As published in the January/February 2021 issue of the CICM magazine Credit Management

What do you do when you want to book a holiday to somewhere you haven’t been before or buy a new electronic gizmo from Amazon?  Chances are you probably ask someone who has already been there or owns that gadget and the modern way to do that is to look at the reviews on sites like TripAdvisor, TrustPilot or reviews on Google.  Studies into the ‘wisdom of the crowd’ have shown that estimates from a wide range of independent people tend to result in accurate averages.

This is exactly what savvy credit professionals do; they ask someone else who is dealing with that specific client for their experience.

In fact, that was how credit reference agencies came into existence.  For example, Experian can trace its origins back to 1803 when a group of London tailors began swapping information on customers who failed to pay their debts.  A more formal organisation was founded in 1826 with the wonderful name of The Society of Guardians for the Protection of Tradesmen against Swindlers, Sharpers and other Fraudulent Persons.  Its members included innkeepers, drapers, hatters and chandlers, who received a monthly circular with information on people who had failed to pay their debts.

Fast forward to today where there are established commercial CRAs in the UK but often the best way is to ask someone else and there are organisations, including the CRAs, who can do that.  There are credit forums often aimed at specific industry sectors which facilitate the sharing of data on accounts whilst carefully keeping within competition law.  Then there are the data sharing schemes administered by the CRAs and this article will investigate these in more detail.

In our pandemic hit economy, data sharing is being utilised more than ever.  This is because more traditional sources of information are rapidly becoming out of date even before publication.  For example, the filing extensions at Companies House mean that accounts for the period ending December 2019 are only just due for filing and so to rely on those accounts for credit risk decisions would do what a lot of people might like to do; ignore 2020.  Company accounts still provide great insight to the inherent strength of a company, but how can you not take into account the events of such an extraordinary year?

Even so, this year has not affected all customers equally and some sectors have thrived, such as online sales, delivery companies and web conferencing.  Even within an industry there are winners and losers.  For example, in dairy production, those supplying supermarkets and local deliveries have thrived but those supplying hospitality have had to pour milk away.

In contrast to publicly filed data, data sharing is the contribution of up to date information about how well customers are paying their financial commitments and their trade credit invoices to a credit reference agency who will aggregate the data to provide an overall view of payment behaviour for a business.  Unlike subjective reviews on Google this is factual information about payments.

There are basically two types of data sharing schemes; open and closed.  Broadly speaking open data sharing schemes are centred on sharing trade credit information and closed data schemes are highly regulated focussed on financial commitments such as bank loans, mortgages, credit cards etc.

Open data sharing schemes

Open data is proprietary data and is generally open to all.  Several of the Commercial CRAs run trade credit payment schemes like the Experian Payment Performance programme, whereby companies who issue B2B invoices share extracts of their sales ledgers with the CRA. The CRA will match the payment information to the correct business to build up a picture of how that business pays its trade credit invoices.

In return, the CRAs usually provide the data sharer with some detailed insight to their portfolio of customers and their payment behaviour with other suppliers which can be used to inform collection strategies.

The data sharer is not identified within CRA products but otherwise the data is considered to be open as it can then be viewed within those products by other credit professionals.

Closed data sharing schemes

These are highly regulated schemes because the data shared is about financial commitments including loans, mortgages, credit cards and current accounts.  There are strict membership criteria and access to the data is on a reciprocal basis i.e. the data you share determines what data you get access to.

Closed schemes further break down to mandatory schemes and voluntary schemes.

Commercial Credit Data Sharing (CCDS) is a mandatory scheme run by HM Treasury to encourage competition between lenders to grant finance to SMEs by the mandatory sharing of finance data by the nine designated banks (which account for 80+% of SME lending).  It is administered by the four HMT designated CRAs (Creditsafe, Dun & Bradstreet, Equifax and Experian), who in turn share this data, via their products and credit scores, with the consent of the SME, with other designated banks.  Other qualifying finance providers can voluntarily join the scheme and must in turn share their data.

This is commercial data only and no consumer data is shared.

There are similar schemes run on a voluntary basis such Experian’s Credit Account Information Sharing (CAIS) which cover both commercial and consumer data.  These are governed by the Steering Committee on Reciprocity (SCoR) which is a cross-industry forum made up of representatives from credit industry trade associations, credit industry bodies and credit reference agencies.

It is voluntary to join if the membership criteria are met and the member decides on what data is shared, which determines under the rules, the Principles of Reciprocity, what the member is entitled to see.   Members are generally finance providers, as well as telcos and utility companies, who share hundreds of thousands of accounts.  These schemes have been in place for more than 20 years and so are currently much larger than the mandatory HMT CCDS scheme in terms of number of members and debt covered.

Crossover agreements

There are many nuances to the various data sharing schemes including what are known as ‘crossover’ agreements.  These are subject to detailed criteria but do allow for some flexibility on the closed user group data.  For example, CCDS data can be used within scores for the purposes of trade credit (but not published). Whereas commercial data sharers under voluntary SCoR schemes e.g. Experian CAIS, can see consumer data in certain scenarios, while those who share trade credit payment data can see summarised SCoR regulated commercial data and scores enhanced with SCoR regulated data.

To explain the details of these crossovers might not interest every reader but you can read about them here https://scoronline.co.uk/ and at gov.uk searching for ‘HMT credit information sharing’.

Trade credit is a hugely important form of finance for businesses and now that the cash from the Bounce Back loans is running out, we see the amounts of trade credit reaching pre-pandemic levels.

Trade credit payment data doesn’t have the complications of the closed schemes and is a true up to date picture of how a business is paying its trade debts.  Using the ‘wisdom of the crowd’ to understand the reality of how a business pays has got to be better than going it alone, at the very least it will supplement your own customer information and maybe corroborate what your applicant is telling you.

It is very easy to share trade credit data and as trade credit data is open data, it will be available to other credit professionals through CRA products, thus enabling better credit decisions to be taken and more trade credit to be granted to those who can be trusted with it.  Those with good payment records will find it easier to access trade credit and all this will help rebuild the credit economy the UK so desperately needs from the effects of the lockdowns in 2020.  So, share data to help the greater good of the economy!  A bit like leaving a review on Google.

Now, I wonder if that new electronic gizmo is any good…?

Richard Leonard is Head of Data Partnerships at Experian Ltd. For further information on the schemes in this article please contact datasharing@experian.com. Please note data is correct at time of publication.