Review of Australia’s Credit Reporting Framework

beforepay.com.au
jamie.twiss@beforepay.com.au
Suite 2, Level 6, 50 Carrington St
Sydney NSW 2000

Beforepay Group Limited (Beforepay) welcomes the opportunity to respond to the Australian Government’s issues paper on the Review of Australia’s Credit Reporting Framework (Paper).

We believe that Australia’s credit reporting framework plays a pivotal role in facilitating responsible lending and safeguarding consumer interests and welcome this review. However, in light of technological developments such as the Consumer Data Right (CDR) regime, there is an opportunity to refine the existing framework such that it remains effective and conducive to innovation.

About Beforepay

Beforepay was founded in 2019 as a mission-driven organisation to support working Australians. As part of this mission, we provide short-term advances and financial management tools to our consumers. Our products aim to empower consumers to manage their short-term financial challenges while avoiding predatory lending and avoiding the risk of long-term indebtedness. We offer eligible consumers an advance of up to $2,000 (average
$379 in Q3 FY24) of their pay or tax refund for a 5% fixed transaction fee, with no interest or late fees. The advance does not revolve, and customers can only enter into one advance with us at a time, to reduce the risk of a debt trap. Alongside our pay and tax refund advance products, we also provide budgeting tools, spending insights and articles within our mobile app to promote good financial habits.

We use alternative data (i.e. data obtained outside of the credit reporting regime), to make lending decisions in respect of our customers, therefore we are able to provide feedback on specific matters of consideration in the issues paper, detailed below.

Consideration of technological developments and other innovations in the financial system with regard to overall operation of the credit reporting framework

The review paper rightly identifies an overlap between the CDR regime and credit reporting. We encourage introducing flexibility within the credit reporting framework to support innovation in consumer credit, and in particular by further enabling the use of alternative data by existing and emerging small to medium lenders as an alternative to traditional credit-reporting data. The use of the CDR regime and other data in innovative ways will lead to improved customer outcomes, as lenders are able to understand loan applicants better and provide more tailored lending decisions, limits, and pricing.

We assess customer risk based on an internal model that uses bank transactional data obtained via screen scraping or the CDR regime. The use of this alternative data provides us with a view of a customer’s spending habits, identifies high risk behaviour and other debts of a similar nature, enabling us to determine a customer’s affordability for our product. Since inception, we have refined our native risk-scoring model using more than
50,000 individual variables to select the 400-500 most predictive variables that could impact a borrower’s financial stability and creditworthiness. We do not conduct a credit check or use credit reports, which we see as using a much narrower range of data and providing less insight into a customer’s risk profile.

Promoting the use of the CDR regime and other alternative data sources will drive innovation in risk assessment, allow for more accurate risk measures and therefore greater affordability to credit, and also promote financial inclusion by removing the barriers to formal credit that the current system places in front of younger people and recent arrivals to Australia, many of whom do not have a credit history.

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Beforepay Group Limited ● ABN: 63 633 925 505 ● beforepay.com.au
beforepay.com.au
jamie.twiss@beforepay.com.au
Suite 2, Level 6, 50 Carrington St
Sydney NSW 2000

The scope of mandatory credit reporting, including the number and type of eligible licensees and the data they are required to contribute, with regard to mandatory credit reporting provisions in the Credit Act

In the long term, we believe that the adoption of the CDR regime is the most suitable solution to determine a customer’s creditworthiness. Currently, however, there are limitations to this, and concerted efforts are required from data holders to enhance the data quality and usability of the CDR regime. We believe that in the short term, bolstering compliance measures to monitor adherence of data holders with the CDR regime, improving its user experience by simplifying consent mechanisms for consumers, and ensuring that the data provided under the regime is of the same quality as what is provided directly to the consumer are imperative to enhancing the usability of the CDR regime, facilitating an eventual shift towards relying on CDR data over traditional credit reporting data.

Until the CDR regime matures and becomes more fit-for-purpose, if the scope of the credit reporting framework was to be extended to include all credit providers such as non-bank lenders, we believe that introducing explicit thresholds for mandatory credit reporting based on a lender’s size as well as the size of individual loans would be appropriate. In our view, where individual loan sizes are small and non-revolving, the framework should allow for flexibility in choice between using internally built models and credit checks to assess customer creditworthiness. This would enable smaller, innovative entrants to gain traction before facing the overheads and costs associated with credit reporting, with only a minimal impact on the volume of data available under the regime.

The Buy Now, Pay Later (BNPL) sector has revolutionised the financial services industry in recent years, redefining the boundaries of accessible finance and offering affordable options to those previously underserved by traditional credit products. We believe that the prescriptive nature of the mandatory credit checks proposed in the draft BNPL regulatory reform, and the broad nature of the proposed reforms such that other exempt credit products might be included in the definition of “Low Cost Credit Contracts” in the future, runs the risk of entrenching a specific approach to risk assessment, stifling innovation and reducing competition in the lending market. This will lead to continued market concentration and poor customer outcomes in many cases, either through inaccurate credit decisions, inappropriate limits, or higher costs to the customer.

The ability to perform in-house research and development enables small and medium lenders to offer cheaper innovative products to customers, and mandating prescriptive credit checks could mean that lenders are only able to offer more expensive forms of credit to account for the cost of regulation.

The current credit reporting regime provides less data than is now available under the CDR regime, and entrenching it further by extending its scope may likely hinder innovative approaches to the use of data. It could also deter new small and medium lenders from entering the market, and will also likely widen the current divide between Australians with credit histories and those without, potentially cutting off many young people and recent arrivals with thin credit files from access to an important part of the financial system.

In our experience, the use of alternative data provides deep insight into a customer’s ability to afford and repay small amounts of credit, therefore fulfilling the purpose of the credit reporting framework whilst enabling innovation. We believe that revising the credit reporting framework to allow for technological developments will set an even playing field for lenders to compete and ultimately offer new and innovative forms of credit to
Australian consumers.

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Beforepay Group Limited ● ABN: 63 633 925 505 ● beforepay.com.au