Increasingly, informed lending, backed by meaningful credit reporting, is viewed as key for jump-starting under-developed economies. How are local bureaus doing at clearing the hurdles to establishing useful credit reporting systems?
By Kate Gibson
The "buy-now, pay-later" approach that helps fuel the U.S. economy would not fly in many regions overseas, including portions of Eastern Europe, Asia, and the Middle East, where transactions are conducted in a dramatically different fashion. In Jordan, for instance, obtaining a bank loan can hinge on a person's last name - a family's reputation and standing in the community is considered ahead of payment history and other factors. In China's capital, Beijing shoppers await the delivery of refrigerators from area department stores only after paying the total price in advance.
In Rumania and Poland, World Bank officials found banks that do not bother to retain files on credit applications. "They don't keep the paperwork - they throw everything away," says Norm Magnuson, spokesman for Associated Credit Bureaus Inc., an industry trade group based in Washington, D.C.
Depending on the region, laws, and culture, obtaining information on the credit worthiness of an individual or business is frequently a haphazard business. Privacy issues are of far greater concern in Europe and elsewhere than in the United States. Even in countries with advanced credit reporting systems, the information gathered varies, with many countries restricting the type of credit information that can be legally gathered. Australia, for instance, only allows the compilation of negative, as opposed to both positive and negative, information. However, the country's "extremely stringent" privacy laws are under review, says Neil Wood, group managing director for Total Credit Management Services Pty Ltd., established in Victoria, Australia in 1977.
Consumer Credit Data Restrictions
While there are no restrictions on the data collected on commercial accounts, there is ongoing debate about consumer information, as well as its ownership. "The banks in Australia introduced in their service provider contracts several years ago conditions whereby the data is always theirs," Wood explains. "However, where there is no stipulation in contractual law for this provision, then the data can belong to the bureau."
Making matters even more confusing "is a strong argument in relation to consumers now that may be encapsulated in law, to say that the subject of the data may themselves own it, and unless they grant authority for such data to be used then it may not be used," Wood says. Consumer protection laws have "altered drastically in favor of the consumer in the past 10 years in Australia," says Wood, with processes such as skip tracing becoming more difficult. Previously public record databases, such as electoral rolls and motor vehicle registration information, are no longer viewed as part of the public record.
In South Korea, the restrictions are less harsh, but the data gathered is by no means as extensive as in the U.S.. "Many credit grantors contribute negative data," says Yoonkyung Noh, an assistant manager with the credit information team at Korea Information Service, a credit reporting company based in Seoul.
KIS sells commercial and consumer credit data to credit grantors, including financial institutions. "Our database includes positive data to a degree, by which I mean credit account opening and closing information," says Noh, who adds that credit reporting in South Korea currently does not include payment performance data. However, "the credit-related market is changing and growing at a significant rate and the demand for positive data is increasing just as much," she adds.
Until recent years, South Korean lenders would reject or approve credit applicants in "a very traditional way - manually, using information gathered from applicants themselves with a certificate or official papers," Noh says.
Ongoing efforts to set up credit reporting systems in several Russian cities face even bigger stumbling blocks - laws that ban outright the exchange of information between banks and third parties.
The situation is changing, however, as towns and cities in countries around the globe look to jump-start their economies. Some are steered, others are pushed, into adopting radical change, with pressure coming from regional bankers associations as well as the U.S. Agency for International Development, the World Bank, and other agencies that fund economic growth initiatives in underdeveloped markets.
Without consumer credit reporting systems, in some countries banks unknowingly extend credit to customers already in default with the same institution or make loans to people overextended elsewhere. In helping lift some of the world's emerging markets to their feet, credit reporting is viewed as an important and elementary piece of the lending infrastructure, industry officials say. "The World Bank has been instrumental in encouraging emerging market countries to adopt a credit economy based on a meaningful credit reporting infrastructure," D. Barry Connelly, president of the ACB, declared at a November gathering held in Shanghai and cosponsored by the city's finance society.
Demand for credit reports is "rising across the Asian Pacific region in both consumer and commercial areas," echoes TCM's Wood.
With major U.S. credit bureaus active abroad (CCR, July 2001) and roughly 100 foreign-based credit reporting bureaus already in place, global activity in the credit reporting arena has stepped up markedly during the past two to three years, U.S. industry observers say. "We get two to three inquiries a month from foreign countries asking for basic information on credit reporting," the ACB's Magnuson says.
In recent years, the ACB, which counts 30 international credit bureaus among its primarily U.S.-based membership, has held global credit reporting conferences with its overseas counterpart, the European Association of Consumer Credit Information Suppliers, or ACCIS, a Dublin, Ireland-based trade association of 20 credit agencies in 14 European countries.
"Most emerging economies in the international market are looking at credit bureaus to give their economies a boost," says Larry Ulrich of LDU Enterprise, a former credit bureau and collections agency owner who found his telephone ringing steadily with overseas calls after he attempted retirement in 1999. The Toledo, Ohio-based credit and collections consultant has since found himself traveling to Russia and Jordan, both of which are vying, with varying degrees of success, to lay the foundations for economic growth via a credit economy.
"It is only now that banks from the U.S. or Europe are looking for new markets to get into the retail [consumer] side of the business," says Ulrich. "The local banks are saying 'Whoa, we don't have retail credit, we better figure this out before the competition comes in.'" But for many regions, the consultant adds, "there are a myriad of issues - legal and cultural - that need to be resolved before the big guys get involved."
In Jordan, Ulrich says credit cards are unheard of among most of the kingdom's population of roughly 4 million, with only the upper-class carrying plastic. Even then, an American bank issues that plastic, and its use is limited, with credit cards typically accepted only at hotels and similar establishments that cater to an international clientele.
Unlike Russia, where efforts to create credit bureaus in such cities as St. Petersburg and Moscow are barely off the ground, the Jordanian situation will likely change rapidly, Ulrich predicts. The kingdom's parliament is expected to quickly adopt a proposed law akin to the Fair Credit Reporting Act that governs consumer credit reporting in the United States. The law would overturn Jordan's present rule that makes the sharing of credit information a criminal offense, and likely lead to the establishment of a credit bureau within a year, Ulrich says. "They want to be the credit bureau of the Middle East," he says of the Jordanian effort.
Despite any regional aspirations, setting up credit reporting systems is initially a local issue, following the U.S. pattern, which had local banks and retail stores establishing credit bureaus in nearly every town after World War II. "The local bank, local department store, local credit bureau could all function on behalf of the citizens of that city. That is the way it appears the system is developing in China," the ACB's Connelly said in his address in Shanghai. "If you have not experienced the centralization of credit grantors nationally, it is only logical that you would begin locally," Connelly said, pointing to systems developing in three Chinese cities: Shanghai, Beijing, and Dalian.
Much further along - and exhibiting traits similar to the U.S. system - is Japan's credit market and credit reporting process. Three kinds of credit reporting agencies have existed since the early 1970s in Japan: the first affiliated with banks, the second with consumer finance firms, and the third with credit granting companies.
While Japan has no specific laws to control consumer credit reporting, voluntary regulations call for the information to be used only to determine creditworthiness, and not for such purposes as employment and business activities.
On a less positive note, Japan's mature credit market has seen an increase in personal bankruptcies. More than 70,000 Japanese consumers filed bankruptcy in 1997, the highest number in the nation's history, according to Japan Information Center Corp.
That's an aspect that credit officials in countries with less developed credit systems should strive not to emulate.
Overseas Credit Bureaus (A selected list in alphabetical order)