MasterCard Releases Independent Research into Options for Comprehensive Credit Reporting in Australia
Sydney, 11 December 2006 - In a bid to drive reform towards a fairer credit assessment regime in Australia, MasterCard Worldwide today released an independent research report that provides analysis of international credit reporting models, their impacts and possible credit assessment models for the Australian market.
The study, entitled 'Options for implementation of comprehensive credit reporting in Australia' was commissioned by MasterCard and conducted by Edgar, Dunn & Company and The Centre for International Economics.
Taking the World Bank and OECD principles into account, the report provides structural recommendations for implementation of comprehensive credit reporting in Australia based upon existing structures in other markets. According to the report, a hybrid structure comprising elements of the UK, German and Argentinean systems would offer the most appropriate option.
"In commissioning this research, we hoped to provide options for the structural framework of a more equitable and effective system of credit reporting in Australia. The report evaluates both consumer and industry perspectives and analyses the effectiveness of various reporting systems around the globe," said Leigh Clapham, executive vice president, Australasia, MasterCard Worldwide.
"MasterCard believes the introduction of a more comprehensive credit reporting structure as adopted in most developed countries around the world, will provide enormous benefits to both lenders and borrowers and will also facilitate more efficient pricing and reduced debt default. For example, Hong Kong saw material defaults by individuals fall by 27% following the introduction of a comprehensive credit reporting system in 2003."
At present Australia operates a negative-only credit reporting system which only gives lenders access to negative information about a potential borrower. Lenders must base their assessment of a person's credit worthiness on limited information, such as the failure to pay a debt or a history of bankruptcy in the last five years. They cannot access the potential borrower's history of paying debts on time or the size and nature of these borrowings.
"The existing credit reporting system was developed several decades ago when consumers typically used a single bank for all of their financial requirements. In those days there was little need to share data between financial institutions. And when it was required the process was quite simple," Clapham added.
"But the market has changed significantly over the decades. Consumers have become much more financially aware and sensibly shop around for the best deal. Today it is quite normal for a consumer to have a credit card with one institution, a mortgage with another and an overdraft facility with a third."
"Meanwhile the financial services providers making these credit decisions are being forced to operate blindfolded. Intentionally or unintentionally, some consumers are submitting misleading credit applications and gaining access to facilities well beyond their means. Meanwhile responsible borrowers, who should be rewarded with better rates and access to larger facilities, are missing out on these benefits while having to pick up the tab for the defaults of others.
"The proposed reform will further reduce the potential for consumers to over-commit to credit facilities. It will allow financial institutions to properly assess an applicant's capacity to pay before extending them a line of credit. And with this reform in place, any institution extending credit to a vulnerable consumer can be held accountable under the Uniform Consumer Credit Code," concluded Clapham.
"Whilst the research demonstrates the considerable benefits to borrowers and lenders of adopting a more comprehensive credit reporting structure, it also addresses numerous weaknesses in the current system that disadvantage both parties", said Michael Walters, a Director of report co-authors Edgar, Dunn & Company.
"In such a competitive market, the interest rates and fees for consumers with a good repayment history would typically be reduced if financial institutions were able to readily access such history," Walters added.
MasterCard recently shared the Options for implementation of comprehensive credit reporting in Australia research report with the Australian Law Reform Commission, which is currently investigating the issue as part of its review of the Privacy Act 1998. The Commission is expected to issue a discussion paper shortly.
About MasterCard Worldwide
MasterCard Worldwide advances global commerce by providing a critical economic link among financial institutions, businesses, cardholders and merchants worldwide. As a franchisor, processor and advisor, MasterCard develops and markets payment solutions, processes over 16 billion transactions each year, and provides industry-leading analysis and consulting services to financial institution customers and merchants. Through its family of brands, including MasterCard®, Maestro® and Cirrus®, MasterCard Worldwide serves consumers and businesses in more than 210 countries and territories. For more information go to www.mastercardworldwide.com.
