Michael Turner For The Straits Times

Credit bureau scene could do with more competition

-- ST ILLUSTRATION: MIEL
-- ST ILLUSTRATION: MIEL

New regulations are being proposed for better oversight of Singapore's credit bureaus. But the fundamental problem of an unequal playing field in the industry has yet to be addressed.

Credit bureaus, which compile data on borrowers to determine if they are creditworthy, have been in the news lately with a new licensing scheme proposed by the Monetary Authority of Singapore (MAS).

The country's financial regulator unveiled plans in August to introduce a Credit Bureau Act, to strengthen oversight of such agencies.

In theory, the Act could pave the way for new players to join the market. But that's provided steps are taken to address the virtual monopoly that exists in the credit bureau industry and to encourage more real competition.

Credit bureaus were introduced to Singapore in 2002, when all major lenders were required to provide their lending information to the newly set up Credit Bureau Singapore (CBS).

In 2007 a second bureau, DP Credit Bureau (DPCB), was allowed to operate - but with one major difference. Lenders were still required to supply data to CBS but this requirement was not extended to DPCB. Until today, lenders can choose if they want to furnish data to DPCB.

In addition, CBS is partly owned by the representative body of the lenders themselves - the Association of Banks in Singapore - making it what the industry calls a "non-neutral" credit bureau. Global experience suggests that banks have a preference for their own bureau.

So while competition can be said to exist in the Singapore credit bureau market, the companies do not compete on an equal basis.

Credit bureaus are important to an economy as they provide tangible benefits such as better access to credit, lower rates of default, and reduced economic risk. Because credit bureaus furnish banks with information to identify "good" credit risks, they also contribute to keeping interest rates low since portfolios with lower-risk loans can enjoy lower interest rates.

But by denying comprehensive data to all licensed credit bureaus, Singapore runs the risk of stifling competition and distorting the information-sharing market.

This could give rise to a number of problems. CBS' dominant position in the collection and exchange of banking data, and its guaranteed acquisition of data from the dominant lenders, could lead to complacency, lower innovation and less incentive for it to secure new data from different industry sectors.

For banks, this might result in reduced access to the many innovative products and analytical tools offered by other major credit reference companies around the world. For instance, some use both bank and non-bank data to provide a more complete picture of an individual's total credit exposure.

Also, recent policy changes in Singapore now require lenders to do more bureau checks when issuing unsecured credit, such as credit cards. This will not only reduce the risk of consumers getting into debt troubles, but also represent increased costs for the banks. As only one bureau has comprehensive data, there is no competitive pressure to keep the costs down - an arrangement that hardly serves the banks well.

For consumers, it could prove difficult to get a second opinion on their credit status if only one bureau has comprehensive information on their borrowing data.

Then there is the operational risk of having only one bureau with comprehensive data. If something were to impact on a credit bureau's ability to provide credit checks, then lending decisions would grind to a halt.

An analogy can be made with having just one public transport provider in a city - if it fails to perform then the public is left stranded. The financial system in Singapore would do well to have an alternative provider in place.

The optimal situation for Singapore's credit bureau market would be a homogeneous oligopoly, with two or more bureaus competing on a level playing field.

Each should have similar data and be forced to compete with one another on price, data quality, value-added services, product innovation and access to payment data from non-financial sources such as retailers, utility companies and telcos.

If financial institutions are required to furnish lending data, then they should do so in a competitively neutral way - to all the credit bureaus licensed by MAS - so as not to distort the market.

In Mexico, where two credit bureaus are majority-owned by large creditors, data is fragmented and very little competition exists in value-added services, the competition authority recently issued recommendations that banks are under a legal obligation to fully report credit payment data to all licensed credit bureaus.

The Mexican authority argued that this is the best way to promote competition upstream in value-added services and downstream among lenders offering consumer financial services.

The Asian Bankers Association's position paper on credit bureaus supports this approach, calling for the introduction of measures to promote full-file and comprehensive reporting to private credit bureaus.

It is the dynamic nature of the information-sharing market that makes competition so important.

Modern banking is increasingly based on fast-evolving information technology, such as the use of electronic payments, mobile banking and other innovations. Competition will compel credit bureaus to respond to these technological changes with innovation and value-added services.

Singapore, like all nations, has consumers and entrepreneurs who are currently under-served by mainstream finance. In America and other advanced countries, innovations in information sharing are enabling improved and increased distribution of capital to under-served customers such as small and medium-sized enterprises and entrepreneurs.

For these reasons, the establishment of a non-distorted, competitive and dynamic information- sharing market has great long-term value for Singapore and will enhance its economic position in the region.

The writer is chief executive officer and president of the Policy and Economic Research Council (Perc), a United States-based non-profit policy research centre with expertise in finance and credit information sharing.

stopinion@sph.com.sg