The credit reporting system in the US recently came under surveillance on various fronts, from a lack of clarity into credit scoring systems for customers and flawed credit reporting to cyber security risk incidents. IT infrastructure is evolving rapidly, transforming the way the cloud, traditional data centers, and data endpoints interact. Blockchain is the newest kid on the technology block.
Blockchain is rewriting traditional approaches for managing data, ownership, and transparency. Blockchain could well have a significant impact on how credit bureaus function by addressing the gaps with ID verification, ownership of data, and data security.
Prevailing Issues in the Credit Reporting System
Cyber security risk for consumers’ personal data
Cyber security risk is a major issue within the centralized credit system, evident from the 2017 Equifax breach and its fallout. The big credit reporting agencies such as Equifax, Experian, and TransUnion, are an integral part of the US financial systems. These credit bureaus collect and maintain credit information of consumers and then sell it to other businesses in the form of credit reports. In September 2017, Equifax disclosed that the personal data of 146.6 million Americans was stolen, including information such as social security numbers, addresses, credit card details, amongst other personal data.
Costs of a centralized credit facility
Equifax, Experian, and TransUnion earn their revenue by receiving fees, paid for mostly by banks to access credit histories. Banks usually pass on these charges and fees to the end user, via higher lending Annual Percentage Rates (APRs), for the privilege of getting credit access.
Absence of consumer transparency and control
Consumers have little to no clarity on how credit scoring works or the sharing of their personal information to lenders by credit reporting agencies. Lenders receive credit scores that might be different from what a consumer may receive and are customized for the nature of credit product the lender is applying for. The lender can also share the consumers’ personal data with other lenders, creating a marketplace where the consumer has no control.
Errors in credit reports
Credit reports have enormous implications on a consumer's life. Credit scores affect loans, mortgage interest rates, renting apartments, etc. However, a Federal Trade Commission study highlighted consumers pointing out ‘material errors’ in their credit reports. Such mistakes can directly influence a borrower's ability to obtain credit.
Blockchain: The Problem Solver?
Advocates of blockchain say that it can address the broken and outdated data practices followed by the credit bureaus.
Blockchains immutably record transactions of members of a shared network without any central authority or intermediary, for example, a bank. Rather than having an intermediary record, oversee, and protect such transactions, every transaction is verified by consensus of majority of members in the decentralized network. Every time a party updates a copy of the ledger, every other party’s ledger copies are also automatically updated.
Blockchain records transaction data in a sequential chain of blocks. Each block is encoded and has information of the previous block, and therefore all verified blocks are linked to an unchangeable chain from the most recent block all the way back to the first block.
Data storage in a blockchain can eliminate integrity risks from centralized storage systems. Without a central point of failure, hacking and data breaches become substantially more difficult. Blockchain also has the potential to reduce cost of access to data. Consumers get direct access to the credit data, allowing them to ensure integrity of the data that lenders access.
Is this the End of Credit Agencies?
Not likely; or at least not yet. While the blockchain can change radically change credit reporting, the technology is still relatively new and could take years to go mainstream. There are still hurdles for a full-scale blockchain transformation, including the scalability of IT infrastructure required to store hundreds of millions of consumers’ data. However, a variety of credit reporting blockchain startups are tacking the problems and the credit reporting industry will, no doubt, be an interesting area in the coming years.
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