Two-and-a-half years ago, the financial world was full of hype about a great new system that would lead to cheaper loans for customers who paid their bills on time.
The idea was that Australia – like most developed countries – would allow businesses to access much more information about their customers’ credit histories, rather than limited data, such as customer defaults or bankruptcies.
This sharing of information would help bank rivals and fintech businesses offer lower-priced products to better compete with the big banks.
How much of that promise do you think has been fulfilled?
Some online lenders are offering cheaper loans through what is known as “risk-based pricing”. But none of the big four banks is fully participating in the data sharing, which is voluntary, and known as comprehensive credit reporting.
Comprehensive credit reporting in Australia was “lagging” since its 2014 introduction, despite there being “clear public benefits associated with higher levels of participation,” said a Productivity Commission report unveiled by chairman Peter Harris this month.
A likely reason is it doesn’t suit the big banks’ commercial interests to hand over their customers’ financial data to rivals. It is just one example of the growing fight between businesses over consumers’ financial data.
Not only does this fight involve commercial rivalry, but also challenging questions about privacy, and how much consumers are prepared to trade away for cheaper financial products.
The sheer quantity of data being created every day is staggering. IBM has estimated the amount of digital data generated in 2002 now gets created every two days.
Some of this is us sending pictures and videos to each other on WhatsApp – it is fun but probably has little economic value.
However, the growing pile of financial data clearly has value, and a growing number of businesses want to get their hands on it.
In banking, there is an argument that more sharing of information such as electronic payments or account balances between businesses could benefit customers, because it would boost competition and cut prices.
The Commission’s report fell short of saying banks should be forced to share more of the information they hold about customers, but left little doubt that we can expect greater sharing of our financial information in the future.
Even if the banks don’t want to share much of the data they hold, the huge amount of public online information about people is opening up other ways for lenders to assess borrowers. Some US businesses assess loan applicants by looking at their social media activity, for instance.
The Commission’s argument is that over the long term, the proliferation of such data helps address the “information asymmetry” between lenders and borrowers.
That refers to banks and other lenders charging relatively safe borrowers higher rates than necessary, because they can’t be sure about their creditworthiness.
“The digital age – new data sources and increased technical capacity to analyse existing and new data – is transforming the financial sector, bringing with it innovation, competitive pressures, more efficient decision making by financial service providers and more empowered consumers,” the report says.
Even so, the benefits of cheaper finance need to be weighed against the clear risks from financial corporations analysing ever-growing piles of data on their customers.
One risk is that more financial data leads to “spamming” of customers with unsolicited credit offers that are not in customers’ interests. Another obvious risk is the potential for privacy breaches.
But perhaps the most worrying risks created by the data revolution are in insurance.
Whether it is tracking their customers’ exercise habits through Fitbits, or monitoring driving habits with cars’ on-board computers, insurers are also tapping into vast amounts of data on their customers.
The carrot for consumers is the prospect of lower premiums for the lower-risk customers.
Insurers are already offering deals whereby consumers can get a cheaper policy if they show they’re doing more exercise, through a Fitbit, or cheaper cover for safer drivers.
However, big data is also going to mean more consumers are going to find they are uninsurable.
A Monday report from the Actuaries Institute says big data has made insurers so good at spotting risks that it will soon create policy headaches for governments, because prices for some highest-risk consumers will be unaffordable.
This is already the case if you’re trying to get flood cover in the highest-risk areas. Policies in some flood-prone parts of Queensland became so unaffordable after the 2011 floods that the state government was forced to intervene and build levies to protect towns.
Genetic testing, which is becoming far cheaper and is expected to grow in popularity, is even more problematic.
Customers must tell a life insurer about genetic test results if they are applying for an underwritten policy in Australia, but then the insurer can use that information to refuse to cover them.
Already, the report says there are reports of some customers putting off getting a genetic test because of concerns they might have to share it with their insurer.
The report presents a growing dilemma for consumers as they are forced to trade off lower prices with their own privacy – and it says this will test how much we really value “efficiency benefits compared to privacy considerations”.
These costs of big data’s growing role in financial services need to be weighed up against the promise of cheaper products.
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