Before Nigeria Scales Credit Bureaus

Nigeria is a cash-based economy. For years, the government has been trying how to re-wire the economy to make it credit-based. The Cashless Policy which encourages electronic transactions and the BVN (Bank Verification Number) policy which links biometrics with bank account numbers are some initiatives government has used to drive this redesign. Through Nigeria Inter-Bank Settlement System (NIBSS), the financial institution can easily build a good chart of any Nigerian banking customer through its BVN. When you add NIMC (National Identity Management Commission) Identity Number to it, you have a new dawn.

The new dawn is that financial institutions can use the data which have been collected from bank accounts and other sources to provide loans, mortgage and other credit services. We are following the advanced nations. But before we clone America or UK’s credit bureau system, we can modify or adapt certain elements in the credit bureau system of the countries. America’s credit bureau system is not optimal. There are widespread identity thefts, cybersecurity risks, and  other shortfalls inherent in the systems. The problems are systemic.

Last week, Equifax, a global credit bureau firm, was hacked and the financial data of 143 million Americans and 400,000 British consumers were compromised. The implication is that these people are now left vulnerable to identity theft or fraud for a very long time.

Last Thursday evening we announced a cybersecurity breach potentially impacting 143 million U.S. consumers. It was a painful announcement because of the concern and frustration this incident has created for so many consumers. We apologize to everyone affected. This is the most humbling moment in our 118-year history.

Equifax Security first discovered the intrusion on July 29. Understandably, many people are questioning why it took six weeks to report the incident to the public. Shortly after discovering the intrusion, we engaged a leading cybersecurity firm to conduct an investigation.

At the time, we thought the intrusion was limited. The team, working with Equifax Security personnel, devoted thousands of hours during the following weeks to investigate.

In U.S. and UK, credit bureaus like TransUnion, Experian and Equifax make money by selling confidential data of citizens to financial institutions who use the data to deliver credit services to the citizens. The lenders like banks provide the data from the citizens’ financial records to the credit bureaus at no cost. The credit bureaus need the data to build the credit profile of the citizens and the banks rely on them to sell products and services like mortgage, credit cards, etc. There is no involvement of the citizen in this process. Yet, it is the citizen data that everyone is making money from, but the citizen can neither restrict no control his or her data. The citizen does not need to control its data contents as you want a total picture of unfettered citizen’s credit state. Yet, there needs to be way to ensure protection of citizen data.

What Nigeria Can Do

It is evident that the credit bureaus do not really care about the security of citizen data. Banks do care because losing customer funds through cyber-breaches will cost them money. The credit bureaus do not see citizen data as being that important. Their customers are the banks and not the citizens, and that is why they never care what they send to the banks. The citizens cannot take the jobs away from them. They have no incentive to be absolutely correct on the data they send to banks. The banks pay them and the banks are their customers, and provided they are happy, the citizens are irrelevant.

So for Nigeria, we need to do things a little different. We need to have within the Central Bank of Nigeria a unit that will supervise credit bureaus the way we do to banks. Also, citizens must enroll before any bureau can monetize their data in the specific system. By asking the citizens to enroll before banks can use their data, via credit bureaus, it creates incentives for the bureaus to make efforts to be optimal in their services.

Sure, it can hurt the citizen if the data is not reported but it will also hurt the credit bureau if it has no data to monetize. We have existed for decades with no credit system and can wait for few months to get it right. But for the credit bureaus which are starting, they need the citizens’ data. I recommend the following in Nigeria to make sure we break any oligopoly power as is being experienced in the U.S. credit bureau sub-sector:

• CBN should register and give licenses to at least five credit bureaus
• Credit bureaus can get data from all the banks and approved sources but they cannot profit from them until a customer approves for them to monetize the data. By pushing them to wait until a citizen approves, they have an incentive to be optimal to the services they deliver to the citizen besides the banks
• A citizen must sign up with at least three bureaus at all times
• Where it is evident that a specific credit bureau is not performing well, a citizen can withdraw its approval to report its credit. That can happen once per two years. Once that happens, it will take another two years for that customer to rejoin that specific credit bureau. But at the time, the credit bureau will still be collecting the data but cannot monetize it with banks.
• A citizen at all times must have its credit records approved for monetization with at least three bureaus

By having this structure, a citizen will have leverage thereby reducing the poor reporting and lack of efforts by credit bureaus to harden systems to avoid identity thefts. A credit bureau that neglects its systems resulting to massive hack can lose all customers and will have nothing to sell to banks. So that creates an incentive to deliver better protection unlike what we have today. The addition of this citizen component will seed incentives for win-win in the sector.

All Together

The alignment of the interests of the banks, credit bureaus and citizens will be catalytic in establishing a functioning credit ecosystem in Nigeria. This is not included in the current CBN’s guidelines for establishing credit bureaus in Nigeria. We cannot do it the way the Americans have done it. We need a system that provides a citizen element so that credit bureaus have clear incentives to deliver good services. You cannot be selling people’s data and yet have no incentives to serve the people and protect their data. With this proposed model, the oligopolistic system that runs in the credit bureau industry will be dismantled in the Nigerian model. The outcome will be a virtuoso credit bureau system that secures customers data as it serves its core customers, the banks.

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