Banks have been warned that high-credit quality customers will be encouraged to negotiate lower interest rates on their loans with borrowers able to access their credit scores for free from Tuesday on a new website backed by peer-to-peer lender SocietyOne.
The comprehensive credit reporting regime has increased the quality of information held by credit bureaus such as Veda Group, which charges for credit scores that have typically been sought by borrowers who have been rejected for credit. The launch of GetCreditScore.com.au will now allow borrowers to access their credit score at a point in time (after providing identity information) without having to pay a fee.
"There is a carrot here, in that becoming more aware about your credit score gives you more information, which is power," said Matt Symons, chief executive of SocietyOne. The P2P lender has been looking to attract high quality borrowers onto its internet-based matching platform, which reduces the risk for investors in the loans.
"The score arms a borrower to go and discover the price for a debt consolidation loan from SocietyOne or others using a risk-based pricing approach," he said. "They could also go to their bank and say 'Why am I paying this egregious interest rate when other lenders are offering me a better price?'"
With risk-based pricing of credit lying at the heart of the P2P lending business model, banks are fretting about the potential for P2P to cherry pick the highest quality risks out of their lending books. Increased transparency about credit scores is also an uncomfortable development for banks, which have not embraced comprehensive credit reporting given the threat of disintermediation.
Banks have been refusing to provide positive customer data into the comprehensive reporting regime (the legislation does not force them to do so), undermining its effectiveness.
SocietyOne asked the financial system inquiry being chaired by David Murray to recommend the federal government take further steps to reduce asymmetric credit data favouring the incumbents to enabling more competition. It suggested in a submission to the inquiry that positive reporting be made mandatory for all credit providers, and increasing the scope of the data collected.
Despite the arrival of comprehensive credit reporting in Australia, a culture of borrowers understanding how their credit history might impact on interest rates has failed to develop, in contrast with the United States where the "FICO score" is used widely.Information at fingertips
"Hopefully, there is a groundswell that can be built around people wanting access to their credit data, putting the same information available to banks at their finger tips, so the power shifts back to the consumer," Mr Symons said. "If other international precedents are followed here, it is inevitable SocietyOne will be joined by others launching risk-based pricing into consumer and SME [lending] markets, and as that starts to happen, people will have options not historically available to them." Westpac Banking Corporation holds a small equity stake in SocietyOne through its venture capital fund, Reinventure Group, which invested $5 million in the company in March.
GetCreditScore.com.au has been designed as a stand-alone entity from SocietyOne for regulatory reasons and will operate on its own platform with no data sharing with the P2P lender.
Mr Symons said he was not able to comment about recent reports in The Australian Financial Review that high-profile investors including Kerry Stokes, James Packer and Lachlan Murdoch are considering investing in SocietyOne. Nor would he put a number on the company's current loan book, but said it was "tracking well" and had "good momentum".
Publicly-listed Veda is supportive of the move towards creating greater awareness about credit scores and how they influence consumers' ability to both get credit and seek out the best deal.
GetCreditScore.com.au is using VedaScores. Veda offers comprehensive credit services including credit reports, tracking credit scores over time, analysis of how a score is determined, and alerts. Dun & Bradstreet also offers credit products.
