This paper seeks to discuss ways that EU policymakers could help to reduce irresponsible consumer lending in the wake of the Covid-19 crisis and data misuse following recent changes in the EU payments industry. The proposal is for a new approach to assessing consumer creditworthiness that could, with the right legislative support, replace the current credit scoring approach and, in so doing, greatly reduce the incidence of irresponsible lending, discrimination, exclusion from accessing credit and data abuse.
- Focus on household budget data – when lenders assess the creditworthiness of potential customers, they should look only at core household budget data: income and essential expenditure, as well as data on the consumer’s ability to manage their budget. Other data should not be processed.
- Respect consumers’ ownership of data – lenders should only obtain personal data with their owners’ informed consent and in line with GDPR principles. Further regulatory guidance will be needed for data access via third party aggregators under Open Banking. A privacy-focused approach could even forbid financial service providers from obtaining access to the raw consumer data, limiting them to receiving inferred or aggregated data, such as the results of an analysis of a consumer’s budget.
- Limited data storage – when prospective lenders collect and process people’s data for the purpose of offering credit, they should only retain the data if they go on to sell a credit product and should only store it for the duration of the contract.
- The benefits of handling data properly – applying these principles to creditworthiness assessments should improve trust and transparency and reduce exploitation and financial exclusion.