Will Schufa unwittingly blow open German credit markets?
June 11, 2012
The German credit bureau, Schufa, caused a quite a stir last week when a plan to mine online data for credit information was leaked to the public. Commentators attacked the proposed project for breeching privacy and politicians decried the appropriateness of social media in determining a person’s credit standing.
A far more important implication, however, has thus far escaped notice—the potential impact alternative data could have in opening Germany’s consumer credit markets.
The way information circulates gives shape to the markets for consumer credit. A clear example of this is found in the U.S. where third-party providers compete to sell information about individuals. Deep and liquid U.S. credit markets are supported by a handful of independent credit bureaus—Trans Union, Experian, Equifax—that offer a variety of comparable products such as credit reports and credit scores to the financial services industry.
The structure of consumer information in Germany is quite different. The largest bureau, Schufa, is an industry collective. According to the company’s website “SCHUFA’s shareholders include special credit institutions, savings banks, private banks, cooperative banks as well as trading companies and other service providers”.
Schufa’s organizational structure is key to understanding the conservative nature of German credit. Schufa’s stated goal is to protect “members”—not markets—“against losses in the credit business”. This means that Schufa can slow new entrants because it is under no obligation to service non-member institutions. In contrast to its three U.S. counterparts, it makes no claim to serve the whole population of creditors.
At present, access to credit information about Germans is tightly coupled to membership in Schufa. But since any good analytics firms can trawl through online data, it is unlikely that Schufa could exert the same control over credit assessments generated from open sources of consumer information. Schufa’s turn toward social media, therefore, threatens something more than the privacy of German citizens. It also threatens to erode the tight organizational structure that contains the German credit system.