Guest blogger Oliver Browne is a Financial Industry Analyst with Credit Card Insider. The views expressed are his.
The US credit reporting system has recently come under scrutiny on multiple fronts. Issues raised include a lack of transparency into credit scoring systems for consumers, widespread errors in Americans’ credit reports, significant data breaches, and concomitant questions around proper deployment of data storage security across enterprise data centers and the general cybersecurity of personal computers. As IT infrastructure is entering a period of rapid evolution transforming the way traditional data centers, the cloud, the edge and data endpoints interact, some believe blockchain has immense potential to change how numerous industries work, increasing efficiency, security, and more. How might the implementation of blockchain offer potential solutions for this industry?
Current issues in the US credit reporting system
The credit reporting industry has met ample criticism in recent years, for several problems plaguing the credit system.
Insufficient cybersecurity of personal data
With the recent hack of the credit reporting agency Equifax, data security has been highlighted to be a major flaw within the current centralized credit system. Large data-collecting Credit reporting agencies (such as Equifax, TransUnion, and Experian) are presently an integral part of the US financial systems. They collect and maintain consumer credit information and then sell it to other businesses (for example, lenders) in the form of credit reports. Equifax disclosed to the Securities and Exchange Commission that the personal data of 146.6 million Americans was stolen, including information such as social security numbers (145.5 million stolen), addresses (99 million stolen), credit card numbers (209,000 stolen), amongst a plethora of other personal data. Many Americans were justifiably frustrated as to why Equifax controlled their personal information without them having any say in when and how it is utilized, never mind how easily Equifax could let it slip through their fingers.
Large-scale data breaches haven’t just been reserved to the credit reporting industry. Companies such as Yahoo (3 billion user accounts hacked), eBay (145 million users compromised), and Uber (personal information of 57 million users and 600,000 stolen) have also been subject to data breaches highlighting the imperative need for better cybersecurity solutions across industries.
Lack of consumer transparency and control
The current credit reporting system causes a power imbalance between lenders and consumers. As it stands, consumers have little to no visibility on the process behind credit scores, credit checks, and the sharing of their personal information by credit reporting agencies to lenders. When a consumer pulls a credit score from myFICO this is just one of dozens of types of credit score. Lenders receive credit scores with that may be different from what you receive, that are customized for the type of credit product you are applying for. For example, a mortgage lender will receive a credit score that is specifically tailored for mortgage loans. The lender can also share this personal data with secondary market lenders, effectively creating a marketplace where the consumer lacks control.
Widespread credit report errors
Consumers are constantly reminded how important it is to build great credit history. Credit scores have massive implications on consumers’ everyday lives. Credit scores affect things such as loans, mortgage interest rates, renting apartments, and even potentially getting a job. However, the Federal Trade Commission found that more than one in five from a sample of 1001 participants had at least one “potentially material error” in their credit reports. Such mistakes can make a potential borrower appear like an inferior candidate for credit.
Errors in credit scores are widespread due to the size, speed, and economic incentives of the credit reporting system. The Consumer Financial Protection Bureau found that each of the major credit reporting agencies has in excess of 200 million adult credit files and receive information from approximately 10,000 credit furnishers of data. Per month, these furnishers provide information on over 1.3 billion consumer credit accounts, which requires a swift system. Taking the sheer quantity and speed of data coming in, mistakes are inevitable. These large-scale inaccuracies are then tolerated by the credit agencies as fixing such errors is deemed too costly for the benefits they would receive back themselves. The onus to mend these credit discrepancies and maintain report accuracy is also on the consumer, not the credit bureaus.
Blockchain: a potential solution?
Proponents of blockchain technology have touted its implementation as a potential cure for the ailments that currently haunt the credit reporting system. The decentralized nature of blockchain is often referenced by supporters in their claims.
Blockchain records the transactions of members of a shared, decentralized network without any central authority, central database or third party intermediary, for example, a bank or broker. Rather than having a third party intermediary oversee, record, and protect such transactions, each transaction is verified by consensus of a majority of the members in the network. Each time a party updates a copy of its ledger, all other parties’ ledger copies are automatically, simultaneously, and permanently updated. Each recorded transaction is given a timestamp and a unique cryptographic signature.
Blockchain’s salient feature (and where it receives its name from) is that it records transaction data in a sequential chain of blocks. Think of blocks as packages of transaction data that are hashed and encoded. Each block contains the hash of the previous block, therefore all verified blocks are linked in an immutable chain from the most recent block all the way back to the “genesis” block, the first block. This effectively means that once transaction data has been written into the blockchain, nobody can alter it. Transactions are recorded in a permanent fashion. This renders the blockchain as a tamper-proof, auditable history of all a network’s transactions, as long as one party doesn’t control the majority of the decentralized network.
Melanie Swan, author of Blockchain: Blueprint for a new Economy, states the urgent requirement of better industry-wide cybersecurity could possibly be one of the biggest drivers of blockchain adoption. Highly-centralized databases, such as the case of Equifax, are seen as tempting targets by hackers, where all information is stored in a centralized location. The decentralized and immutable nature of blockchain is starting to resonate with many due to the fact it is much harder to hack than a centralized database. Decentralized storage records protected by cryptographic signatures on blockchains could potentially enable a dramatic increase in cybersecurity. Crosby et al (2016) use a basic analogy to highlight this:
“It is easier to steal a cookie jar kept in a secluded place, than stealing a cookie jar kept in a marketplace, being observed by thousands of people.”
Proponents of blockchain also believe that a decentralized blockchain system can help restore the skewed power balance, providing greater transparency and allowing consumers greater control of their personal data. Samantha Radocchia, Co-Founder and CMO of Chronicled, states by having credit reports made available through blockchain, consumers wouldn’t have to rely on intermediary credit agencies to provide them with them with a snapshot of their current credit. They would instead have complete control of their data — not just a generalized report provided by a credit agency — to show lenders themselves. Moving credit reporting towards a distributed ledger technology like blockchain could also assist in mending the issue of widespread errors. With direct access to their credit data consumers would know in real-time about any changes or errors in the data, empowering them to show accurate data to lenders as needed rather than relying on the constant behind-the-scenes back-and-forth exchange of sensitive data between data furnishers and agencies.
What are the hurdles, and who will overcome them?
The potential benefits of blockchain technology for the credit reporting industry could be revolutionary. However, the key word of this sentence is potential. Blockchain technology is still a relatively recent development, its application to real-world issues is far from settled, and academics and businesses alike recognize it could take years to do so. There are still numerous hurdles between this moment and a full-scale blockchain revolution on the credit reporting industry, including the sheer scalability of IT infrastructure — endpoint to edge to core — required to accommodate hundreds of millions of consumers’ data. With numerous credit score and identity blockchain startups emerging, the credit reporting industry will be an interesting space to watch in the next few years.