not going to be doing this forever. Those that take advantage of the cost reductions offered by open banking may come to be seen as having a competitive advantage.
For credit bureaux the key is to hold on to their existing customers by offering credit files for considerably less than they have been. Costs should be brought down to be more in line with US and UK models.
Bureaux data is still valuable, even in the age of open banking. A credit report, in addition to all the transaction information obtained via open banking, provides a much more comprehensive picture of a prospect. So why not price it right so that it can be used alongside open banking?
If this happens, it is more likely to be used more routinely and in greater volume than it is at the moment.
Although the income per search would come down, overall sales volume would be likely to rise.
The US and UK markets show that credit bureaux can thrive, despite the banking revolution. These markets have demonstrated that, by tapping established open banking and decisioning tech providers, who are ready and waiting to engage, and by changing their pricing, credit bureaux can continue to flourish.
Andrew Tierney
Credit and risk consultant
