Visa International - Korea Credit Bureau Study by yantingting


									   ACCE SS
   G ROW T H

                                       Visa International -
                                Korea Credit Bureau Study
                 Building a sustainable consumer finance industry
                              in Korea : The Role of Credit Bureaus
                                                          July 2004
    AC C E S S
   G ROW T H

                   The payments industry in this country has come a long way in a relatively short time. All of
                   us in the industry recognize that there are problems associated with the unsustainably rapid
                   rate of growth in recent years, but as we address these, we should not lose sight of some
                   very real achievements. Korea has established a substantial consumer and business-to-
                   business electronic payment system that embraces some of the most technologically
                   advanced features of any market in the world. In the same way that some of these solutions
                   are being adopted in other markets, so we have to continue to learn from other countries
                   how best to manage the future development of our own industry.

                   This report is a contribution by Visa to one of the most pressing challenges facing our
                   industry - the adoption of an efficient credit bureau industry that can serve the interests
                   of all parties in the system. Credit bureaus lie at the heart of sound lending practices and
                   benefit not just lenders but also borrowers offering wider and diversified access to broader
                   segments of consumers. Furthermore, the growth of the overall economy depends largely
                   on lenders' abilities to sustain financing while managing risks efficiently and effectively. As
                   the report details, there is no one solution that fits all markets. Visa's experience in working
                   with members, merchants, regulators and cardholders in more than 150 markets teaches
                   us that while it is immensely valuable to transfer knowledge between markets, solutions
                   have to recognize particular local circumstances.

                   Encouragingly, we have seen real progress in recent months as all parties in the industry
                   have worked together to address close to four million credit delinquent consumers and
                   large credit losses. There is still much to be done, but Visa offers this report as a contribution
                   to the urgent and important discussions that must be had to define and resolve the issues
                   and legitimate concerns of all interested parties in quickly establishing a strong credit
                   bureau industry.

                   We look forward to playing our full part in the discussions that lie ahead.

                   YC Kim
                   Country Manager Korea
                   Visa International

                   If you have any feedback on this publication please email

                   Visa International
                   Oriental Chemical Building 19F
                   50, Sokong-Dong, Chung-ku
                   Seoul, Korea 100-070
    AC C E S S
   G ROW T H

                   Contents                                              1|Introduction
                    1. Introduction                                 1    Since the country’s 1997-98 currency crisis, Korea’s economy has experienced a significant
                                                                         influx of both influential business practices and capital. This has resulted in a return to
                    2. Executive summary                            3    strong GDP growth.
                    3. The Korean market                            7
                                                                         A slowdown in global demand in 2000 began to place pressure on Korea’s export-driven
                    4. The Role of credit risk management           16   growth and in response, Korea looked to alternative means to ensure growth momentum.
                                                                         Increasing consumer credit, in particular unsecured, card-based credit emerged as a primary
                    5. Selected country experiences                 19   policy option. Both the government and finance industry pursued strategies to grow consumer
                    6. Recent experiences in establishing bureaus   23   debt aggressively.

                    7. Implications for Korea                       26   However, as consumer credit trended quickly upward, there was a marked increase in
                                                                         delinquent loans. The industry reached a critical point in 2003 as delinquency increased
                    8. Direction for Korea                          29   and consumer income fell. LG Card had to seek capital bailouts from parent companies,
                    9. Transition considerations                    33   creditors and the government. Korean regulators reported that the number of consumers
                                                                         classified as credit delinquent1 had risen to 3.7 million individuals – an all-time high.
                   10. Benefits of change                           41
                                                                         The drivers of Korea’s recent credit performance are interdependent and include:
                   11. Appendix                                     43
                                                                            • Significant industry-focus on the aggressive growth of consumer debt
                      Appendix A - International markets            43
                                                                            • Weak credit risk management practices
                      Appendix B - Selected country experiences     45
                                                                            • The absence of credit bureau services
                      Appendix C - Glossary                         52
                                                                            • Ineffective management of cross-institution limits and exposures due to limited
                      Appendix D - List of references               53        information sharing
                                                                            • High growth in unsecured consumer debt as a percentage of consumer income,
                                                                              combined with limited consumer experience in debt management
                                                                            • Government promotion of consumer spending on cards through tax incentives 2
                                                                            • A propensity to issue charge cards over credit cards
                                                                            • A slowdown in GDP growth driven by slower global demand

                                                                                                                              1 The law classifies a borrower who has KRW 300,000
                                                                                                                                  overdue for over 90 days as a credit delinquent.
                                                                                                                                Payment becomes overdue if it is not made by the
                                                                                                                                payment date specified on the monthly statement.
                                                                                                                              2 The Korean government sought to promote consumer
                                                                                                                               debt to respond to a slow down in export led growth
                                                                                                                                (boost private consumption), and reduce tax fraud
                                                                                                                              among merchants. This policy also served to migrate
                                                                                                                                    risk away from the weakened corporate sector.

                                                                                                                               AC C E S S
                                                                                                                           I N N OVAT I O N
                                                                                                                              G ROW T H

                                                                                                                                              2|Executive summary
    This document addresses the absence of effective credit bureaus in Korea, and will answer                                                 Korean market                                   The main roadblock preventing Korea from
    two fundamental questions:                                                                                                                                                                developing a highly effective bureau industry
                                                                                                                                              Korea has historically operated a fledgling     is the level and quality of information shared
                How can a Korean credit bureau environment benefit all of its stakeholders?                                                   credit information infrastructure consisting    among lenders. The Korean regulatory
                What’s needed to facilitate this progression?                                                                                 of industry associations and intra-sector       framework requires financial institutions to
                                                                                                                                              information sharing. Over the last two years,   provide limited information to the KFB: When
    Credit bureaus collect information about individuals and/or companies from lenders and                                                    the private sector has entered the market       compared with other countries, and what is
    other sources. A bureau collects this information to provide a consolidated view of an                                                    and accelerated improvements in the             required for more effective credit risk
    individual or company’s credit performance. The information is provided to potential lenders                                              information sharing model. Current Korean       management, this mandatory information
    in the form of a credit report and/or credit score, which gives them a better understanding                                               regulation is not a constraint to effective     is clearly insufficient for effective risk
    of the borrower’s credit history and behavior prior to making a decision. Bureaus add value                                               information sharing, but regulators may be      management.
    by connecting the maximum number of lenders with the right levels of information, and                                                     able to play a role in fostering competitor
    provide additional insight from basic information. The basic business model is depicted                                                   collaboration. The industry shares              There is inconsistency in the information
    graphically in illustration 1.                                                                                                            information on three planes:                    available across industry sectors. For
                                                                                                                                                                                              example, the larger credit card companies
                                                                                                                                                 • Mandated information from the              share short-term delinquency information,
                                      Information    Aggregation           Information                                                             financial services sector to the Korea     but this data is not made available to the
                                       Providers     and Insight              Users
                                                                                                                                                   Federation of Banks (KFB) and from         rest of industry.
                                                                                                                                                   there to the credit bureaus
                                                                                                                                                 • Intra-sector information sharing           Bureaus are looking at ways of opening the
                         Oth                                                                                                                       through industry associations or small     flow of information by establishing private
                             er                                                                    e
                                    n-fi                                                   fin anc                                                 groups of companies                        contracts with lenders. The challenge with
                                          nan                                          on-
                                                ce                                 erN                                                                                                        this approach is that the type, depth and
                      Telcos                                                   Oth                                                               • Additional information sourced by
                               & Utilit
                                       ies                                                   & Utilit
                                                                                                       ies                                                                                    format of information are subject to private
                                                                                  Telcos                                                           credit bureaus from the industry           negotiations rather than being agreed

                                                       Credit                                                                                      through private commercial contracts       industry standards.
                      Other Finance                   Bureaus                          Other Finance

                                   es                                              Card M                                                     A review of the current credit risk             A combined effort from stakeholders, credit
                             onolin                                                           onolin
                       Card M                                                                           es                                    management capabilities in Korea, in            providers, credit bureaus, consumers, and
                                                                                                                                              comparison with international experience,       regulators is important for the urgent task
                             ks                                                              Ban
                          Ban                                                                    ks                                           shows that there are significant                implementing key credit bureau capabilities
                                                                                                                                              opportunities for improvement.                  in an acceptably short timeframe. It is
                                                                                                                                                                                              important for all parties to work together to
                                                                                                                                              Implications for Korea                          manage and accommodate differences in
    Illustration 1
    Basic credit bureau business model
                                                                                                                                                                                              objectives and expectations.
    aggregation and supply of information                                                                                                     International comparisons suggest that
                                                                                                                                              Korea’s credit reporting market and credit
    Source: Accenture
                                                                                                                                              risk management practices are behind the
                                                                                                                                              US. Unless Korea improves its present credit
                                                                                                                                              reporting infrastructure, it runs the risk of
                                                                                                                                              falling behind emerging Asian benchmarks
                                                                                                                                              as well.

2                                                                                                                                                                                                                                              3
    Executive summary                                                                                                                     Executive summary

     Direction for Korea                                                        3. Protection of consumers’ rights and
                                                                                   respect for individual privacy
     The development of an enhanced credit
                                                                                4. Willingness for change in current
     bureau structure for Korea must take into                                                                                                                                                                            Phase I – Regulators lead a drive to
                                                                                   industry positions and practices
     account the current market conditions and                                                                                                                                                                            expand the minimum industry information
                                                                                                                                                                                                                          model bearing in mind the requirements
                                                                                                                                                                                                   Phase III
     ensure acceptance from all key                                             5. Encouragement of free competition                                                                                                      of all stakeholders

                                                                                                                                              Value added to economy
     stakeholders.                                                                 within the regulatory environment                                                                 Phase II

                                                                                                                                                                                                                          Phase II – Industry commits to
     This report provides five guiding principles:                        We believe that effective progress can be                                                             Phase I
                                                                                                                                                                                                                          implementation of the information model,
                                                                          achieved by focusing on four key capabilities:                                                                                                  a prudent credit practices framework and
                                                                                                                                                                                                                          consumer education
          1. A commercially viable business model                         information quality, sophistication of lenders,                                                     Korea Today
          2. Clear acceptance by all stakeholders                         cross-sector participation and regulatory
                                                                          facilitation.                                                                                                                                   Phase III – Market forces ensure the
                                                                                                                                                                                                                          industry capability continues to evolve
                                                                                                                                                                                                                          without formal coordination from
                                                                                                                                                                                                                          regulators or industry
                                                                                                                                                                       Korea 1995

                                                                           nt                                  Se
       Primary Change Agent                                              me                                         r vi
                                                               ir   on                                                  ce
                                                            nv                  Regulatory       Information                 C
                                                                                                                                           Illustration 3
           Regulator                                                            Facilitation        Quality


                                                                                                                                           Possible transition path for evolution of


                                                                                                                                 i l it
                                                                                                                                           credit bureau industry
                                                 e ra

                • Information Quality


                                                      Ownership                                                 Bureau                     Source: Accenture
                • Cross-Sector Participation          Structure                                                 Services

                • Regulatory Facilitation                                                                                                  The adoption of an effective credit bureau                          Transition considerations
           Industry                                                                                                                        is likely to occur in three-phases. The first
                                                 Cross-Sector                                                       Value Added            is most likely to focus on achieving domestic                       Information model: Expanding the position
                • Sophistication of Lenders      Participation                                                        Services
                                                                                                                                           efficiency, international standards and                             of positive and negative data is an industry
           Market Forces                                                                                                                   quickly enhancing the quality in the                                priority. Any interim solution needs to be
                • Bureau Services                                                                                                          information exchange. We believe initial                            agreed in the context of longer-term
                                                               of Lenders
                                                                                                             Usage                         regulatory assistance can lead to a swift                           commitments. One way to increase
                • Value Added Services                                                                     Penetration
                                                                                         Efficiency of
                                                                                                                                           improvement in the quality of information                           information depth and consistency is to
                • Usage Penetration                                                                                                        and an increase in cross-sector participation.
                                                                                        Infrastructure                                                                                                         increase the mandatory information
                • Efficiency of Infrastructure                                                                                             The second phase is likely to focus on a                            provision requirements currently managed
                                                                                       et Sophistication                                   coordinated industry effort to improve credit                       by the KFB. Improved cross-sector
                                                                                                                                           risk management capabilities and to ensure                          participation will also be critical.
                                                                                                                                           that the benefits of increased information
                                                                                                                                           are realized. Consumers will also need to                           Competitive concerns: All lenders should
     Illustration 2
     Target changes in Korean capabilities                                                                                                 be educated on what an improved credit                              be granted equal access to credit information
                                                                                                                                           reporting environment means to them. The                            on a reciprocal basis. The way this
     Source: Accenture
                                                                                                                                           final phase would be primarily concerned                            information is captured and the shape it
                                                                                                                                           with ensuring the sustained development                             takes when presented to lenders may offer
                                                                                                                                           of the Korean bureau market.                                        an interim solution to encourage industry
                                                                                                                                                                                                               collaboration and consistent participation.

4                                                                                                                                                                                                                                                                    5
    Executive summary
                                                                                                          AC C E S S
                                                                                                      I N N OVAT I O N
                                                                                                         G ROW T H

     Access to credit: As access to credit
     information improves, the industry must
                                                        Consumers will benefit from:
                                                                                                                         3|The Korean market
                                                           • Pricing that more accurately reflects
     ensure that the economy does not
                                                             their individual circumstances
     experience a sudden fall in credit availability.
                                                           • Improved access to credit, based on                           • Korea has historically operated a fledgling credit reporting infrastructure, consisting
     Credit risk management (CRM): The industry              a better understanding of their                                 mainly of industry associations and intra-sector information sharing.
     needs to develop adequate credit risk                   financial position                                            • Over the last two years, the private sector has entered the market and improved
     management capabilities internally that can
                                                           • Greater understanding of the need                               the information sharing model.
     accommodate changes to the bureau
                                                             to manage their credit                                        • The two specialist industry players today are National Information & Credit Evaluation
     environment. Lenders with the most
     sophisticated CRM will realize the greatest           • Rewards for enhanced credit behavior                            (NICE) and Korea Information Service (KIS).
     benefits from improved credit information.              over time                                                     • There are no known restrictions on new entrants to the credit reporting market.
     However, it is important to note that the
     prevalence of charge and conventional credit       Lenders will:                                                      • The essential regulatory framework is in place and is currently being reviewed by
     cards in Korea is exacerbating the incidence                                                                            regulators.
     of delinquency across the industry.                   • Be in a better position to measure
                                                             and price the underlying risk of a                            • The current information model shows that the industry shares information on three
                                                             given account                                                   planes:
     Consumer participation: Regulators must
     balance the demands of individuals’ rights            • Increase segment specialization and                                1. Mandated information from the financial services sector to KFB and
     against the need for effective information              access the capabilities necessary to                                  then to the credit bureaus
     sharing. International experience supports              lend responsibly to broader risk                                     2. Intra-sector information sharing through industry associations
     the provision of credit information without             segments
     specific consumer consent when the request                                                                                   3. Additional information sourced by credit bureaus from the industry through
     is for credit purposes only. However,                 • Enhance credit risk management                                          private commercial contracts
     consumers’ interests cannot be ignored in               practices in line with leading global
                                                             practices                                                     • A review of the current capabilities in Korea based on international experiences
     the development of such a policy. Options                                                                               shows that there is room for improvement.
     to achieve this include running education
                                                        Bureaus will:
     programs and involving consumer groups                                                                                • The ongoing credit crisis in the consumer segment has created a sense of urgency,
     in a consultative process as the industry             • Gain access to enhanced information,                            both within the industry and among regulators, to enhance these
     processes are determined.                               enabling improved services,                                     capabilities in the near term.
                                                             increased user demand, improved
     Industry structure: While there are a number            economies of scale and ultimately
     of alternatives that can be considered, we              more development capital for re-
                                                                                                                         Today’s Korean credit bureau business            Key players
                                                                                                                         represents only a minor portion of the credit
     are unaware of a compelling argument that               investment
                                                                                                                         information industry, although the industry      The Korean credit bureau environment
     would indicate the current structure is a
                                                                                                                         expects significant development in the           consists of five major stakeholders:
     constraint to competitive market evolution.        Regulators will:
                                                                                                                         coming years. Korea’s first privately operated   consumers, industry participants (suppliers
                                                           • Gain access to more accurate and                            credit bureau was established in 2002 andit      and buyers of information), industry
     Benefits of change                                      timely data regarding the state of the                      is only recently that the credit information     associations, credit information companies
                                                             consumer finance market                                     industry has begun to view a fully functioning   and regulators.
     All industry stakeholders will see significant
                                                                                                                         credit bureau business as a strategic growth
     benefits of an enhanced bureau industry -             • Face a reduced likelihood of                                opportunity for both the industry and the
     credit bureaus increase the accuracy of                 significant industry delinquencies and                      economy.
     lending decisions, the availability of credit           the need to “bail out” or recapitalize
     to the economy, and reduce the size and                 domestic lenders
     frequency of delinquency. These outcomes
     ultimately increase the stability and growth          • Be able to respond to changes and
     of consumption and corporate profitability.             trends more proactively
                                                           • Manage a fundamentally less volatile
                                                             lending environment

6                                                                                                                                                                                                                       7
                        The Korean market                                                                                                                               The Korean market

                                                                                                                                                                         KIS are the most active participants in the       Information framework
                                                                                                                                                                         industry. KIS launched Korea’s first credit
                            Consumers                                                  CONSUMERS
                                                                                                                                                                         bureau, KIS CB, in February 2002 and              The Korean credit bureau industry has two
                                                                                                                                                                         started its first credit bureau service in May    different levels of information sharing. The
                            Industry                                         Card         Consumer
                                                                                                                                                                         2002. It had 48 data-sharing member               government regulates the first level, which
                                                    Retail Bank                                                 Telco              Others
                            Participants                                   Company         Finance                                                                       institutions by the end of 2003. NICE             ensures the collection of basic information.
                                                                                                                                                                         followed shortly afterwards, starting its first   All financial institutions are obliged to provide
                                                                                                                                                                         credit bureau service in November 2002,           required credit information to the KFB on a
                            Industry              Korea Federation of        Korea Non-Bank       Korea Association of                                                   and has developed the largest number of
                            Associations             Banks (KFB)                Financing            Information &               Others                                                                                    regular basis. At the second level, private
                                                                               Association        Telecommunication                                                      data sharing member institutions, with 111        credit bureaus collect additional information
                                                                                                                                                                         by the end of 2003.                               from financial and non-financial institutions
                            Credit                    Credit Inquiry                  Credit Investigation                 Debt Collection                                                                                 based on commercial contracts. The private
                            Information                 Business                           Business                          Business                                    In April 2004, Kookmin Bank, LG Card,             credit bureaus aggregate these two
                                                                                                                                                                         Samsung Card, Woori Finance Holdings and          complementary sources to improve the
                                                                                                                                                                         Seoul Guarantee Insurance signed an               completeness of information.
                                                   Ministry of Finance &             Financial Supervisory               Financial Supervisory                           agreement to open a joint credit bureau.
                                                     Economy (MOFE)                      Service (FSS)                     Commission (FSC)
                                                                                                                                                                         Although the deal remains subject to              All regulated lending institutions are required
                                                                                                                                                                         government approval, it represents a move         to report three types of basic credit
    More than 5,000      Illustration 4                                                                                                          There is a basic        toward greater intra-sector information           information to the KFB: personal
                                                                                                                                                 mandated set of         sharing. This is positive for the long term
    financial            Korean credit information structure
                                                                                                                                                                         stability of Korean credit markets and helps
                                                                                                                                                                                                                           identification, credit transactions and credit
                                                                                                                                                 credit data that the                                                      delinquencies. Credit transaction information
    institutions         Source: Accenture
                                                                                                                                                                         address the information sharing barriers          includes only the borrower’s current status
    currently provide    Industry participants mostly include financial                  details, credit transactions and credit                 financial services      that have existed to date between card            (total amount and date). It does not show
                         institutions such as retail banks, other                        delinquency. This data is made available                sector has to           companies and banks. However, to be more
    mandated credit      banking institutions, credit card companies,                    to the participating financial institutions as                                  effective and to fully address weaknesses
                                                                                                                                                                                                                           the borrower’s payment behavior, credit
                                                                                                                                                 provide to KFB.                                                           limits or other positive information. The
    data to KFB          consumer finance companies, and                                 well as to private credit bureaus with the                                      within today’s system, the bureau needs to        delinquency information only indicates
                         insurance companies. A number of non-                           credit bureau industry currently relying                                        provide equal access to consistent                whether or not the borrower is categorized
                         financial institutions such as department                       heavily on this data set. With the exception                                    information for all lenders and require           as a credit delinquent under the current
                         stores with merchant credit and mobile                          of the Korea Non-Bank Financing Association                                     lenders to provide credit information in          regulation. The law classifies a borrower
                         service providers with customers’ bill                          (KNFA) and the Korea Association of                                             exchange for access to bureau information.        who has KRW 300,000 overdue for over 90
                         payment histories also actively participate                     Information & Telecommunications (KAIT),                                                                                          days as credit delinquent. This basic data
                         in this market. At present, these institutions                  industry associations do not actively                                                                                             consists of both positive and negative
                         share only limited information with the credit                  participate in the collection of credit                                                                                           information but lacks substantial detail in
                         bureau industry. This has been identified                       information. The KNFA only collects credit                                                                                        either category.
                         as one of the key industry challenges that                      card usage information on consumers who
                         needs to be overcome.                                           hold four or more credit cards. The KAIT
                                                                                         collects payment default information on
                         The industry associations collect mandatory                     fixed line, wireless, Internet access, and
                         information from their members. The most                        cable TV services.
                         influential is the Korea Federation of Banks
                         (KFB), a non-profit, industry-owned                             While there are six companies licensed to
                         organization. More than 5,000 financial                         operate credit bureaus, only National
                         institutions in Korea report the regulatory                     Information & Credit Evaluation (NICE) and
                         mandated minimum set of credit information                      Korea Information Service (KIS) currently
                         to the KFB, including data on personal                          operate consumer credit bureaus. NICE and

8                                                                                                                                                                                                                                                                              9
     The Korean market                                                                                              The Korean market

                     Identification Information

                     • Name
                                                                                 The existence of a Citizen                               Financial         Korea Federation of                   Credit Bureaus
                     • Address                                                  ID number facilitates fast,                              Institutions   1      Banks (KFB)             2
                     • Citizen ID number                                          cost-effective matching

                     Credit Transaction Information

                     • Current status of loan & guarantee
                            – Date opened                                      Limited Positive Information
                                                                               (e.g. no payment history, no
                            – Total amount                                         existing credit limit)
                     • Status of bank & credit card account
                                                                                                                                                                       Individual Contracts
                            – Open / Close status
                     • Current status of credit card cash advance
                            – Total amount

                                                                                                                                     Non-Financial                4
                     Delinquency Information                                                                                          Institutions
                                                                                                                                                                       Individual Contracts
                     •    ‘Credit Delinquent’ status
                            – Credit delinquency                               Limited Negative Information
                                                                                    (e.g. no short-term
                            – Payment guarantee delinquency                      delinquency information)
                            – Public record delinquency (e.g. tax)
                                                                                                                     Illustration 6
                            – Disturbance of financial system
                                                                                                                     Credit bureau information flow
                              (e.g. fraud)
                                                                                                                     Source: Accenture
      Illustration 5
      Mandatory information reported to the KFB                                                                      While the additional information submitted                   • As the collected data sets are based
      Source: Accenture                                                                                              by non-financial institutions augments the                     on commercial arrangements, the
                                                                                                                     information that the credit bureaus provide,                   actual data points collected are
      To supplement information collected by the                     banks and other lenders. The major              its uncoordinated nature represents one of                     proprietary, preventing this study from
      KFB, private credit bureaus develop                            contributors to this information sharing        the major stumbling blocks in the                              accurately evaluating the
      commercial contracts with industry                             among non-financial institutions are            development of credit bureau services in                       effectiveness of cross-sector
      participants to build more comprehensive                       department stores with large merchant           Korea. Some other challenges of note are:                      information sharing today.
      credit information databases. Under these                      credit accounts. Unfortunately their                 • By the end of 2003, NICE had 161                      • The five major credit card issuers in
      private arrangements, the credit bureaus                       default/delinquency information is only                participating member institutions, of                   Korea have had minimal participation
      share more detailed information including                      collected by the private credit bureaus, not           which 111 were data sharing                             with regard to sharing information,
      transaction information and short-term (less                   the KFB. This is shown in Illustration 6.              members. KIS had 85 participating                       particularly on short-term
      than 90 days) delinquency information with                                                                            member institutions, of which 48                        delinquencies.
                                                                                                                            were data sharing members.
                                                                                                                                                                                  • A successful credit information
                                                                                                                          • More importantly, their data sharing                    industry is based on fairness,
                                                                                                                            members were not reporting the                          standardization, accuracy and
                                                                                                                            same sets of data, and most of the                      reciprocity. While there has been
                                                                                                                            data reported was negative                              substantial progress made by credit
                                                                                                                            information.                                            bureaus and the industry, as long as
                                                                                                                                                                                    selective participation and data
                                                                                                                                                                                    sharing exists, overall industry
                                                                                                                                                                                    effectiveness will be compromised.

10                                                                                                                                                                                                                        11
                           The Korean market                                                                                                                                                          The Korean market

                            Regulatory framework                                                                                         regulation will be abolished in two years,                    These models, based on secondary market                              Assessments of each country are made
                                                                                                                                         which means lenders will independently                        research, do not attempt to isolate specific                         through qualitative judgments when
                            The Usage and Protection of Credit                                                                           manage credit delinquent status. This is the                  service providers. Instead, they provide a                           comparing observations of key markets
                            Information Act (the Credit Information Act)                                                                 case in many countries around the world.                      broad look at industry capabilities against                          across the Americas, Europe and Asia. It is
                            ensures fair usage of credit information and                                                                 The government will help the credit bureaus                   service capabilities, the operating                                  important to note that regulatory facilitation
                            protection of privacy. The current Credit                                                                    gain access to a wider range of information.                  environment and market sophistication.                               does not equate to the level of regulator
                            Information Act has three main sections that                                                                 An example of this is the Korea Labor                         Each is a function of its underlying                                 participation. Also, ownership structure
                            are relevant to the credit bureau                                                                            Welfare Corporation’s (employment                             dimensions as described in the table below:                          does not imply that private ownership is
                            environment:                                                                                                 information) commitment to providing                                                                                               superior to public ownership.
                                                                                                                                         relevant information.
                                 • Collection, investigation and                                                                                                                                          Capability       Dimension        Characteristics
                                   processing of credit information                                                                      Introducing the capability models                               Service           Information      1 – Limited coverage, accuracy, matching, long and infrequent data refresh, no positive
                                                                                                                                                                                                         Capability        Quality              data.
                                 • Distribution, usage and management                                                                                                                                                                       4 – Extensive data set, full information, frequent refresh, error capture and correction
                                   of credit information                                                                                 Throughout the course of this paper, we will                                                           capabilities
     With the increased                                                                                                                  draw comparisons between the credit                                               Bureau           1 – Simple products, basic data aggregation, no additional information
                                 • Consumer protection                                                                                   information industries of Korea and selected
     need for adequate                                                                                                                                                                                                     Services         4 – Value services, predictive models and scores, strong integration capabilities with user
                                                                                                                                         countries. Korea will be compared in greater
     credit reporting       The Credit Information Act was written before
                                                                                                                                         detail to three specific countries: the US,                                       Value Added      1 – No additional services beyond credit assessment information
                            the emergence of credit bureaus in Korea.                                                                                                                                                      Services
     mechanisms,            Since then, the government has recognized
                                                                                                                                         Singapore and Australia. Each provides                                                             4 – Substantial product and service expansion (e.g. marketing, consulting, collections)

     regulators are in                                                                                                                   lessons and insight from international                          Market            User             1 – Limited usage within financials service with little or no additional sector application
                            a need for responding to the current credit                                                                                                                                  Sophistication    Penetration      4 – Broad industry usage across all credit providers, consumer self assessment and
     the process of         delinquency problem. The Ministry of                                                                                                                                                                                management

                            Finance and Economy (MOFE) has identified                                                                                                                                                      Infrastructure   1 – No automated data transfer, limited integration between players, limited use
     strengthening the      specific areas for improvement, such as
                                                                                                                                         We have developed a Credit Information                                            Efficiency           of technology
                                                                                                                                         Industry Capability Model, utilizing a spider                                                      4 – Multi party integration, dominance of technology based access and integration,
     current regulations    credit delinquency regulations and the credit                                                                                                                                                                       host to host
                                                                                                                                         analysis framework to describe the relative
                            bureau environment, enabling the credit                                                                                                                                                        Lender         1 – Credit decisioning and monitoring based on simple tracking, no scoring and
                                                                                                                                         basic characteristics of each country’s credit                                    Sophistication     predictive analysis
                            bureaus to gather more comprehensive
                                                                                                                                         bureau capabilities.                                                                             4 – Extensive use of credit data and business rules in debt origination, maintenance
                            information. The credit delinquency                                                                                                                                                                               and collection
                                                                                                                                                                                                         Operating         Regulatory       1 – Unclear policies, heavy data restriction and privacy bias, volatile standards
                                                                                                                                                                                                         Environment       Facilitation     4 – Well defined policies, active industry dialogue and facilitation, consistency, and market
                                                                                                                                                               Considers the inherent
                                                              nt                                           Se                                                                                                              Ownership        1 – Heavy government ownership, competition restrictions, partisan government investment
                                                         me                                                     r vi                                           capabilities of the credit bureau
                                               ir   on                                                                 ce
                                                                                                                                                 Service       service providers across basic                                               4 – Strong private sector drive entrepreneurialism, free competition, specialized government
                                            nv                     Regulatory             Information                       C
                                                                                                                                                Capability     data capture and provision                                                       role
                                                                                                                                                               through bureau services and into

                                                                   Facilitation              Quality


                                                                                                                                                               high end value added credit                                 Cross Sector     1 – Little or no co-ordination in collecting and reporting across sectors, different access
                                   ti n

                                                                                                                                i li t

                                                                                                                                                               services                                                    Participation        rules

                                        Ownership                                                           Bureau                                                                                                                          4 – High levels of cross industry collaboration, standard data architecture and quality
                                        Structure                                                           Services                                                                                                                            framework
                                                                                                                                                               Illustrates the sophistication of
                                                                                                                                                               lending practices, the efficiency       Illustration 8
                                                                                                                                                               of the industry infrastructure and
                                                                                                                                                 Market        the extent to which bureau              Capabilities dimensions and characteristics
                                                                                                                        Value                 Sophistication   services are utilized to support
                                                                                                                        Added                                  lending decisions within financial
                                  Participation                                                                        Services
                                                                                                                                                                                                       Source: Accenture
                                                                                                                                                               services and other industries

                                                                                                                                                               Reflects the tone of the regulatory
                                          Sophistication                                                 User                                                  environment (e.g. persuasive,
                                           of Lenders                                                 Penetration                                              facilitative, reactive), the role of
                                                                                                                                               Operating       ownership in industry
                                                                             Efficiency of                                                    Environment      participation, and the degree to
                                                                            Infrastructure                                                                     which collaborative decision
                                                                     M ark                                                                                     making and information sharing
                                                                          e t So p h i s t i c a t i o n                                                       occurs across industry sectors

                            Illustration 7
                            Country capability model

                            Source: Accenture

12                                                                                                                                                                                                                                                                                                                                          13
     The Korean market                                                                                                                                            The Korean market

      Korea capability model                                                                   more detailed than required by the KFB                              • The current structure lacks an inclusive      • Ownership structures are unregulated.
                                                                                               reporting, such as increased detail on                                view of all sectors.                            There are currently six licensed players
      The first application of the capability model                                            shorter-term delinquency information.                                                                                 in the market, two of which have made
                                                                                                                                                                   • Although bureaus will continue to close
      framework is for the Korean credit                                                       There is an opportunity to realize greater                                                                            substantial investments.
                                                                                                                                                                     cross-sector participation gaps,
      information environment. Despite the relative                                            benefits for all industry participants by
                                                                                                                                                                     international evidence suggests the           • Bureaus have little to no effect on
      youth of Korean credit bureaus, they are                                                 increasing this sharing. This information
                                                                                                                                                                     prevalence of sector- based sharing is          industry association decision-making.
      seeking to move beyond simple information                                                could be made available to all industry
                                                                                                                                                                     substantially reducing the value of credit
      collection and distribution. They are                                                    participants with a requirement that they                                                                           • The regulatory framework would benefit
                                                                                                                                                                     bureau services.
      aggressively seeking to expand their reach                                               reciprocate the exchange.                                                                                             from increased clarity and enhancement
      and breadth.                                                                                                                                                 • User penetration trends will move closer        on areas such as the type of information
                                                                                            • Local players continue to pursue                                       to international levels over time as credit     reported.
                                                                                              improved bureau services, including                                    bureaus continue to expand their sources
                                   nt                          Se                             capabilities in scoring, either through                                                                              • In the absence of significant market
                          n   me                                    r vi                                                                                             of data aggressively.
                      iro                                                  ce
                                                                                              internal skills or partnerships.                                                                                       participation, regulators may seek to
                   nv          Regulatory        Information                    C
                                                                                                                                                                                                                     facilitate the industry's evolution in Korea.

                               Facilitation         Quality
           in g

                                                                                            • The current bureaus are based on value-
         r at


                                                                    Bureau                    added services, including debt collection
        Op e

               Structure                                            Services
                                                                                              and credit solutions. The sector is well
                                                                                              serviced, maturing and competitive, but
         Cross-Sector                                                       Value             core gaps lie in the depth and breadth
         Participation                                                      Added
                                                                           Services           of risk advisories or consulting-type         While some lenders
                                                                                              services.                                     have developed
                 of Lenders
                                                          Penetration                       • There is fair coverage of the financial       sophisticated
                                         Efficiency of
                                        Infrastructure                                        services sector through the KFB and the       capabilities in
                                                                                              credit bureaus. The commercial credit
                                    ket Sophistication
                                                                                              bureaus are now in the process of
                                                                                                                                            recent years, the
                                                                                              opening up to the non-financial sectors.      industry as a whole
      Illustration 9
      Korea credit bureau capability model                                                  • The general network and infrastructure        fell significantly
      Source: Accenture                                                                       within Korea is excellent when compared       short of best
                                                                                              with global standards. Korea quickly          practice
                                                                                              established an electronic infrastructure
      Key considerations for the                                                              for the capture and exchange of
      Korean market                                                                           information. Bureaus can support online
                                                                                              and host-to-host communication today,
      • To date, bureaus have faced considerable
                                                                                              but tape-based exchange for mandatory
        reluctance by the various players in the
                                                                                              industry reporting still occurs between
        financial and non-financial sectors to
                                                                                              the KFB and the private bureaus.
        share quality information. Most of the
        existing information is negative and does                                           • The relative youth of credit information
        not capture short-term consumer                                                       services combined with historically lax
        behavior. It is important to note that the                                            risk management practices and limited
        ‘Big Five’ credit card issuers in Korea                                               demand for information, indicate lender
        have taken a valuable step in sharing                                                 sophistication must increase
        information among themselves that is                                                  substantially.

14                                                                                                                                                                                                                                                                   15
                                                                                                                         The role of credit risk management
         AC C E S S
     I N N OVAT I O N
        G ROW T H

                        4|The role of credit risk management                                                                 • Portfolio acquisition: This
                                                                                                                               encompasses the processes and
                                                                                                                                                                           • Portfolio acquisition: Loose adherence
                                                                                                                                                                             to credit policies and limits, particularly
                                                                                                                               procedures banks use to capture a             during the initial phases of the recent
                                                                                                                               loan application, decide whether to           growth cycle, contributed heavily to
                          • Credit Risk Management (CRM) is the practice of understanding and managing the                     accept the application and how to             recent industry issues. A key
                            risk a business incurs in extending credit. Without effective CRM practices, lenders               price loans that are accepted                 consideration when evaluating the
                            are significantly less likely to realize benefits from credit bureaus.                                                                           effectiveness of acquisition capabilities
                                                                                                                             • Portfolio maintenance: Allows lenders
                                                                                                                                                                             within a market is the performance lag,
                          • The CRM process consists of three key components:                                                  to track changes in the risk profile of
                                                                                                                                                                             because default activity typically trails
                               1. Portfolio Planning allows a lender to estimate and plan risk exposures and                   a portfolio over time. By tracking the
                                                                                                                                                                             lending decisions by 12 to 24 months.
                                  expected returns at the ‘portfolio level’.                                                   borrowing activity of their customers,
                                                                                                                                                                             Current industry discussions should take
                                                                                                                               both on their own products and those
                                                                                                                                                                             into consideration:
                                2. Portfolio Acquisition describes the processes and procedures banks use to                   held with other lenders, an institution
                                   capture loan applications, decide whether to accept them, and how to establish              can monitor changes in its overall             -   Current capabilities are generally a
                                   price.                                                                                      risk exposure and take proactive                   substantial improvement over those
                                                                                                                               measures to reduce risk where                      in place at the beginning of 1999.
                                3. Portfolio Maintenance allows lenders to track changes in the risk profile of
                                   a portfolio over time and to take actions to ensure both risk and return levels                                                            -   Although credit scoring, including
                                   are meeting expectations.                                                                                                                      utilizing both bureau attributes and
                                                                                                                          CRM practices in Korea                                  bureau scores, is a widely accepted
                          • Korea has the opportunity to increase the returns it realizes from CRM. More
                                                                                                                                                                                  practice, a key challenge is the
                            prudent portfolio planning could have constrained the aggressive acquisition                  • Portfolio planning: Characteristics of
                                                                                                                                                                                  consistency with which credit scores
                            strategies pursued since1999.                                                                   current practices in Korea give rise to
                                                                                                                                                                                  are applied.
                                                                                                                            the following issues for consideration:
                          • Loose application of credit policies and limitations around available credit decision
                                                                                                                                                                              -   Korea has historically had a
                            processes and tools, particularly during the initial phases of the recent growth cycle,          -   Risk management could be better
                                                                                                                                                                                  significant volume of loans
                            contributed heavily to recent significant increases in delinquencies. However, the                   integrated with the management of
                                                                                                                                                                                  determined through manual
                            capabilities that exist today are, on average, a substantial improvement over where                  the business as a whole. Although
                                                                                                                                                                                  exception processes rather than
                            they were in 1999.                                                                                   lenders typically conduct regular
                                                                                                                                                                                  credit scores. There are opportunities
                                                                                                                                 analysis and reporting of the lending
                          • With concerns regarding the quality of credit portfolios driving a slowdown in the                                                                    to increase the proportion of
                                                                                                                                 portfolio, there are opportunities to
                            acquisition activities of lenders, portfolio maintenance is expected to remain a core                                                                 automated decisions which could
                                                                                                                                 improve the quality of this information
                            focus of Korean lenders for the foreseeable future.                                                                                                   reduce costs and increase the
                                                                                                                                 and the links between portfolio
                                                                                                                                                                                  consistency of decisions.
                                                                                                                                 analysis and business decisions
                                                                                                                                                                              -   The proportion of institutions working
                                                                                                                             -   Increasing the proportion of
                        CRM is an essential core competency for         The CRM process                                                                                           with major international vendors and
                                                                                                                                 consumer loans determined by using
                        lenders. It should influence sales and                                                                                                                    advisors on scoring is increasing. A
                                                                                                                                 credit scores rather than by
                        customer strategies, helping determine by       The CRM process consists of three key steps:                                                              number of domestic banks are
                                                                                                                                 judgmental decisions, would improve
                        which risk segments a lender is willing to                                                                                                                already using and/or developing
                                                                            • Portfolio planning: Allows a lender to             the consistency and comparability of
                        pursue. It requires specific business                                                                                                                     technologies from leading
                                                                              estimate and plan risk exposures and               risk data
                        processes and procedures to ensure that                                                                                                                   international vendors such as
                                                                              expected returns at the ‘portfolio
                        lending decisions adequately consider and                                                            -   Better integration of risk within card           Experian and Fair Isaac.
                                                                              level’. The portfolio level is a summary
                        price for risk.                                                                                          businesses would almost certainly
                                                                              of loan information across categories                                                           -   Risk-based pricing is commonly
                                                                                                                                 have led to a faster contraction of
                                                                              such as customers, segments and                                                                     applied. A Korean consumer today
                                                                                                                                 aggressive marketing activity in the
                                                                              product types and is used to project                                                                can easily access products and
                                                                                                                                 face of deteriorating credit
                                                                              performance and direct changes in                                                                   services with different interest rates
                                                                              sales strategies.                                                                                   based on their risk rating.

16                                                                                                                                                                                                                       17
     The role of credit risk management
                                                                                                         AC C E S S
                                                                                                     I N N OVAT I O N
                                                                                                        G ROW T H

         -   Critically, given the current quality of
             industry information available through
                                                        -   The core focus of domestic lenders
                                                            is to contain delinquency and
                                                                                                                        5|Selected country experiences
             bureaus, lenders are taking greater            increase the quality of existing
             risk in pricing down perceived lower           portfolios.
             risk customers, than comparable                                                                             • In the US:
                                                        -   The lack of consistent and detailed
             decisions made by banks in full
                                                            term-based delinquency information                             • Sophisticated credit bureaus provide decision support to lenders
             reporting environments.
                                                            from credit bureaus dramatically
                                                                                                                            • Federal policy has encouraged lenders to make credit available to a broad
      • Portfolio maintenance: Portfolio                    reduces the ability of institutions to
                                                                                                                              segment of the US population. The result has been a dramatic increase in access
        maintenance is expected to remain a                 estimate effectively their share of
                                                                                                                              to credit, particularly for those in lower income groups.
        core focus of Korean lenders for the                total customer delinquency.
        foreseeable future.                                                                                                 • A well developed credit bureau industry with highly sophisticated capabilities
                                                        -   The absence of relevant transaction
                                                                                                                              has become one of the leading providers of solutions and advice to local industries
         -   Given significant risk and delinquency         information means banks are
                                                                                                                              across the world.
             levels within the current lending              severely constrained in recognizing
             environment, combined with a high              behavioral warning signs for debt held                       • In Singapore:
             penetration of unsecured debt to               with other banks before delinquency                            • Regulatory facilitation and industry participation have played important roles in
             GDP, new lending volumes in Korea              occurs.                                                            speeding up the establishment of a credit bureau.
             have slowed dramatically.
                                                                                                                            • Although relatively new and currently collecting and distributing relatively limited
                                                                                                                              information, the Singapore credit bureau is, however, more expansive than the
                                                                                                                              existing Korean model.
                                                                                                                            • The bureau is responding to demands by the industry and plans to include
                                                                                                                              customer credit limits for each card and the extent to which each are utilized.
                                                                                                                         • The Australian market:
                                                                                                                           • Represents a developed economy with a sophisticated lending environment.
                                                                                                                            • Places significant limitations on what bureaus can collect and distribute, due
                                                                                                                              largely to concerns over individual privacy.
                                                                                                                            • Is a negative (delinquency-based) credit reporting environment. Information
                                                                                                                              regarding positive credit transaction activity and behavior may not be collected
                                                                                                                              or distributed.
                                                                                                                            • Faces limitations regarding the sophistication of risk-based pricing and product
                                                                                                                              options which is in a large part due to the lack of sufficient industry level (positive)
                                                                                                                              credit information.

18                                                                                                                                                                                                                       19
                         Selected country experiences                                                                                        Selected country experiences

                          Credit bureaus in the US                        • There is significant cross-sector                                                                                                                                   Credit bureaus in Australia
                                                                            participation, with players from the                                                        e nt                                      Se
                                                                                                                                                                                                                       r vi
                                                                                                                                                                     nm                                                       ce
                                                                            financial and non-financial sectors. Credit                                          iro
                          The US is generally regarded as the most                                                                                            nv        Regulatory             Information                         C            The key features of the Australian market

                                                                                                                                                                        Facilitation              Quality

                          developed credit information market in the        reports are now being used by                                                                                                                                       are:

                                                                                                                                                      in g


                          world and as such we have not provided a          consumers and “non-lending”

                                                                                                                                                                                                                                         it y
                                                                                                                                                   Op e
                                                                                                                                                          Ownership                                                     Bureau                  • The information model only allows for
                          capability model. The key considerations                                                                                        Structure                                                     Services
                                                                                                                                                                                                                                                  negative information, a function of tight
                          for the American market are:                                                                    Regulators played a
                                                                          • Ownership structure is unregulated,                                                                                                                                   credit information legislation.
                          • The market has matured to grow the              but the market has stabilized with three      substantial role in       Cross-Sector
                                                                                                                                                    Participation                                                          Added
                                                                                                                                                                                                                                                • The established history of the market
                            data set to include information from            key bureau players and one scoring                                                                                                            Services

                            the financial and non-financial sectors.        specialist.
                                                                                                                          driving the progress                                                                                                    and the sophistication of its players have
                            There are now fewer instances of                                                              of the Singaporean               Sophistication
                                                                                                                                                            of Lenders
                                                                                                                                                                      i                                       Usage                               led to the availability of advanced bureau
                                                                          • The regulatory framework has                                                                                                    Penetration                           services, notwithstanding the limitations
                            institutions not providing information to
                                                                            undergone substantial revision over the       market                                               Efficiency of
                                                                                                                                                                              Infrastructure                                                      imposed on data collection.
                            the all the credit bureaus
                                                                            years, especially with the introduction of                                                                                     M ar
                                                                            the Fair and Accurate Credit Reporting
                                                                                                                                                                        k e t S o p h i s t i ca t i o n
                                                                                                                                                                                                                                                • A vibrant value-added service market
                          • The market has high capabilities in
                                                                            Act. This is supplemented by an active                                                                                                                                exists through bureau providers,
                            bureau services and is one of the leading                                                                            Illustration 10
                                                                            and consultative approach with                                                                                                                                        additional service specialists, such as
                            providers of solutions and services to                                                                               Capability model - Singapore
                                                                            consumer groups.                                                                                                                                                      Collections House and Legal Co.
                            local industries across the world.                                                                                   Source: Accenture                                                                                Extensive consulting and technology
                          • Credit management and consulting                                                                                                                                                                                      services are also accessed through
                            services are highly developed in this
                                                                          Credit bureaus in Singapore                                            • The financial markets are building up                                                          international players including Experian
     The US market          market.                                                                                                                key capabilities in risk management,                                                           and Fair Isaac to close domestic gaps.
                                                                          The key considerations of the Singapore
     has high                                                             market are:
                                                                                                                                                   though the non-financial segment has
                          • Credit reports and credit scores have                                                                                  yet to utilize credit management services                                                    • Baycorp Advantage, Australia’s major
     capabilities in        become part of the decision-making                                                                                     significantly.                                                                                 consumer credit bureau, has a diversified
                                                                          • The Singapore credit information market
     bureau services        process in the market for financial             and infrastructure are relatively new.                                                                                                                                client base of banks, specialist financial
                            and non-financial credit providers.                                                                                  • The current model splits financial and                                                         services, telecommunications, retailers,
     and is one of the                                                      Having been established in partnership                                 non-financial sector participation, thereby
                                                                            with Dun & Bradstreet and Baycorp, it is                                                                                                                              mortgage specialists and insurance
     leading providers    • The infrastructure is mature and proven                                                                                inherently limiting cross-sector sharing.                                                      companies. Direct consumer usage is
                            and there is extensive use of electronic        able to draw upon global experience.                                   This issue may be addressed by mergers,
     of solutions and       information exchange with a high degree
                                                                                                                                                                                                                                                  facilitated but has not been a focus.
                                                                          • The current capabilities are limited to                                but could also be contractually
     services to local      of integration between the bureaus and          reporting on information collected from                                addressed                                                                                    • The historical dominance of Baycorp as
     industries across      users.                                          the members.                                                         • Ownership structures are unregulated,
                                                                                                                                                                                                                                                  the major consumer credit bureau has
                                                                                                                                                                                                                                                  enabled sustained investments in a well-
     the world            • There is substantial lender sophistication.   • There are currently minimal value-added                                with the market having two players, both                                                       integrated technology platform that has
                            Risk-based pricing is a common feature          services provided by the credit bureau.                                in the private sector.                                                                         captured a high proportion of industry
                            for most consumer products. Many
                                                                          • The credit reports will be used by all the                           • The Monetary Authority of Singapore has                                                        volumes.
                            institutions also employ advanced
                            delinquency prediction models.                  members of the Association of Banks,                                   undertaken substantial regulatory                                                            • Some limitations exist regarding the
                                                                            Singapore; including ABN-Amro,                                         facilitation to ensure the implementation                                                      sophistication and prevalence of risk-
                                                                            American Express, Citibank, DBS, HSBC,                                 of the credit bureau and maintains an                                                          based pricing and product options from
                                                                            Maybank, OCBC. Standard Chartered                                      active role in the bureau’s development.                                                       lenders. This is partially a function of
                                                                            and UOB.                                                                                                                                                              insufficient information and partially due
                                                                                                                                                                                                                                                  to market practices.

20                                                                                                                                                                                                                                                                                            21
                           Selected country experiences
                                                                                                                                                                              AC C E S S
                                                                                                                                                                          I N N OVAT I O N
                                                                                                                                                                             G ROW T H

                            • Faced with a low participation hurdle
                              (only negative data), private bureaus
                                                                                                                        • The sophistication observed in the US
                                                                                                                          market has been achieved over a
                                                                                                                                                                                             6|Recent experiences in establishing bureaus
                              have expanded the network of                                                                significant period of time, enabled
                              information suppliers.                                                                      through substantial and sustained
                                                                                                                          investment from private bureaus.                                     • The emerging credit reporting markets have leveraged technology and skills transfer
                            • Ownership structures are unregulated
                              and there is no public registry. The                                                      • The US market benefits significantly from                              to jumpstart their own markets through partnerships and other arrangements.
                              private market has seen progressively                                                       a facilitative regulatory environment.                               • Hong Kong experience indicates:
                              more entrants.                                                                                                                                                     • Crisis levels of both delinquency and bankruptcies led to a sudden increase in
                                                                                                                        • The time required to establish a
                            • Privacy legislation has placed significant                                                  functional credit bureau industry has                                    the willingness of lenders and other stakeholders to pursue positive reporting.
                              constraints on the industry information                                                     shortened. Emerging markets are                                         • The establishment of the Hong Kong bureau was a consultative process with
                              model, with limited regulatory activity to                                                  benefiting from increased international                                   regulators gathering views from all stakeholders – banks, consumer associations,
     Some limitations         change industry structure or function.                                                      experience and precedents.                                                other interest groups and the bureau service provider.
     exist regarding the                                                                                                • The typical Asian experience is the result                              • Since the introduction of positive information sharing, charge-offs and bankruptcies
                                                                                                                          of regulatory action.
     sophistication and                            nm
                                                             t                                 Se
                                                                                                  rv   ice
                                                                                                                                                                                                    have begun to fall.
     prevalence of risk-                   nv                Regulatory        Information                   C          • It is critical that regulators establish a                           • Recent regional experience indicates that credit bureaus are increasingly a core


                                                             Facilitation         Quality

                                                                                                                          sufficient minimum standard from which
                                  ti n

     based pricing and                                                                                                                                                                           part of Asian economies’ development, with regulators and industry working together
                                er a


                                                                                                                          the industry will continue to grow.

                                                                                                                                                                                                 to drive rapid change.
     product options                Ownership
                                                                                                                        • Heavily engaging industry input and
     from lenders                                                                                                         participation can generate sustainable
                                Cross-Sector                                                       Value
                                                                                                   Added                  momentum for change and reduce the                                 In support of the selected country case         Perspectives from Hong Kong
                                                                                                                          likelihood of regression to old practices.                         studies, this report documents the
                                                                                                                                                                                             establishment of credit bureau industries       “Hong Kong’s move to positive information
                                         Sophistication                                      Usage                      • In contrast, the Australian experience                             within other countries. The Hong Kong           sharing – a banker’s perspective”
                                          of Lenders                                       Penetration
                                                                    Efficiency of                                         highlights the potential impact of                                 commentary outlines the perspectives of a
                                                                   Infrastructure                                         restrictive regulation. Despite the                                lender that managed its bank’s transition       Context
                                                                 M a rk
                                                                       et Sophistication
                                                                                                                          presence of sophisticated domestic and                             from the negative reporting environment to      In mid-2003, positive credit information
                                                                                                                          international lenders and historically                             the positive information exchange executed      sharing was introduced with a privately
                            Illustration 11                                                                               strong CRM practices, the Australian                               today. The India analysis outlines the          owned bureau. Hong Kong had historically
                            Capability model - Australia                                                                  market forfeits much of the benefits of                            experience of a bureau chief executive in       shared 'blacklists' of borrowers capturing
                            Source: Company websites, media
                                                                                                                          bureau services. As a result, the                                  establishing India’s first private credit       delinquency, bankruptcies or legal
                                                                                                                          Australian market has produced a                                   bureau. The report also outlines the            judgments filed against them. However, the
                            Case study conclusions                                                                        relatively stable and low risk delinquency                         Thailand experience in the Appendix. This       crisis levels of both delinquency and
                                                                                                                          record at the expense of pricing flexibility,                      provides the perspective of a regulator who     bankruptcies experienced in recent years
                            • The US has evolved from a fragmented                                                        product choice, risk-adjusted credit                               played an extensive role in the evolution of    led to a sudden increase in the willingness
                              lender market. The historical lack of a                                                     returns and restricted access to credit                            the Thai credit information industry.           of lenders and other stakeholders to pursue
                              dominant group of lenders reduced                                                           for lower income consumer segments.                                                                                positive reporting.
                              competitive resistance to information
                              sharing.                                                                                                                                                                                                       The commentary below outlines the
                                                                                                                                                                                                                                             experience of an undisclosed Accenture
                                                                                                                                                                                                                                             client. The client is a large lender and
                                                                                                                                                                                                                                             provides insights from that perspective.

22                                                                                                                                                                                                                                                                                         23
                        Recent experiences in establishing bureaus                                                           Recent experiences in establishing bureaus

                            Participant concerns                            In response to the threat of a possible credit    • There is no clear evidence to date that         Other considerations for Korea include:
                            The primary concerns of lenders related to      squeeze, the Hong Kong Monetary Authority           any one player has profitably advanced          • Limiting access to existing customer
                            the definition of the industry information      (HKMA) established some simple rules. For           its competitive position as a result of the        information for two years has not
                            framework and the rights and obligations        the first two years under a positive reporting      bureau                                             eliminated the threat of a credit squeeze
     Hong Kong lenders      of industry participants in enabling it. Some   framework, institutions would only be able                                                             - it has probably only delayed it.
                                                                                                                              • Smaller players may be deriving greater
     were primarily         of the key questions for lenders were:          to request customers’ bureau data if a
                                                                                                                                relative benefit from the bureau - new
                                                                            customer approached a lender requesting                                                             • Increased information and pricing
     concerned with         • Who would contribute data to the              a new line of credit, or a lender had good
                                                                                                                                application volume is material relative           flexibility are allowing lenders to access
     their information        bureau?                                       reason to believe a customer was
                                                                                                                                to existing assets.                               segments traditionally serviced by
     rights and                                                             experiencing payment difficulties (e.g.,                                                              unregulated lenders.
                            • Who would have access to this data?                                                             Insights from the Hong Kong experience
                                                                            seriously delinquent or had proactively asked
     obligations under      • Under what conditions would access            for debt restructuring).                          Some of the concerns that may reduce the          • Positive bureaus know actual debt to
                                                                                                                                                                                  income ratios and limits to income levels.
     the new system           be granted?                                                                                     willingness of existing players to share credit
                                                                            Thus banks cannot check the bureau records        information include:
                                                                                                                                                                                Key lessons learned
                            Lenders were concerned that other players
                                                                            of existing customers who do not request          • Lenders may be reluctant to disclose the        • The best credit risk managers will realize
                            could delay their data contribution and/or
                                                                            new credit or exhibit signs of serious              extent of deterioration in existing                the greatest benefits from increased
                            unfairly gain access to the information
                                                                            delinquency. As a result, portfolio scans to        portfolios due to competitive or valuation         information sharing.
                            provided. As net providers of information,
                                                                            measure the overall health of a loan book           concerns.
                            larger lenders faced greater relative                                                                                                               • Lenders shift from competing on the size
                                                                            will not be allowed until 2005.
                            exposures to inconsistency and voiced the                                                         • More effective lenders may be concerned           and depth of their credit information
                            loudest concerns. The secondary concern         The results                                         that regulators will force sharing of debts       databases to the depth and accuracy of
                            related to how well information rights and                                                          to underpin weaker bank performance.              the insights they can draw from this
                                                                            The overall transition was relatively smooth
                            obligations would be policed, particularly as                                                                                                         information.
                                                                            with no major problems.                           • Competition may be enhanced as more
                            TransUnion (the local credit bureau) had
                            profit incentives to release data.              • A credit crunch has not occurred                  sophisticated global players, who use           • Best practice will include the ability to
                                                                                                                                bureaus as a key information source,              tie these credit insights to marketing and
                                                                            • Charge-offs and bankruptcies have                 may seek to exploit skill and experience          portfolio management actions at the
                            A final, industry-level concern was to ensure
                                                                              begun to fall                                     gaps by entering the market and/or                customer and account levels.
                            that the market avoided an immediate and
                            broad-based credit squeeze. Once lenders        • Although lenders experienced dramatic             importing superior capabilities and
                                                                                                                                resources to capture market share from          • The best lenders will be able to increase
                            could validate borrowers across industry          falls in loan approval rates, the best                                                              or decrease their exposures over time
                            credit lines, a general concern emerged that      lenders targeted a return to previous             domestic players.
                                                                                                                                                                                  based on changes in customers and
                            a large proportion of customers would be          levels or higher within six to nine months                                                          market circumstances.
     Access to the credit   downgraded and subsequently their access
                                                                            • There is evidence of some increased
                            to credit reduced. Since no one knew the
     bureau is restricted   size of the debt problem in Hong Kong, the
                                                                              balance transfer activity, although levels
                                                                              are not exceptionally high
     to new applications    impact of such a squeeze on the broader
     and serious            economy was unknown.                            • Some sub-prime lenders have targeted
                                                                              debt consolidation with moderate
     delinquents in the     The process                                       success
     first two years        The establishment of the Hong Kong bureau
                                                                            • Increasing risk-based pricing is apparent,
                            was a consultative process with regulators
                                                                              however, a prevalence of upward
                            synthesizing views from all stakeholders –
                                                                              movement may be beginning to emerge
                            banks, consumer associations, other interest
                            groups and TransUnion. Regulators sought
                            to police the system through both mandatory
                            obligations and guidelines for participants.

24                                                                                                                                                                                                                             25
                                                                                                                                                                               Implications for Korea
         AC C E S S
     I N N OVAT I O N
        G ROW T H

                        7|Implications for Korea                                                                                                                                   Lenders have moved from a focus on simple
                                                                                                                                                                                   growth through increasing the number of
                                                                                                                                                                                                                                                          delinquency crisis. As recovery and
                                                                                                                                                                                                                                                          delinquency management efforts intensified,
                                                                                                                                                                                   cardholders, to debt monitoring and                                    credit originations and the use of credit
                                                                                                                                                                                   maintenance.                                                           reports as a means of determining credit
                           • International comparisons clearly indicate that the Korean credit reporting market
                                                                                                                                                            Large incumbents                                                                              card applications were no longer industry
                             and CRM practices are behind the US and will fall behind Asian benchmarks without                                              are expected to        During the growth phase in household credit,                           priorities. The immediate problem shifted
                             immediate improvement.                                                                                                         have reservations in   there were no active credit bureaus that                               to debt management and the sharing of
                                                                                                                                                                                   could have assisted in the credit assessment                           delinquency information, particularly
                           • The crisis experienced by the credit card industry, combined with increasing levels                                            the sharing of         process. The KFB was the only industry                                 maintaining track of consumer borrowing
                             of industry and regulator focus on credit bureaus, suggest a high probability of                                               positive information   source for credit information. The level of                            from multiple sources. As a result, the
                             change in the near- to medium-term.
                                                                                                                                                            due to fears of        information provided solely by the KFB is                              current demand from industry is focused
                           • Although bureaus will continue to close cross-sector participation gaps,, international                                                               insufficient to drive a world-class credit                             on information and tools that enable lenders
                                                                                                                                                            increased              assessment process.                                                    to monitor changes in portfolio credit quality
                             evidence suggests the prevalence of sector-based sharing is substantially reducing
                             the value of credit bureau services.                                                                                           competition for the                                                                           proactively over time. This is possible only
                           • In the absence of significant market participation, regulators may choose to hasten
                                                                                                                                                            most attractive        KIS and NICE entered the credit bureau                                 with participation by all the major players in
                                                                                                                                                                                   market in 2002 at a time when the industry                             the consumer credit market, including
                             industry evolution in Korea.                                                                                                   customer               was already seeing evidence of an emerging                             financial and non-financial sectors.
                           • A coordinated effort by the various stakeholders is important to create urgently                                               segments.
                             required key capabilities in an acceptable timeframe.                                                                                                                                                                  439            447

                           • A natural amount of tension will continue to exist in the market as stakeholders
                             pursue different objectives.                                                                                                                                                                                  342
                                                                                                                                                                                                                                                   Household Debt

                                                                                                                                                                                                KW - trillion
                        The crisis currently being experienced by                             the industry and/or regulators to take a                                                                             214
                        the credit card industry, combined with                               more aggressive role in the development of                                                                                                                                             Matured credit
                                                                                                                                                                                                                                                                                      market with
                        increasing levels of industry and regulator                           the domestic environment. However, the                                                                                                             97.4                               improved credit
                        focus on credit bureaus, suggests a high                              Korean market presents unique                                                                                                52.9                                                        discipline
                        probability of change in the near- to medium-                         characteristics and needs that must be                                                                                                                         8.5
                        term. The Korean credit bureau capability                             considered from the perspective of all
                        model clearly indicates an opportunity for                            stakeholders.                                                                                                     1999       2000        2001      2002       2003

                                                                           • Obtain relevant consumer                                                                                                                  Growth phase with easy           Credit recovery and
                                                                             information                                                                                                                                consumer credit from               delinquency
                                                                                                                                                                                                                          multiple sources              management phase
                                                                           • Prevent poaching of “high
                                                                             value” customers
                                                                           • Retain competitive information
                                                                                                                                                                                                                                                          KIS and NICE enter the Credit Bureau business
                                                                                  Credit Industry
                                 • Drive industry to an                                                                 • Ensure credit decisioning is
                                   acceptable standard                                                                    fair and correct                                         Illustration 13
                                                                                                                                                                                   Household debt
                                 • Ensure adherence to                                                                  • Ability to identify and correct

                                   regulations and policies                       Stakeholder                             errors                                                   Source: 2003, Household Credit Trend - Bank of Korea
                                 • Meet social and                                Expectations                          • Capability to better manage
                                   national obligations                                                                   individual credit worthiness
                                 • Preserve role of                                                                     • Ensure fairer pricing and
                                   industry associations                                                                  improved access to credit
                                                                                  Credit Bureau
                                                                            • Ease the sourcing of credit
                                                                            • Seek open competition and
                                                                              commercial pricing
                                                                            • Financially viable business
                                                                              and operating model

                        Illustration 12
                        Stakeholder expectations

                        Source: Accenture

26                                                                                                                                                                                                                                                                                                        27
     Implications for Korea
                                                                                                                                     AC C E S S
                                                                                                                                 I N N OVAT I O N
                                                                                                                                    G ROW T H

                                                                    3.72       With more than 5,000 contributing lending
                                                                               institutions, the KFB has a very broad
                                                                                                                                                    8|Direction for Korea
                                                  3.23                         coverage of financial information providers,
                                          2.96                                 and thereby consumers. Comparing global
                                                                               experience with Korea, we see substantial                              • The industry must take into account the current market conditions and ensure
       2.46                2.46                                                gaps in the quality of information.                                      acceptance from all key stakeholders
                                                                                                                                                      • Five guiding principles are proposed for the industry to adopt during the transition
                                                                               Private credit bureaus have sought to close
                                                                               the gaps in information depth by forging
        Q1                         Q4                                Q4
       2002                       2002                              2004       commercial contracts with lenders. These                                    1. A commercially viable business model
                             # of delinquencies - MM                           contracts allow the bureaus to collect more                                 2. Clear acceptance by all stakeholders
                                                                               detailed and timely information. The difficulty                             3. Protection of consumer rights and respect for individual privacy
       Illustration 14
                                                                               with this contracting-based approach is that
       Number of delinquencies                                                                                                                             4. Willingness for change in current industry positions and practices
                                                                               a lack of consistency emerges regarding
       Source: 2003, Household Credit Trend - Bank of Korea                    what is collected, when it is collected, who                                5. A regulatory environment that encourages free competition
                                                                               has access to the information and on what                              • By mapping current market capabilities to international best practice we believe
       Consumers' exuberance and relative
                                                                               conditions it can be accessed. This can                                  that by focusing on four key priorities the Korean credit reporting market will see
       inexperience with personal debt have
                                                                               undermine both lender and borrower                                       an overall improvement in credit decision making:
       contributed to the severity of the current
                                                                               confidence in the fairness and utility of the
       problems.                                                                                                                                           1. Information quality
                                                                                                                                                           2. Sophistication of lenders
       The success of the credit information                                                                                                               3. Cross-sector participation
                                                                               A comparative analysis of the Korean
       industry is dependent on lenders providing
                                                                               information framework with the US,                                          4. Regulatory facilitation
       and using information.
                                                                               Singapore and Australia is provided below.
                                                                                                                                                      • Market forces are likely to ensure that other key components of the industry capability
                                                                                                                                                        set will continue to develop at a sufficient pace.
                                              Extent of participation in the credit             Depth of information shared
                                                       reporting market                            with credit bureaus

                                                                                                                                                    A definitive direction for the industry is        to reach it. We suggest two approaches to
                                         Bank             Non-Bank FI            Other          Negative          Positive                          unlikely to emerge without substantial            these challenges:
                                                                                                                                                    stakeholder dialogue.
                                                                                                                                                                                                      • We have defined guiding principles that
                                                                                                                                                                                                        can be used to initiate and facilitate
                                                                                                                                                    There is little doubt within the research or
                                                                                                                                                    financial industry that full-scale credit
                                                                                                                                                    information sharing offers significant            • We have presented a target capability
                                                                                                                                                    benefits to all stakeholders as a                   model for discussion to provide clear
                 Singapore                                                                                                                          homogenous group. However, in seeking to            direction on the possible focus, priority
                                                                                                                                                    promote change, one key challenge must              and general quantum of change.
                                                                                                                                                    be addressed: significant uncertainty exists
                                                                                                                                                    regarding how the benefits are shared across      We have not defined the target model
                                                                                                                                                    - and particularly within - stakeholder groups.   beyond a capability model level of detail.
                                                                                                                                                    The value sharing that unfolds in any given       This allows for significant debate and
                            Very High                    High                  Moderate            Low                 None                         market will be a function of both the model       consideration of value-sharing implications
                                                                                                                                                    that is chosen and the transition path utilized   of these decisions.
       Illustration 15
       Comparison of information models

       Source: Accenture

28                                                                                                                                                                                                                                                  29
     Direction for Korea                                                                                  Direction for Korea

       Korea credit bureaus                             Competition and regulatory                         Target Korean Capability Model Changes
       industry guiding principles                      encouragement: There must be positive
                                                        regulation and encouragement to facilitate
       Commercially viable: The business model          a competitive base environment from which
       for the credit bureau must be commercially       to grow. At the same time, it is important                                                                                   nt                                  Se
                                                                                                             Primary Change Agent                                                  me                                         r vi
       viable for all players. Pricing must be market   that market forces are allowed to shape the                                                                      ir   on                                                  ce
                                                                                                                                                                      nv                  Regulatory       Information                 C
       driven and be fair to the participants. In the   industry structure and ownership patterns                 Regulator                                                               Facilitation        Quality



       long-term, market forces determine how the       to best suit market demands without undue

                                                                                                                                                           e ra
                                                                                                                          • Information Quality

                                                        regulatory interference.

       industry information model expands. .                                                                                                                    Ownership                                                 Bureau
                                                                                                                          • Cross Sector Participation          Structure                                                 Services

       Benefits statements: For the credit bureau       Improving Korea’s credit                                          • Regulatory Facilitation
       market to mature, all players in the industry    risk management                                           Industry
       must be made aware, and be convinced of,                                                                                                            Cross Sector                                                       Value Added
                                                                                                                          • Sophistication of Lenders      Participation                                                        Services
       the benefits. Regulatory guidance could be       We are suggesting a three-part focus strategy
       a tool to aid this process, but the market       to maximize the impact of change efforts.                 Market Forces
       must be allowed a substantial role in defining   • Utilize regulatory facilitation to promote                      • Bureau Services
       optimal sharing of the incremental value           industry cooperation on information
                                                                                                                                                                        Sophistication                                 Usage
                                                                                                                          • Value Added Services                         of Lenders                                  Penetration
       created.                                           quality and cross sector participation                                                                                                   Efficiency of
                                                                                                                          • Usage Penetration                                                     Infrastructure
       Consumer rights: Consumer education and          • Pursue an industry-led program to                               • Efficiency of Infrastructure
       involvement is an essential element in             increase the sophistication of lenders                                                                                             Mark
                                                                                                                                                                                                 et Sophistication
       gaining acceptance of an effective credit          and borrows
                                                        • Allow market forces to drive outward
                                                          pressure on the remaining capabilities.          Illustration 16
       Acceptance of change: All stakeholders                                                              Key changes in capabilities
       must be willing to accept change in their        Of the nine capability areas, it is information    Source: Accenture
       current positions. Consumers must be willing     quality and cross-sector participation that
       to accept an increase in the amount of credit    will contribute most to the effectiveness of       There are a number of industry dimensions                                • The improved quality of bureau services
       information available to lenders, in order to    a bureau service in improving industry credit      that correlate with the dimensions targeted                                and marketing will lead to increased
       be able to access fairer pricing. Current        decisions. By increasing the number of             by the focus strategy:                                                     penetration as more lenders,
       industry players have, over time, acquired       lenders contributing information and the                                                                                      telecommunication companies,
       a competitive advantage at substantial cost      quality of information they contribute, many       • Two maturing bureaus service the Korean
                                                                                                                                                                                      insurance companies and trade
       and effort by building substantial customer      of the other variables will follow an outward        industry with at least one potential new
                                                                                                                                                                                      financiers begin to utilize an expanded
       databases and developing insights. Changes       expansion through market forces.                     participant. Faced with an expanded
                                                                                                                                                                                      product range.
       in the credit bureau business model must                                                              data set, private bureaus will be in a
       recognize the value of these assets and the                                                           position to enhance the quality of reports                             • Increased usage will lead to economies
       impact of delivering the proposed changes                                                             provided and provide insight drawn from                                  of scale, enhanced pricing, increased
       on these values.                                                                                      the information.                                                         profits and re-investment, and, as a
                                                                                                                                                                                      consequence, enhanced infrastructure
                                                                                                           • Private credit bureaus will ensure bureau
                                                                                                             and value-added services continue to
                                                                                                             evolve at a sufficient pace in order to
                                                                                                             maintain domestic effectiveness and
                                                                                                             international parity.

30                                                                                                                                                                                                                                                31
     Direction for Korea
                                                                                                                                     AC C E S S
                                                                                                                                 I N N OVAT I O N
                                                                                                                                    G ROW T H

       Potential transition paths                                          participants. We contend that market forces
                                                                           are the most appropriate mechanisms to
                                                                                                                                                    9|Transition considerations
       We believe regulatory involvement will                              drive the evolutionary process in this area.
       facilitate expansion of information quality                         Any attempt by regulators to develop or
       and cross-sector participation. Accelerated                         define the appropriate actions in this space                               • As the industry evolves, a number of issues need to be addressed:
       market-led change is unlikely: Korea is                             is unlikely to accommodate the unique
                                                                                                                                                          • Expanding positive and negative data provision is an industry priority. The format
       characterized by a large number of parties                          needs of all lenders, and will subsequently
                                                                                                                                                            in which this information is presented may offer interim solutions to encourage
       with potentially conflicting expectations and                       result in ineffective averaging and
                                                                                                                                                            industry collaboration and ultimately consistent participation. However, any
       a history of moderate or limited coordination.                      constraints.
                                                                                                                                                            interim solutions should be agreed in the context of longer-term commitments.
       International experience does not indicate                          By enhancing the industry information                                          • International experience supports the provision of credit information without
       a strong role for regulators in enhancing                           model, regulators will create an environment                                     consumer consent when the request is for credit purposes only. As in established
       CRM practices. The sophistication of CRM                            wherein CRM becomes the primary means                                            in other markets, opting rights for consumers can be utilized to address other
       practices within a given market is a function                       of competition. Market forces will drive                                         issues such as the use of credit information for direct marketing.
       of the capabilities of its individual                               lenders to invest in its development.
                                                                                                                                                          • The benefits of a credit reporting market will not be realized by the industry
                                                                                                                                                            unless the participants develop adequate credit risk management capabilities
                                                                                                                                                            that accommodate changes in the bureau environment.
                                                                                                                                                          • Consumers will need to be constantly engaged in this process. This may include
                                                                                      Phase I – Regulators lead a drive to
                                                                                                                                                            running education programs and involving consumer groups in a consultative
                                                                                      expand the minimum industry information                               process while the industry determines its politics in adopting a comprehensive
                                                               Phase III              model bearing in mind the requirements
                                                                                      of all stakeholders                                                   credit management regime.
          Value added to economy

                                                 Phase II

                                            Phase I                                   Phase II – Industry commits to
                                                                                      implementation of the information model,
                                                                                                                                                    Information model - Keys                         Enhancement of the negative and positive
                                                                                      a prudent credit practices framework and
                                                                                      consumer education
                                                                                                                                                    to success                                       information reported by the industry can
                                                                                                                                                                                                     substantially enhance the value of bureau
                                          Korea Today
                                                                                                                                                    The information model defines, at a high         services.
                                                                                      Phase III – Market forces ensure the                          level, the type and flow of information across
                                                                                      industry capability continues to evolve
                                                                                      without formal coordination from                              the value chain as it moves from raw,            This change can be brought about either
                                                                                      regulators or industry                                        transactional data, through to credit reports    through regulatory mandate or by industry
                                   Korea 1995                                                                                                       and scores. It is at the core of creating an     consensus. Given the lack of consistency
                                                        Time                                                                                        effective credit information market. The         within the industry and the underlying
                                                                                                                                                    regulator may choose to aid the industry in      urgency of the current crisis, a better option
                                                                                                                                                    overcoming barriers to collaboration.            may be for the regulator to take a lead role
       Illustration 17
                                                                                                                                                    International experience suggests that           in defining this framework. The current
       Industry transition path
                                                                                                                                                    defining the what, who, how and why of           regulatory framework already utilizes a
       Source: Accenture
                                                                                                                                                    information exchange removes one of the          minimum mandatory reporting requirement.
                                                                                                                                                    single greatest barriers to collaboration, and
                                                                                                                                                    ultimately, to progress. The information         The low levels of credit information available
                                                                                                                                                    framework is the only component of the           to lenders can lead to sub-optimal credit
                                                                                                                                                    capability model that requires consistent        decisions. The challenge that remains for
                                                                                                                                                    compliance of all market participants.           the Korean market is to define the

32                                                                                                                                                                                                                                                33
                            Transition considerations                                                                                         Transition considerations

                             appropriate depth of information that lenders         and capitalize on the existing regulatory                   Competitive concerns                                   Some interim measures to encourage this
                             should be sharing. We do not recommend                infrastructure. Once the minimum sharing                                                                           provision of information may facilitate
                             that lenders share all the available data             requirements are increased, credit bureaus                  All lenders should be granted equal access             collaboration by more reluctant lenders.
                             regarding borrowers, but we do propose that           could continue to maintain their role in                    to credit bureau information on the principle
                             increasing the depth of information will              identifying which additional data can provide               of reciprocity.                                        In a new market where no one player has
                             increase the effectiveness of lending                 meaningful insights to users and structure                                                                         established an information or insight
     The information         decisions. As an example, without                     contracts to promote its provision and                      While ensuring the participation of all the            advantage over any other, the ideal solution
     model should            information regarding the total credit limits         application in the lending process. This                    players in the industry, the business model            would be to report all the information that
                             a borrower can access across all lenders,             proposition is outlined below:                              must recognize the value and importance                is collected, but this is more difficult in an
     explore options in      the borrower’s historical utilization of these                                                                    of acquired transactional information.                 established market where larger players
     sourcing data and       limits and his/her transaction behavior, it           Cross-sector participation and full                                                                                hold information advantages.
     presenting it along     is very difficult for lenders to effectively          information sharing are critical to the credit              The current Korean regulatory framework
                             estimate the true risk of lending.                    information business model.                                 mandates contributions by financial                    Full disclosure is a requirement to achieve
     with appropriate                                                                                                                          institutions and we see no reason to repeal            an effective system, however a phased
     credit scores, while    One immediate means to increase                       The current industry structure is dominated                 this requirement. The regulatory mandate               approach may be considered to facilitate
     giving consumers        information depth and consistency is to               by the KFB as the major aggregator of the                   could be expanded to include non-finance               cooperation during a transition period. One
                             increase the mandatory information                    mandated information from the financial                     companies although market forces are likely            option would be to consolidate the
     options with their      provision requirements currently managed              services sector. By virtue of this requirement,             to be sufficient to effect this.                       information that is reported by lenders into
     personal privacy.       by the KFB.                                           if we ignore the adequacy of the current                                                                           summary level credit reports as an interim
                                                                                   minimum reporting requirement, financial                    Accenture research has not uncovered any               measure. Individual account-level
                             If Korean regulators were to increase the             services sector participation is excellent: it              compelling reasons to restrict access to               information could potentially be masked
                             depth of information lenders were required            is the inconsistency beyond mandatory                       credit information for any specific party other        from the market without seriously limiting
                             to provide to the KFB, it would both increase         information requirements that causes                        than reciprocity. The reciprocity principle is         its usefulness to the credit decision. This
                             the effectiveness of lender credit decisions          problems.                                                   a vital mechanism to enable market forces              would allow a transition period for
                                                                                                                                               to accelerate involvement in the                       participants, while providing the industry
                                                                                                                                               development of bureaus. By requiring all               access to some of the benefits of information
                                                                                                                                               users of information first to become                   sharing sooner than would normally be the
                                                                                                                                               providers of information, the growth in users          case. It is critical that any interim measure
                                                                                      A   The proportion of information that lenders in        of bureau services will underwrite the growth          be used only as a mechanism to allow
                                                                                          Korea currently exchange
                                                            C                                                                                  in suppliers of information.                           lenders to move into the new environment.
                                                                                      X   The minimum information Korean lenders
                                                                                          should exchange to realize a significant uplift
                                                                                          in performance and enable effective CRM and
                                                                               X          a stable lending industry
                                                                                                                                                        Negative data
                                                                                      B   The gap regulatory facilitation can seek to close
                                                                                          whilst acknowledging competitive concerns

                                                                                                                                                100 %
                                                 B                                                                                                                             Aggregate                Credit                  Credit

                                                                                          The information that credit bureaus continue                  Positive data          and Audit                Scoring                 Report
                                                                                          to seek in private contracts to improve results

                                                                                          100 percent of the credit information that                    Cross sector data
                                                 A                                    D
                                                                                          could possibly be collected about consumers

                                                                                                                                                        • Mandated data     • Collect all data       • Scoring performed     • Credit report with
                                                                                                                                                          points              points from industry     using all available     “agreed” fields
                                                                                                                                                                            • Ensure accuracy                                • Credit Score

                             Illustration 18
                             Adding value through improved data sourcing                                                                       Illustration 19
                                                                                                                                               Information model
                             Source: Accenture
                                                                                                                                               Source: Accenture

34                                                                                                                                                                                                                                                       35
                            Transition considerations                                                                                                  Transition considerations

                             Access to credit                                  The Bad Bank initiative is a creative and                                need to make decisions regarding where to                            scorecard increases, lenders are able to
                                                                               positive mechanism but a large proportion                                maintain, reduce and/or increase exposures.                          accept an increasing proportion of
                             As the credit approval process improves, the      of borrowers are ineligible for Bad Bank         There will be                                                                                applications without experiencing an
                             industry must ensure that the economy does        relief. In response, a number of lenders are     varying pay-offs for    Over time, market forces will lead to a                              increase in expected default rates.
                             not experience sudden changes in credit           working on, or have announced, internal                                  reduction of the total available credit for
                             availability.                                     restructuring terms. These terms will need       lenders as the          borrowers in breach of capacity. Improved                            With the arrival of full credit disclosure,
                                                                               to consider the incentives of borrowers          information content     information will also reduce the incidence                           lenders will have access to greater
                             A genuine concern in a full disclosure            seeking to gain eligibility to the Bad Bank      improves.               of granting loans to customers who have                              information to populate scorecards. Given
                             environment is the impact that increased          initiative. We do not suggest that regulators                            reached their capacity. However, lenders                             the industry’s severe problems, these risk
                             information will have on available credit         restrict the freedom of lenders to restructure                           with superior CRM will be in a better position                       factors are more likely to be unfavorable
                             lines. It is reasonable to expect that lenders    accounts, but guidelines enforcing an                                    to decide when to reduce lines and when to                           than favorable. Combining this
                             will seek to reduce exposure to customers         obligation to pursue restructuring over                                  maintain or increase lines. Also, superior                           consideration with lenders' needs to learn
                             who have industry limits and/or outstanding       closure protect the needs of both consumers                              risk management will enable lenders to                               how best to apply the new information, banks
                             balances in excess of their capacity to pay.      and lenders thereby allowing the industry                                utilize pricing to promote debt consolidation                        are likely to experience a decline in credit
                              An increase in available credit information      to commit to a sustained and manageable                                  and balance transfers more effectively than                          approval rates. Those with superior CRM
                             will improve the ability of lenders to identify   transition rather, than the previous over-                               competitors.                                                         are likely to experience a smaller drop in
                             this risk. This could in turn lead to a “credit   extension. It would also allow lenders to                                                                                                     acceptance rates and a faster return to
                             crunch” as lenders scramble for first access      meet the moral obligations of working with                               Superior credit risk managers will also be                           previous or higher levels.
     Internal                to collect on higher risk debts.                  customers who have experienced financial                                 better placed to manage changes in credit
                                                                               difficulties as a result of increased access                             approval rates. At a basic level, lenders apply                      The prevalence of charge cards in Korea is
     capabilities in risk                                                      to credit.                                                               scorecards in an attempt to separate good                            exacerbating the incidence of delinquency
                             The Hong Kong lesson provides an example
     management are          of how the industry can avoid an immediate                                                                                 risks from bad risks. Based on a target loss                         across the industry.
     essential before        credit crunch. Korea will need strong             Risk management capabilities                                             rate, a scorecard will assist a bank in
                             industry guidelines regarding the appropriate                                                                              identifying which loans to accept and which                          Another unique facet of the Korean market
     the economy                                                               Those lenders with the most sophisticated                                loans to decline. As the quality of a                                is the prevalence of charge cards over
                             actions for lenders seeking to reduce
     reaps the benefits      exposure to customers in breach of their          CRM capabilities will realize the greatest
     from the improved       lending capacity. Rather than seeking to          benefits from improved credit information.                                                                                                      Bank ‘A Line Decisions
                             close access to credit immediately and            Improved credit reporting is not a panacea.
     credit reporting                                                          Without enhancing risk management
                             aggressively collect outstanding debt, we                                                                                                                                       Maintain Credit Line                   Close Credit Line
     infrastructure.         believe the industry should establish and         capabilities to capitalize on improved
                             commit to transparent remediation                 information, the benefits are marginal.
                                                                               Credit bureau information and services add                                                                                   Industry exposure                         Industry exposure is
                             guidelines. Guidelines issued by the                                                                                                                Maintain                breaches capacity to pay,               acceptable, Bank B increases
                             Financial Supervisory Service based on            value to the industry by increasing the                                                          Credit Line               delinquencies likely to                share of wallet to 100%, Bank
                                                                                                                                                                                                               remain high                       A losses customer relationship
                             consultation with the industry could achieve      effectiveness and efficiency of lending
                             a mutual sense of fairness and obligation         decisions. To achieve this, enhancements                                    Bank ‘B’ Line
                             by all parties. Due to the complexity and         made to the credit information environment
                             temporary nature of this problem, we do not       must be integrated with existing CRM
                                                                                                                                                                                                            Industry exposure is                  Industry exposure is zero,
                             believe legislation is a suitable response.       technologies and processes. With better                                                         Close Credit            acceptable, Bank A increases               customer losses access to
                                                                               information, lenders will be in a position to                                                       Line                share of wallet to 100%, Bank
                                                                                                                                                                                                       B losses customer relationship
                                                                                                                                                                                                                                                 credit, private consumption
                             The recently created ‘Bad Bank’ is unique         improve credit approval and management.
                             to Korea. The Bad Bank is a consortium of
                             commercial banks and the Korea Asset              During the transition period from limited to
                             Management Corporation, created to buy            full credit information, we expect lenders                               Illustration 20
                                                                                                                                                        Potential lender responses to new risk information
                             up each other’s bad consumer debt, allowing       with superior CRM capabilities to improve
                             them to clear the non-performing loads off        their share of the most appropriate credit                               Source: Accenture

                             their books.                                      risks. With new information, lenders will

36                                                                                                                                                                                                                                                                                37
     Transition considerations                                                                                                         Transition considerations

      revolving products. A typical credit card in             revolving card, the customer is only required                            Consumer Participation                           Consumer education on how to better
      Korea acts like a charge card – a consumer               to pay a small proportion of outstanding                                                                                  manage personal credit and the costs and
      will receive a statement at the end of each              debt, typically up to five percent. The key                              Regulators must balance the demands of           benefits of doing so can help ensure that
      month outlining total expenditure with                   differences and implications for credit status                           individuals’ rights against the needs of         borrowers are not tempted to regress to
      settlement in full required to at the specified          are described below. Converting customers                                information sharing to facilitate an effective   prior, irresponsible borrowing practices
      payment date. The challenge with this model              with a moderate to low level of risk onto                                lending market.
      is that the payment cycles are very                      revolving cards reduces the probability of                                                                                The industry and the regulators will require
      demanding for consumers and are not                      them becoming delinquent. For customers                                  For lenders and the economy to gain the          a mechanism for incorporating consumer
      aligned with income. If 10 percent of the                whose risk profile is not appropriate for a                              maximum possible benefits from credit            needs into the information sharing
      amount remains unpaid, a customer will                   shift to a revolving product, restructuring                              bureaus, compulsory consumer participation       framework. We are unaware how current
      technically be classified as overdue and                 the debt into term products is an alternative                            - for credit information purposes - is a         industry bodies such as the KFB Credit
      eventually delinquent. In contrast, with a               option.                                                                  cornerstone of fair and consistent               Information Committee accommodate
                                                                                                                                        information exchange.                            consumer representation. A consultative
                                                                                                                                                                                         process can assist in bringing all
                  Period                Factor           Charge (KRW)                Credit (KRW)               Consumer rights         Privacy is the overriding consumer               stakeholders together.
                                                                                                                                        consideration, especially as it relates to the
                  Month 1               Spent            2,000,000                   2,000,000                  and privacy will be     ways in which credit reports might be used       With increasing information, it is important
                                        Min Payment      2,000,000                   100,000                    key concerns to the     such as for employment selection.                that the industry maintains guidelines to
                                                                                                                regulators even as      Consumers need to be able to restrict the        ensure delinquents are managed in a fair
                                        Actual Payment   500,000                     500,000
                                                                                                                                        use of their personal data for purposes other    manner. In addition to a potential credit
                                        Credit Status    Overdue                     Current                    they start to           than approving credit. Consumer confidence       crunch, regulators must seek to protect
                  Month 2               Spent            0                           0                          facilitate              will be greatly influenced by the regulations    consumers from the possibility of source
                                                                                                                improvements in         concerning individuals’ privacy and ensuring     lenders seeking to aggressively collect before
                                        Min. Payment     1,500,000                   75,000
                                                                                                                                        the continued availability of credit. It is      their competitors after closing credit lines.
                                        Actual Payment   500,000                     500,000                    the credit reporting    reasonable to expect that borrowers are less
                                        Credit Status    30 days delinquent          Current                    business.               likely to withhold information if providing it   Industry Structure
                                                                                                                                        will reduce the cost of borrowing. Lender
                  Month 3               Spent            0                           0
                                                                                                                                        support for consumer opt-outs on credit          There are a number of ways in which a
                                        Min. Payment     1,000,000                   50,000                                             related information sharing is low. However,     competitive market could evolve. The primary
                                        Actual Payment   500,000                     500,000                                            there is renewed interest around the world       considerations will be to balance the need
                                                                                                                                        in providing “opt-in” and “opt-out”              for an adequate information infrastructure
                                        Credit Status    60 days delinquent          Current
                                                                                                                                        capabilities to consumers for non-credit         with the optimization of investments and
                  Month 4               Spent            0                           0                                                  purposes such as direct marketing.               effort. A number of options are illustrated
                                        Min. Payment     500,000                     25,000
                                        Actual Payment   500,000                     500,000

                                                         Current, has delinquency    Current, improving
                                        Credit Status    on internal records, poor   scoring, classified as
                                                         behavior score              good risk

      Illustration 21
      Illustration of charge and credit products

      Source: Accenture analysis

38                                                                                                                                                                                                                                    39
     Transition considerations
                                                                                                                                          AC C E S S
                                                                                                                                      I N N OVAT I O N
                                                                                                                                         G ROW T H

                                                                                                                                                         10|Benefits of change

                            Private                          Private                     Private                 Private
               KFB         Contracts           KFB          Contracts        PCR        Contracts               Contracts                                  • Consumers will benefit from fairer pricing, easier access to credit, improved financial
                                                                                                                                                             literacy, and rewards for good credit behavior.
                      CB                               CB                    KFB           CB             KFB               CB                             • Lenders will be in a better position to measure and price the underlying risk of a
                                                                                                                                                             given account, facilitating increased segment specialization where required, the
                     Report                   Report        Report        Report         Report         Report            Report                             capability to lend responsibly to broader risk segments. and the requisite information
                                                                                                                                                             to enhance credit risk management practices.
           1     Add non-financial        2      Allow KFB to operate    3     Establish a new public    4      Eliminate the
                 Institutions to KFB             in the dual role of           reporting entity                 regulatory registry
                 mandatory basic                 industry information                                           role                                       • Bureaus will gain access to enhanced information, enabling improved services,
                 reporting                       custodian and private         KFB operates as a
                 requirements                    bureau                        private bureau                   Lenders provide                              increased user demand and improved economies of scale.
                                                                                                                direct access to
                                                                                                                all bureaus
                                                 This model can exist
                                                 with or without non-
                                                                               This model can exist
                                                                               with or without non-
                                                                                                                                                           • Regulators will gain access to more accurate and timely data on the state of the
                                                 financial reporting           financial reporting                                                           lending markets, enabling them to respond to changes and trends more proactively.
                                               Private arrangement       Mandatory arrangement

      Illustration 22
                                                                                                                                                         Consumers                                        Lower income groups and those with an
                                                                                                                                                                                                          impaired credit record will find that the
      Potential industry structures
                                                                                                                                                         Consumers stand to gain from fairer risk-        creation of a credit reporting information
      Source: Accenture analysis
                                                                                                                                                         based pricing and a better fit of products to    infrastructure helps them to obtain credit
                                                                                                                                                         their needs and repayment capabilities, with     from formal channels instead of relying on
      1. Inclusion of non-financial organizations                        3. Introduce a public credit registry to
                                                                                                                                                         a reduced risk of economic and social            private loans or “unregulated lenders” and
         submitting mandatory reporting to the                              aggregate mandatory reporting currently
                                                                                                                                                         hardship.                                        being subject to their associated problems.
         KFB. Implementing this model across all                            collected by the KFB. This would require
         businesses that extend some form of                                a significant public investment and
         credit to consumers is unlikely, and it                            substantially change the role played by
                                                                                                                                                         Consumers will have more accurate                Lenders
                                                                                                                                                         matching of credit lines to repayment
         would be difficult to implement and                                the KFB.                                                                                                                      A mature credit information structure will
                                                                                                                                                         capabilities. Although some consumers will
         police in practice. However, the inclusion                                                                                                                                                       enable lenders to segment and market their
                                                                                                                                                         experience a tightening of their credit lines,
         of selected non-financial institutions may                      4. Move toward a US-type model. This                                                                                             products better while minimizing provisioning
                                                                                                                                                         these changes would be reasonable and
         be a useful compromise. The current                                structure would eliminate the regulatory                                                                                      and bad debts.
                                                                                                                                                         driven by income levels. The pricing of credit
         public reporting targeted by the                                   registry role played by the KFB and allow
                                                                                                                                                         products will become more competitive as
         government is a good example, in which                             all bureaus to compete as equals,                                                                                             Lenders stand to gain large benefits from
                                                                                                                                                         the industry develops practices to measure
         data custodians can be directed to                                 sourcing data directly from lenders. This                                                                                     an effective credit information structure in
                                                                                                                                                         and track credit risks more effectively.
         participate.                                                       option maximizes the role of market                                                                                           Korea. While some of the obvious gains are
                                                                            forces in determining information models                                                                                      in delinquency management, the benefits
                                                                                                                                                         One of the most important benefits will be
      2. The KFB expands its role and acts as                               and investment. Effective auditing would                                                                                      will touch upon most banking processes
                                                                                                                                                         the capability of consumers to manage their
         both an industry registry and a private                            become critical to ensure fairness.                                                                                           from product development to debt
                                                                                                                                                         credit ratings. With an appropriate consumer
         credit bureau. There are two challenges                                                                                                                                                          management.
                                                                                                                                                         awareness program that explained the
         with this approach. As the KFB is not
                                                                                                                                                         concept of credit management and pricing,
         mandated to maximize profits it may not                                                                                                                                                          Lenders will be able to develop products
                                                                                                                                                         consumers would, for the first time, be able
         be an optimal bureau services provider                                                                                                                                                           that better match the credit risk profile of
                                                                                                                                                         to manage their borrowings and repayments
         over time. Secondly, other bureaus would                                                                                                                                                         various segments. As the market matures,
                                                                                                                                                         to optimize their credit scores based on
         be placed at a competitive disadvantage                                                                                                                                                          there may be specialized lenders that cater
                                                                                                                                                         industry scoring models.
         if the KFB controls the mandatory
         database and competes in the bureau
         services market.

40                                                                                                                                                                                                                                                     41
     Benefits of change
                                                                                                                  AC C E S S
                                                                                                              I N N OVAT I O N
                                                                                                                 G ROW T H

      to sub-prime segments, micro loans, and
      other specialized segments that would not
                                                        quality is expected to lead to increased
                                                        demand for services. Increased demand
      have been possible with the current level of      will in turn lead to increased user
      credit information available in Korea. This       penetration.
      can reduce the dependence of these                                                                                            A.     International Markets
      segments on unregulated lending.                  The flow-on from increased user penetration
                                                        is improved economies of scale, allowing                                    B.     Selected Country Experiences
      Managing the credit processes from                bureaus to charge lower prices. Some                                        C.     Glossary
      planning, acquisition and management will         component of scale benefits is likely to be
      be made more efficient with the availability      re-invested into advanced capability                                        D.     List of References
      of credit information. In addition to managing    development, ensuring the industry keeps
      the credit risk, lenders will be able to better   abreast of international developments.
      automate their internal processes and reap
                                                                                                                                 Appendix A
      operational efficiencies. The industry will       Regulators                                                               International Markets
      also be a better position to track and resolve
      repayment delays.                                 In addition to immense gains in the reduced       Public credit          Experience across international markets          Many reasons have been hypothesized for
                                                                                                                                 outlines a diverse range of credit information   the formation of public credit registries. The
                                                        social and economic costs of ineffective          registries have        industry structures. The number of markets       most common are:
      In the near term, we believe that better          lending, regulators will gain from a transfer
      customer credit information will help the         of lending from the “unregulated sector” to
                                                                                                          generally evolved      without credit information sharing continues
                                                                                                                                                                                  • The lack of private credit registries in the
      industry in developing debt restructuring         the regulated sector.                             to meet the            to drop.
      packages. Restructuring of debt from the                                                            requirements of        Public and private credit                        • The high cost of technology and
      current set of delinquent customers can           A mature credit information market provides
      maximize the preservation of capital and          regulators with the capability to track
                                                                                                          the national           registries                                         communications infrastructures, a factor
      minimize social problems and hardships.           consumer debt closely, and the means to           regulators.                                                               commonly cited by participants in smaller
                                                                                                                                 The presence of credit information entities        developing markets
      Adequate credit information will help the         stimulate or support activity more effectively.
                                                                                                                                 varies substantially across countries.
      industry in developing these packages.            The performance of financial institutions                                                                                 • Driven by legislation in the face of
                                                                                                                                 Depending on factors such as the maturity
                                                        can also be better monitored, thereby                                                                                       inadequate support by industry
                                                                                                                                 of the market and available technology,
      Bureaus                                           enabling more proactive management of
                                                                                                                                 countries have developed different collecting      participants.
                                                        risks and issues.
                                                                                                                                 and reporting entities. Some countries have
      As the quality of information and level of                                                                                                                                  There is a marked difference in the source
                                                                                                                                 public registries, some private, others both,
      services from the bureaus increase, they          A stable financial services sector promotes                                                                               and types of data collected by private credit
                                                                                                                                 and some, none at all.
      are able to add more value to the credit          stability across the economy, increasing the                                                                              registries. Public credit registries are usually
      sector.                                           confidence of local and foreign investors in                                                                              set up by a central bank or other regulatory
                                                                                                                                 Although they vary in detail, public credit
                                                        the Korean economy and financial system.                                                                                  or industry bodies in order to manage the
                                                                                                                                 registries around the world share common
      Once the hurdles of regulatory clarity and                                                                                                                                  credit market in the economy. Maintenance
      availability of information are addressed,                                                                                                                                  of consumer credit information, especially
      credit bureaus will be able to provide tangible                                                     Private credit         • Most are operated by the central bank          from the non-financial services sector, is
      benefits to the industry.                                                                                                    or bank supervisor                             usually not a key function. The private
                                                                                                          registries track                                                        credit registries usually source information
                                                                                                                                 • Participation by supervised financial
      With the maturity of source data, the bureaus                                                       most consumer            institutions is compulsory                     from financial and non-financial sectors to
      will be able to provide better services and                                                         credit behavior,                                                        provide an overall picture of the credit
      information to the industry. Increased                                                                                     • Most information collected is from the         capabilities of individual consumers. Private
      participation by lenders may reduce non-                                                            both from financial      commercial banking sector                      credit registries often co-exist with public
      lending sector resistance to providing                                                              and non-financial      • Information usually includes both positive
                                                                                                                                                                                  credit registries. Some reasons that can be
      information. Increased information service                                                          sources to                                                              attributed to their growth are:
                                                                                                                                   and negative data
                                                                                                          determine better       • Information collected is used for aiding
                                                                                                                                                                                  • Free market principles and a non-
                                                                                                          predictive models.                                                        intervention stance by regulators
                                                                                                                                   the regulatory process and is usually
                                                                                                                                   provided to the industry, sometimes at
                                                                                                                                   a cost.

42                                                                                                                                                                                                                                 43
                      Appendix                                                                                                                                                  Appendix

                                                                                                                                                                                 Appendix B
                                                                                                                                                                                 Selected country experiences
                                                                                                                                                                                 United States of America
                                                                                                                                                                                 Background                                         Information framework 4
                                                                                                                                                                                 The US has a very mature lending market            The credit bureaus are governed by a set of
                                                                                                                                                                                 with sophisticated credit bureaus providing        privacy guidelines that ensures an equitable
                                                                                                                                                                                 decision support to lenders. Federal policy        approach and provides recourse to the
                                                                                                                                                                                 in the US has encouraged the credit industry       borrowers. Some of the principles are:
                                    No Bureau                                                                                                                                    to make credit and other financial services
                                                                                                                                                                                                                                    • Credit bureaus can create credit reports,
                                                                                                                                                                                 available to a broader segment of the US
                                    Public Bureau                                                                                                                                                                                     but content must be limited to credit
                                                                                                                                                           There is a growing    population. The result of these public policies
                                                                                                                                                                                                                                      histories, and cannot be of an
                                    Private Bureau                                                                                                                               has been a dramatic increase in credit
                                    Public and Private
                                                                                                                                                           body of research      availability to all segments of the US
                                                                                                                                                                                                                                      investigative nature.
                                                                                                                                                           indicating that       population, particularly to those toward the       • The information is restricted to personal
                                                                                                                                                           credit bureaus        bottom of the socio-economic spectrum.               identification, open credit lines, public
                       Illustration 23
 The private credit                                                                                                                                                                                                                   records related to the use of credit and
                       Public and private credit registries around the world                                                                               have been a major     There is a large and growing body of research        inquiries on credit file information.
 registries (credit    Source: Adapted from the Credit Registry Maps, World Bank Group
                                                                                                                                                           contributor to        indicating that policies on data collection
                                                                                                                                                                                                                                    • Credit bureaus can release credit files
 bureaus) usually      • Focus on consumer credit information                                           • Increased lender sophistication including        sustained growth      and usage and the parallel technological
                                                                                                                                                                                                                                      only for purposes as defined in the Fair
                                                                                                                                                                                 advances driven by private bureaus have
 have a larger           by banks, non-bank financial companies,                                          the capabilities and regulatory policies         in consumer credit    been a major contributor to this sustained
                                                                                                                                                                                                                                      Credit Reporting Act.
 coverage of the         mortgage companies, and the retail and                                           to allow risk-based pricing of consumer
                                                                                                                                                           and spending.         growth in consumer credit and spending             • The information must also be disclosed
                         service industries                                                               loans
 overall consumer                                                                                                                                                                within manageable default levels 3. Bureau           to the borrower on demand, and there
                       • Private credit registries usually do not                                       • Developments in scoring technologies                                   credit scores and or information are now
 credit market from      limit their data collection based on a                                           and ability to operate a profitable                                    widely applied by both financial and non-
                                                                                                                                                                                                                                      are means to recourse in case of errors
                                                                                                                                                                                                                                      or disputes.
 financial and non-      minimum loan size                                                                services business.                                                     financial entities, including card issuers,
                                                                                                                                                                                                                                    • Derogatory information is kept only for
 financial markets.                                                                                                                                                              merchants, automobile leasers, mortgage
                                                                                                                                                                                                                                      a maximum of seven years, with the
                                                                                                                                                                                 firms and insurance companies.
                                                                                                                                                                                                                                      exception of personal bankruptcy
                                                                                                                                                                                 Industry structure                                   records, which can stay on file for up to
                                                                                                                                                                                                                                      ten years.
                              20                                                                                                                                                 The US consumer reporting industry is
                                                                                                                                                                                 dominated by the “Big Three” bureaus:
                                                                                                                                                                                 Equifax, Experian and TransUnion, which
                              10                                                                                                                                                 purchase and unify data from the remaining
                                                                                                                                                                                 independent bureaus, in addition to
                                                                                                                                                                                 collecting information directly. Dun &
                                                                                                                                                                                 Bradstreet maintains its dominance of the
                                                                                                                                                                                 US small business credit information market.


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                                                                                      Public CR              Private CR

                       Illustration 24
                       Information sources for private and public credit registries                                                                                                                                                                                3 See references (page 53).
                       Source: Credit reporting systems around the globe: The state of the art in                                                                                                                                     4 Reference: The Value of Comprehensive Credit Reports:
                       public and private credit registries - Margaret Miller, World Bank, June 2000
                                                                                                                                                                                                                                    Lessons from the US experience, media, and company websites

44                                                                                                                                                                                                                                                                                               45
     Appendix                                                                                                         Appendix

                     Financial Institutions
                                              Credit Bureaus [eg.                                                      Background                                            Industry structure
                                              Equifax, Experian,
                                                                                                                       The creation of a credit bureau in Singapore          Credit Bureau (Singapore) Pte Ltd (CBS) is
                                                                                  Subscribers and
                                                                                                                       in September 2002 clearly illustrates the             Singapore's first consumer credit bureau.
                                                                                                                       importance of regulatory facilitation and             This is an initiative driven by the Association
                                               Scoring Agencies                                                        industry participation in speeding up the             of Banks in Singapore. Credit Bureau
                                                  [eg. FICO]                                                           creation of these capabilities. Though the            (Singapore) Pte Ltd has a complex ownership
                       Public Information
                                                                                                                       Singaporean market has not seen many of               structure that includes The Association of
                                                                                                                       the problems that some countries in the               Banks in Singapore (ABS), Dun & Bradstreet,
                                                                                                                       region have encountered, the government               Baycorp Advantage Ltd and Singaporean
      Illustration 25                                                                                                  has taken a proactive step in enabling the            investors.
      Industry structure - US
                                                                                                                       creation of a credit bureau.
      Source: Company websites, media                                                                                                                                        Singapore also has a consumer credit
                                                                                                                       In the mid-1990s, to curb aggressive                  bureau called CreditScan, also developed
      With passage of HR 2622, the Fair and               • The new standard prohibits reporting of                    spending on consumer credit, the Monetary             by InfoCredit D&B which helped launch CBS.
      Accurate Credit Transactions Act in 2003,             inaccurate information if the furnisher,                   Authority of Singapore (MAS) imposed rules            CreditScan specializes in collecting and
      Congress significantly amended the Fair               “knows or has reasonable cause to                          that required that credit cards be issued             selling information to retailers, hospitals,
      Credit Reporting Act, which provides                  believe that the information is                            only to individuals with incomes above                utilities, non-bank card companies and
      consumer protection regarding the use,                inaccurate”.                                               S$30,000 and with a credit limit no greater           others.
      accuracy and privacy of consumer credit                                                                          than twice the cardholder’s monthly income.
                                                          • Stronger opt-out for prescreening based
      reports. This law, originally passed in 1970,                                                                    Similar rules were imposed on unsecured
                                                            on credit report information: Prescreened
      ensures that consumers have access to                                                                            personal loans. Consequently, credit card
                                                            offers of credit must contain a phone
      information about them that lenders,                                                                             debt has, in total, been relatively low.
                                                            number to opt-out of such offers in a
      insurers and others obtain from credit
                                                            simple and easy to understand format,
      bureaus and use to make decisions about
                                                            as outlined by regulation within one year
      providing credit and other services. Some
                                                            of enactment.                                                                                        “Bank” Credit Bureaus
      of the key changes5 are:                                                                                                          Financial Institutions         [eg. CBS]                 Financial Institutions

                                                          • The Financial Literacy Education
      • ID theft is a felony and the Federal Trade
                                                            Commission was created to develop a
        Commission is empowered to coordinate
                                                            national strategy to promote financial                                          Non-Financial
        federal efforts to monitor the crime.                                                                                                Institutions
                                                            literacy and education.
      • Improvements in accuracy, access to                                                                                                                        Credit Bureau [eg.            Retailers, Hospitals,
                                                                                                                                                                      Credit Scan]                      Others
        reports and reinvestigations. There have
        been instances of incorrect credit report                                                                                        Public Information

        information and changes have been put
        into place to address them.
                                                                                                                       Illustration 26
                                                                                                                       Industry structure - Singapore

                                                                                                                       Source: Company websites, media

                                                                    5 Source:, media

46                                                                                                                                                                                                                         47
                       Appendix                                                                                                Appendix

                        Information framework                            The upcoming consumer credit bureau will               Australia
                                                                         display bad debt information for six years,
                        Members of CBS are authorized by MAS to          while discharged bankrupts will also remain
                        disclose credit-related information to, and
                                                                                                                                Background                                            Industry structure
                                                                         in the books for a similar period from the
                        obtain information from, CBS. This               date of discharge. Positive repayment history,         Australia is a developed economy with a               Australia does not have a public credit
                        authorization is permitted for members to        however, will be displayed in the bureau on            sophisticated lending environment. The ‘Big           registry: the private sector is the primary
                        check the creditworthiness of existing and       a rolling 12-month basis with older history            Four’ banks, representing 80 percent of               source of credit information. Australia’s
                        prospective customers. Members of CBS            kept in the database. Customers can request            market share, apply advanced CRM                      dominant consumer credit bureau is Baycorp
                        are banks, credit card companies and             their credit reports.                                  practices, as do other lenders. However,              Advantage. Baycorp Advantage is an
                        institutions, which must first be recognized                                                            despite the sophistication of the processes           Australian company that provides both basic
                        by MAS.                                          Based on demands by the industry, CBS6                 and systems, the depth of the available               credit information services and value-added
                                                                         plans to include the customer's credit limit           credit information is markedly less than that         services such as credit and marketing-
                        CBS receives information from its members        on each card and the extent they have                  of advanced environments such as the US.              related decision support.
                        on their customers in addition to other          utilized each credit limit. Another option
                        sources of publicly available information.       under consideration is development of                  The Reserve Bank of Australia (RBA)                   Dun & Bradstreet had historically focused
                        This data is used by the CBS to create the       bureau scores. Bureau scores are a                     estimates that borrowing by Australian                on the commercial credit information sector
                        credit reports of individuals available to its   numerical score indicating the probability             households rose at an annual rate of                  in Australia. This sector is supported by a
                        member institutions. There are strict            of a customer becoming delinquent on their             approximately 14 percent over the past                number of diversified credit services
                        guidelines on personal privacy and the           debt. The bureau, which is in talks with               decade 7. This has led to a two-fold increase         companies. Despite the long-held view that
                        resolution of disputes from individuals.         banks on the issue, also provides                      in the ratio of household debt to household           some of these players would move into the
 Despite significant    Members are responsible for ensuring that        information on balances and payments                   income and has placed Australia in the                consumer sector (Dun & Bradstreet,
                        the information provided is accurate,            relating to mortgages and personal loans.
 advances, the          complete, correct and current. The
                                                                                                                                upper range of industrial nations on this             Collections House, Legalco, Citec), only Dun
                                                                                                                                metric. The RBA estimates this growth was             & Bradstreet has successfully begun to do
 industry within        information included is:                         The 10 member banks of CBS are each                    a function of historically low interest and           this.
 Singapore              • Basic personal profile details                 required to pay a S$20,000 entrance fee                inflation rates and was almost entirely driven
                                                                         and a S$6,600 annual fee. In addition, for
 recognizes the         • Records of all credit checks made on           every check, they must pay S$3. After the
                                                                                                                                by dramatic increases in housing-related
 need to expand the       the consumer                                   promotional period, a consumer requesting
 depth of               • Latest 12 months of repayment trends           a credit report will pay $20 per check. To
                                                                         gain access to CreditScan, firms will need
 information being        showing the promptness of payments
                                                                         to pay an annual fee of S$1,800 and each                               Financial Institutions
 exchanged.               relative to their due dates (no amounts
                          displayed)                                     report is priced at around S$5.

                        • Records of default, if any, as deemed by                                                                                 Non-Financial            Private Credit
                                                                                                                                                                         Bureaus [eg. Baycorp,
                                                                                                                                                                                                               Subscribers and
                                                                                                                                                    Institutions                                                 Consumers
                          the lender based on its business rules                                                                                                          Dun & Bradstreet]

                        • Bankruptcy record, if any
                                                                                                                                                 Public Information

                                                                                                                                Illustration 27
                                                                                                                                Industry structure - Australia

                                                                                                                                Source: Company websites, media

                                                                                           6 Source : Company website, Media                                                                     7 Reserve Bank of Australia Bulletin, “Household
                                                                                                                                                                                                       Debt: What the Data Show”, March 2003.

48                                                                                                                                                                                                                                                  49
                        Appendix                                                                                                           Appendix

                         Information framework                           • Where the individual is a guarantor,                             Thailand
                                                                           certain information in relation to overdue
                         From an information perspective, despite          payment under the guarantee (but only
                         consumer bureau service providers having
                                                                                                                                            Background                                     3. Go for top security: This includes
                                                                           if specified steps have been taken in                                                                              preventing unauthorized access, user
                         an extensive range of products and services,      relation to the overdue payment)                                 Although Thailand has practiced some form         validation, and auditing compliance.
                         the Australian regulatory framework places                                                                         of credit information sharing for
                         limitations on both what they can collect       • Court judgments and bankruptcy orders                                                                           4. Force or strongly encourage all credit
                                                                           made against the individual.                                     approximately 50 years, it is only since the
                         and what they can provide.                                                                                                                                           providers to join: Excepting competitive
                                                                                                                                            most recent regulatory push in 2000 that
                                                                                                                                                                                              concerns, if a lender can not accurately
                                                                         Information regarding positive credit                              the credit bureau environment has made
                         Part IIIA of the Privacy Act 1988 and the                                                                                                                            measure total debt to income,
                                                                         transaction activity and behavior may not                          substantial process. Mr. Thirachai Phuvanat
                         Credit Reporting Code of Conduct together                                                                                                                            particularly as it changes after granting
                                                                         be collected or distributed. Bureaus may                           Naranubula is the secretary-general of the
                         regulate the use of credit information by                                                                                                                            a loan, the lender stands to lose control
                                                                         collect and distribute information regarding                       Securities and Exchange Commission of
                         credit providers in Australia. The Privacy                                                                                                                           and act or react in an untimely manner.
                                                                         the number of credit applications - though                         Thailand. He recently held the chairmanship
                         Act 1998 allows for the collection of basic                                                                        of the bureau established by the Thailand      5. Link all relevant data: Consumer
                                                                         only within the previous five years. For each
                         customer identification and negative credit                                                                        Bankers Association. In his address to an         transactions extend well beyond that of
                                                                         application, the bureau can collect and
                         information (delinquency related data) only.                                                                       international credit bureau conference in         credit. For example, information such
                                                                         publish items such as:
                         Consumer credit files can be kept for a                                                                            Seoul in March 2004, five key lessons were        as a fraudulent insurance claim is a clear
                         maximum of five years. As such, Australian      • The date of application.                                         offered:                                          indication of the borrower’s character
                         borrowers will only have credit files if they                                                                                                                        and applications for utilities can help
                                                                         • The type of credit sought.                                       1. Do away with consumer consent: Credit
                         have sought credit within the previous five                                                                                                                          track down delinquents with inaccurate
 Tight privacy           year period.                                    • The credit provider applied to, but not                             information sharing improves pricing and
                                                                                                                                                                                              contact information.
 regulations restrict                                                      whether credit was granted.                                         fairness for the best borrowers and
                         Consumer credit information files                                                                                     protects poorer borrowers from over-
 the Australian          maintained by a credit reporting agency can     • Whether it was a joint or individual                                extension and reversion to unregulated
 market to negative      contain information such as the following8:       application.                                                        markets.
 information                                                             • If any accounts are delinquent.                                  2. Use the best technology: Bureau
                         • Identity information - name, sex, date of
 collection only.          birth, address, employer and driver's         Bureaus cannot collect nor distribute any
                                                                                                                                               revenues from largely unprocessed data
                           license number.                                                                                                     are a small proportion of overall
                                                                         “positive’ credit information such as loan
                                                                                                                                               revenues. In Thailand, this has been
                         • Details of credit provided to an individual   balance, limit or account opening dates.
                                                                                                                                               achieved through a joint venture that
                           where the individual is at least 60 days      Importantly through, the Privacy Act
                                                                                                                                               includes TransUnion and Dun &
                           overdue in payment and recovery action        regulators have actively sought to protect
                           has commenced                                 consumer rights through a number of
                                                                         mechanisms. The Act stipulates that
                         • Details of applications for a credit report   consumers must be able to gain access to
                           on the individual by credit providers and     their own credit reports, can challenge any
                           other entities                                information in a credit report (have rights
                                                                         of recourse) and can complain to the Privacy
                         • If the individual has presented and
                                                                         Commissioner regarding the use of their
                           dishonored a check drawn for greater
                           than $100 twice

                                                                                8 Adapted from the Allens Arthur Robinson website,
                                                                                 “Industries: Credit providers: Part IIIA of the Privacy

50                                                                                                                                                                                                                                     51
                               Appendix                                                                                        Appendix

 Appendix C                                                                                                                     Appendix D
 Glossary                                                                                                                       List of references
                                                                                                                                The World Bank Group - Credit Reporting Systems -
     Credit bureau              A credit bureau is an organization that works to reduce the information asymmetry     
                                between lenders and borrowers. Credit bureaus collect information about individuals
                                and/or companies from lenders and other sources. The bureau aggregates this                     The World Bank Group - Maps of Credit Reporting in the World Library-
                                information to provide a consolidated view of an individual’s credit performance. This
                                is done in the form or a credit report and/or a credit score. This information is provided
                                to lenders, thus giving them a better understanding of the borrower’s credit history and        The World Bank Group - Credit Reporting Systems: Surveys -
                                behavior prior to making a decision.                                                  

     Credit delinquent          Credit delinquent is any consumer who has defaulted on his or her payment terms as              Various presentations made at the first Central Asian Credit Bureau Conference, January
                                agreed to with the creditor. Local law currently classifies a borrower who has KRW              2003
                                300,000 overdue for over 90 days as a credit delinquent.                                           • How a Credit Bureau Enhances Credit Approval and Risk Management Processes:
                                                                                                                                      Integration of information and decision-making tools. John Hadlow, Commercial
                                                                                                                                      Manager, Experian International
     Credit information         Includes all the entities involved in creating, collecting, and providing credit information
     industry                   to the end users. This also references the applicable laws and regulations that govern             • Turkish Credit Bureau Case: How and why the banks in the Republic of Turkey decided
                                this industry.                                                                                       to share information on a voluntary basis. Toper CAGLAYAN, General Manager, KKB
                                                                                                                                     Kredi Kayit Bürosu A.S. – Turkish Credit Bureau
     Credit risk                Credit Risk Management is the practice of understanding and managing the risk a
                                                                                                                                   • Case Study: The development of the Saudi Arabian Credit Bureau from inception to
     management (CRM)           business takes on in extending credit, including the pricing for risk, monitoring changes
                                                                                                                                     the Present. Dr. Eyad K. Hajeer, President, American MCS Solutions, Saudi Arabia
                                in risk and acting on those changes.
                                                                                                                                   • Public sector legal and regulatory issues affecting information sharing. Discussion
     Negative information       Negative Information includes data such as bankruptcies or late payments, collection                 on EU regulatory issues – Brussels. Wulf Bach, President, Association of Consumer
                                accounts and judgments.                                                                              Credit Information Suppliers – Germany
                                                                                                                                   • Scoring in Emerging Markets: Classic challenges in bureau and company score
     Opt-in                     Opt-in is the feature by which a consumer can explicitly choose to participate in a                  development. Dr. Paul Russell, Director, Strategic Solutions, Experian International,
                                program.                                                                                             United Kingdom.

     Opt-out                    Opt-out is the feature by which a consumer can explicitly choose to be excluded from               • Credit Card Products: How best to approach consumer credit card opportunities in
                                a program.                                                                                           markets without well established consumer credit histories and ‘new-to-banking’
                                                                                                                                     clients. Varvara Kenny, Credit Analyst, Visa International
     Positive information       Positive Information includes data that reflects the performance of credit lines that are          • How Credit Bureaus in Latin America work with information suppliers: banks,
                                in good standing. This includes data such as account opening, highest balance, current               telecommunication companies, providers of public record data, and insurance
                                balance, credit limit, and utilization and payment histories.                                        companies. Federico Castro, Director, Latin America Business Development, TransUnion
                                                                                                                                     L.L.C. – USA/Latin America
     Private credit registry    (see Credit Bureau)
                                                                                                                                Can Credit Registries Reduce Credit Constraints? Empirical Evidence on the Role of Credit
     Public credit registry     Public Credit Registries Public are operated by the Central Bank, and involve some level        Registries in Firm Investment Decisions. Arturo, Galindo, and Margaret Miller, January 31,
                                of compulsory participation by the financial institutions they supervise. The information       2002
                                collected is used for aiding the regulatory process and is sometimes provided to the
                                industry at large.

52                                                                                                                                                                                                                           53

      Regulation of personal data protection and of reporting agencies: Rafael del Villar, Alejandro
      Diaz de Leon, Johanna Gil Hubert; February 2001

      Can credit registries reduce credit constraints? Empirical evidence on the role of credit
      registries in firm investment decisions: Arturo Galindo, Margaret Miller; 16 March 2001

      Credit score accuracy and implications for consumers: Consumer Federation of America;
      17 December 2002

      Fair, Clear and Competitive – The consumer credit market in the 21st century: Presented
      to Parliament by the Secretary of Trade and Industry by Command of her Majesty; December

      Issues on the Reform of Korea’s Consumer Credit-Reporting Market Infrastructure: Byung-
      Chul Lim; September 2003

      The Terms of Credit Information Management: The Korea Federation of Banks; January

      National Information & Credit Evaluation Investors Relations Book; January 2004

      Korea Information Service Investors Relations Book; December 2003

      This is How We Plan to Solve the Credit Delinquency Problem: The Ministry of Finance and
      Economy; March 2004

      Policy Seminar on “Measures for Enhancing Household-Credit Risk Management of Financial
      Institutions”: hosted by Korea Development Institute; 15 December 2003

      Information Sharing, Lending and Defaults: Cross-Country Evidence: Tullio Jappelli, and
      Marco Pagano; March 2002

      Credit Bureaus in Today’s Credit Markets: Amparo San Jose Riestra; September 2002

      Credit Reporting Systems Around the Globe: The State of the Art in Public and Private Credit
      Registries: Margaret Miller; June 2000

      Key Note Speech at the International Credit Bureau Conference: Deputy Prime Minister and
      Minister of Finance and Economy Hun-Jai Lee; 11 March 2004

      The Need for Credit Bureaux: Experian-Scorex; 2003

      Jim Gordon, IMF New Delhi, “Managing Banking Crises: Lessons from Korea”, May 1, 2002

      Reserve Bank of Australia Bulletin, “Household Debt: What the Data Show”, March 2003


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