Policy Brief

How Credit Reporting Contributes to Financial Inclusion

Consultative Draft, September 2016

1. Introduction and Background

Financial inclusion has become a public policy priority in many countries. Many policymakers and regulators are introducing measures to advance financial inclusion levels in their jurisdictions and in response private-sector stakeholders are scaling up their efforts to reach unserved or underserved populations.

While in the past definitions of “financial inclusion” varied widely across countries, in recent years there has been a significant convergence. Broadly speaking, financial inclusion can be interpreted as covering three main aspects:

i) Access to the various financial products and services that meet the needs of users (i.e. individuals, firms and government entities). These needs generally include making payments, using credit, savings, investment, and insurance products and services;

ii) Regular usage of those financial products and services, which is strongly related to how valuable they are to the users; and,

iii) The overall quality of those financial products and services, which, in tandem with consumer protection and financial capability, makes it possible for a user to benefit to a greater extent from using those products and services in her or his daily life.

In 2015, the World Bank Group (WBG) and a number of public and private sector partners committed to help promote financial inclusion and achieve “universal financial access” by the year 2020 (UFA2020, http://www.worldbank.org/en/topic/financialinclusion/brief/achieving-universal-financial-access-by-2020 ). UFA2020 envisions that 2 billion currently excluded adults worldwide -- women and men alike -- will be able to have access to a transaction account to store money, send payments and receive deposits as the basic building block to manage their financial lives.

Some specific work has been produced as a follow-up to this initiative, including the joint report of the Committee on Payments and Market Infrastructures (CPMI) and the WBG on the “Payment aspects of financial inclusion” released in April 2016 (http://www.bis.org/cpmi/publ/d144.pdf).

While of utmost importance, access to and usage of a transaction account is just an initial step in becoming fully financially included. Another important objective of public policies in numerous countries is to enable vast sectors of the population, including vulnerable and otherwise disadvantaged individuals as well as micro and small enterprises (M&SEs), to access credit1 on reasonable terms and in a responsible manner.

1 For the purposes of this document, “access to credit” is to be understood in a broad sense to include various forms of financing in addition to loans, such as factoring, leasing, and other forms of credit-risk-related funding.

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In the latter context, it is important to introduce the concept of “sustainable” financial inclusion. This refers to the capacity of the individual and M&SE to enter the financial sector and remain within it for a sustained amount of time. With the exception of those voluntarily ending a relationship with regulated financial institutions due to the lack of satisfaction with the products and services, sustainability focuses on the goal of ensuring that the credit capacity of the individual or M&SE is considered via the analysis of credit data and other data which contribute to a fulsome analysis of the individual’s or M&SE’s ability to pay are considered such that the loan offered does not in and of itself lead to over-indebtedness which can result in temporary or permanent exclusion from at least certain financial services (e.g. savings and credit).

For a number of years, the WBG and the International Committee on Credit Reporting (ICCR)2

have been exploring the role that credit reporting plays, or could further play, in improving access to credit. To this end, in 2014 the ICCR published the report “Facilitating SME access to credit through improved credit reporting” and also has explored how credit reporting contributes to financial institution safety and soundness which is vital to ensuring stable access to credit. These work streams build on the seminal baseline General Principles for Credit Reporting published in 2012.

In this policy brief, the ICCR elaborates on how Credit Reporting can contribute to Financial Inclusion, focusing specifically on access-to-credit issues for both individuals and M&SEs whose credit needs remain unserved or underserved by licensed/regulated financial institutions and/or by other formal lenders that are not financial institutions (e.g. retailers).

2. Credit Reporting, Financial Inclusion and Access to Credit

Credit reporting has traditionally been recognized as an essential tool for sound lending by addressing data asymmetries in the relationship between individual and M&SE applicants and lenders. More recently in many markets credit reporting is also seen as a powerful tool for expanding lenders’ ability to expand access to sustainable credit, while also meeting their need for accurately measuring and pricing risk over time.

It must be noted, however, that credit reporting service providers (CRSPs)3 do not offer loans or other forms of financing and do not establish the criteria for loan approvals made by financial institutions or other lenders. The role of the credit reporting system (CRS) in this regard is rather to provide useful information to lenders for decision-making purposes.4 Hence, only lenders can actually tap the potential that a well-functioning credit reporting system can bring to improving

2 The ICCR is chaired by the World Bank, and is currently comprised by the Arab Monetary Fund, Association of Consumer Credit Information Suppliers, Bank for International Settlements, Business Information Industry Association, Center for Latin American Monetary Studies, the central banks of Brazil, China, France, Germany, India, Italy, Mexico, Spain and Turkey, the Consumer Data Industry Association, European Bank for Reconstruction and Development, Financial Services Authority of Indonesia (OJK), Inter-American Development Bank, South Africa’s National Credit Regulator, Reserve Bank of India, and U.S. Consumer Financial Protection Bureau.3 Credit bureaus, along with credit registries and commercial credit reporting companies, are the main types of CRSPs. For the definition of each of these as well as for the general framework defined by the ICCR for credit reporting, please refer to the General Principles for Credit Reporting (see World Bank, (2011)).4 Credit reporting plays other important roles as well. For details see World Bank (2011), section 3.1, pp 23.

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responsible access to sustainable credit by making proper use of the information (and often analytical tools) available from CRSPs.

When used by lenders a properly designed credit reporting system (see the General Principles for Credit Reporting to better understand what goes into a well-designed system) can contribute to their ability to expand a consumer’s or ME&S’s access to sustainable credit in several ways. These are discussed in Box 1.

Box 1: How does Credit Reporting support and facilitate access to credit?

1. By helping individuals and M&SEs build their “reputational collateral” via the accumulation of payment history data and other predictive data sets and making these data available to lenders, credit reporting systems may help lenders to expand markets to include unserved individuals and M&SEs. This market expansion, created by the data found in credit reporting systems, means many gain access to their first loan from sources other than informal and/or predatory lenders.

2. Financial inclusion also includes a “quality” component, which can be interpreted as improved terms and conditions, including interest rates, with which individuals and firms access loans and other forms of credit. In this context, by facilitating lenders to price risks more accurately, credit reporting can help lower-risk individuals and M&SEs that already have a formal loan in obtaining more affordable and flexible terms (e.g. longer tenors) for subsequent loans.

3. By making access to credit sustainable over time. Usage of credit reporting data can be useful for avoiding over-indebtedness. Over-indebtedness can lead to loan re-payment problems and eventually, depending on the severity of the failure, bar individuals/M&SEs from accessing new credit for a period of time, usually four years or more. Where lenders are successful in matching the loan product to the needs and abilities of the applicant the credit offered is sustainable over the term of the loan. New, positive payment history is reported to CRS creating a virtuous cycle of lending, reporting and economic opportunity for consumers and M&SEs.

4. By improving consumer and M&SE financial literacy. Giving individuals and M&SEs access to their credit reports and credit scores and providing them with essential information on how lenders commonly evaluate these data they are empowered with new knowledge leading to better credit management skills and understanding of how credit scores work, in particular. Individuals and M&SEs can also contribute to data quality by disputing inaccurate data reported by their lenders or mismatched by the credit bureau which are found in their credit reports.

5. By helping avoid and combat fraud. One of the functions of a CRSP is to properly identify loan applicants identifying information and match applicant identifying data with existing files of data to ensure that an applicant is not trying to obtain credit that would lead to purposeful over-indebtedness where there is no intention to repay. CRSP rules can also help ensure that only those lenders that are members of the CRSP and that have an authorization from an applicant or otherwise have, by law, a permissible use for the data can access the credit report/history of that applicant. Finally, if individuals and M&SEs are able to access their credit reports they can identify loans that were not requested by them, important missing data or suspicious activity (e.g. unauthorized queries to their data records by one or more lenders).

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6. Credit reporting can also help improve access to credit in an indirect manner, by creating a level playing field for small lenders to compete against larger lenders.

The objective of this Policy Brief is to discuss in a concise manner the key challenges and possible actions in order to leverage credit reporting to its fullest potential as per the above discussion.

3. Access to credit for unserved and underserved individuals

The scenario and key challenges5

Unserved and underserved individuals typically include the poor living in urban areas, as well as most migrants, many rural inhabitants and the young adults. These groups often have low and/or irregular incomes, and many of them are also informally employed. They also tend to lack physical collateral to pledge when seeking a loan.

Lenders, on the other hand, are only willing to extend credit if they have a reasonable level of assurance that the applicant will repay the principal, plus interest and any applicable fee(s).

For these disadvantaged individuals, their “reputational collateral” (i.e. which is built on the basis of an individual’s history of fulfilment of his/her financial and other similar obligations) is the only potential source of information that can provide such reasonable assurance to lenders.

A credit reporting system is generally the only efficient and reliable mechanism for collecting and integrating the information that underlies reputational collateral. Developing a credit reporting system that is effective for disadvantaged individuals remains nevertheless a challenge.6

First, a reliable mechanism for identifying individuals and for linking them unequivocally with their financial obligations is one of the pillars of effective credit reporting. Establishing reliable identity for disadvantaged individuals is often challenging. Reasons for this range from the exclusion of a large share of the disadvantaged individuals from formal labor markets, to some migrants not wanting to be identified by official sources, to the unreliability and/or limited coverage of the national ID system, or even the total lack of such a system for practical purposes.

Second, much of the economic and financial activity of disadvantaged individuals takes place in the informal sector, where transactions are not recorded. Moreover, in some societies women and/or undocumented migrants, among others, may not be able to have accounts, loans or other credits under their own name, and as a result they cannot build a personal credit history.

Third, in other cases disadvantaged individuals may already be using smaller non-bank financial institutions (NBFIs) such as microfinance institutions (MFIs), but these entities very seldom

5 This section builds on the work of CGAP and IFC. See CGAP and IFC (2011).6 The World Bank “General Principles for Credit Reporting” provide guidance for the development of effective credit reporting systems. More details on the General Principles are provided in the concluding section of this Policy Brief.

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report credit payment data to credit bureaus, credit registries or other CRSPs. Often, non-reporting is due to regulatory restrictions, lack of incentives for reporting and/or the cost of credit reporting data being high relative to the size of the loan being extended.

Regulatory changes may be needed in some countries to enable CRSPs to include these MFIs if they are not regulated financial entities. On the other hand, in the absence of regulatory incentives for lenders to voluntarily report data to CRSPs, MFIs may see little or no benefit from sharing credit data if their lending methodologies do not use credit data as available from CRSPs,7 or if they already have information on a significant share of the population who are their clients, which is typically the case for the dominant lenders.

In addition, individuals that already use credit from MFIs in the form of group lending cannot generally build a credit history through this means. Even if credit data and other information at the group level are reported to CRSPs, information on individuals within a group are still needed.8

Lastly, in some countries the credit reporting system may use minimum reporting thresholds, and as a result individuals having only small loans or credits would not be reported in the system.

As a result, disadvantaged individuals are typically left with so-called “thin files” - or no credit file at all. It is a well-known fact that individuals without sufficient information in their credit histories/files have little access to credit from banks, other regulated financial institutions or even from real sector formal lenders.

An additional effect of the limited coverage of credit reporting systems in many countries is that credit data and other relevant information that may exist on disadvantaged borrowers will be fragmented. This fragmentation means lenders will not always have a full picture of the creditworthiness of selected applicants and further will be limited in terms of their ability to manage ongoing risks across current portfolios of loans which, in the extreme can give rise to institutional or systemic safety and soundness risks. This hampers one of the key functions of credit reporting which is providing lenders with a full, system-wide picture of an individual’s current indebtedness and historical credit performance so that they can make informed decisions. In some cases, MFI-specific client databases have been created, and some have even evolved into credit bureaus. However, these generally do not solve data fragmentation problems.9

7 MFIs lending methods often involve detailed personal knowledge of the borrower (e.g. supported by frequent visits to the borrower and his/her business). Other MFIs operate on the basis of group lending. Credit data, as available from CRSPs, generally adds little value when such methods are used.8 Some CRSPs record the group loan to each individual borrower. All such borrowers are equally responsible for the payment of the loan, so they are listed as “co-debtors”. Hence, borrowers of a group loan do not necessarily build an individual credit history, as their history can be affected by a default of another co-debtor (and vice versa).9 As an example, to reduce data fragmentation in 2014 Banco de Mexico issued a regulation that forces all financial organizations to report at least to one credit bureau. This includes unregulated credit providers (“SOFOMES”), government entities that provide credit (including the federal institute for worker’s housing - INFONAVIT), and trusts.

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Additional legal challenges

Use of certain data by lenders and CRSPs which are not related to specific financial obligations and that might be relevant in assessing the creditworthiness of disadvantaged individuals (and any other individual for that matter) might be prohibited in some countries. Typical data items include an individual’s level of education, marital status and employment record, among others. Actual limitations are determined by local regulations on privacy and on what constitutes a “legitimate purpose” or “legitimate interest” for collecting, distributing and using personal data.10

On the other hand, in some countries bank secrecy provisions or other similar laws or regulations may restrict the sharing of data that is specifically related to financial obligations (i.e. credit data) by banks, or even by MFIs and others with CRSPs - and/or the CRSP may be impeded from providing data to lenders that are not regulated by the central bank or the banking regulator.

Moreover, while data and other information collected by certain public records agencies (e.g. national population registers, national ID office, justice administration, etc.) are very often crucial for identifying and assessing all sorts of actual or potential borrowers, a lack of clarity in terms of the way in which CRSPs may access, analyze and distribute such information is likely to make those public agencies reluctant to make their records accessible to them.11

An additional challenge exists in countries where there is no effective enforcement powers and mechanisms over CRSPs, other relevant public and private data sources and other stakeholders (e.g. users) to induce change in the national credit reporting system. In some cases none of the national regulators have enforcement powers, while in others those powers have been vested in two or more regulators without a mechanism to coordinate their actions in this field.

10 An individual granting its consent to lenders for using/sharing his data is a common method to overcome many of the limitations imposed by privacy concerns. At the BOP, however, this practice may be seen as questionable by some due to the low levels of awareness (and very limited financial literacy overall) of the implications of such an action.11 Other relevant problems in this specific area include such records being held in paper/physical form, as well as data quality problems originated from infrequent updates or lack of integrity of records.

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Summary of the challenges for unserved and underserved individuals

Box 2: Key challenges for Consumer Credit Reporting Systems to play a stronger role in improving access to credit for unserved/underserved individuals

1. Credit reporting systems having sufficiently broad coverage in terms of the types and number of lenders that report to it and that use its services, including those that typically lend to disadvantaged groups.

2. Being able to establish the identity of applicants and existing borrowers – may be especially challenging for BOP individuals and migrants.

3. CRSPs having sufficient access to other public and private data sources, including alternative ones, which hold data and other information that is relevant for consumer credit reporting.

4. Achieving a balance between protection of data privacy/bank secrecy provisions and the societal and individual benefits of credit data collection and usage for lending evaluation purposes.

5. CRSPs being capable of processing efficiently and with a high-quality data on unserved and underserved individuals, and of developing useful and affordable value-added products for lenders given small loan sizes (while loan origination costs are relatively fixed).

6. Lenders using CRSP services (e.g. credit reports and other value-added products and innovative decision science technologies) in order to make better informed credit decisions regarding unserved and underserved loan applicants (and any other applicant as well).

4. Micro and small enterprises (M&SEs)

The scenario and key challenges

Many of the challenges for ensuring adequate and accessible access to credit for disadvantaged individuals are also relevant for M&SEs, in particular the lack of sufficient and/or of high quality data and other credit-related information for credit decision-making. Nevertheless, as business entities/legal persons (i.e. that carry out transactions for business purposes rather than for personal purposes), there are a number of other challenges that are specific to M&SEs.12

These challenges have already been identified and analyzed in detail by the ICCR in its 2014 report “Facilitating SME financing through improved Credit Reporting”.13 This section draws largely from that report. Figure 1 illustrates these challenges from the perspective of lenders/other creditors.

12 The G20 Joint Action Plan of GPFI SME Finance Sub-Group identified the development of credit infrastructure for SMEs including improvements of the credit reporting framework for SMEs as a key priority.

13 Being unable to access credit is generally much more common for micro and for some small enterprises than for medium enterprises. However, as stated in Box 1, financial inclusion also includes a “quality” component. In this sense, effective credit reporting can help medium enterprises in obtaining lower interest rates and/or longer-term financing. Hence, the analysis and conclusions of the ICCR 2014 report are deemed also useful for this Policy Brief.

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Figure 1: Main challenges faced by Lenders in connection with M&SEs

Source: Adapted from ICCR (2014), (adapted in turn from the IFC’s SME Finance Forum).

As with disadvantaged individuals, credit reporting can play an important role in making the necessary enhancements in data and information availability and quality for M&SEs. As noted earlier in this Policy Brief, however, only lenders can, through usage of this data, make possible that the benefits of an effective credit reporting system actually materialize for M&SEs.

Commercial credit reporting companies are specialized entities in credit reporting on firms, including medium-sized and some small enterprises, and are therefore key players in this space. Credit registries are nevertheless also important. Likewise, credit bureaus specialized in consumer lending can also play a role, especially for sole proprietorships.

The challenges for credit reporting that are more specific to M&SEs’ access to credit are described in Box 3. Despite their specificity, it is evident that these challenges have a similar nature to those listed in Box 2 for disadvantaged individuals, and have to do with the proper identification of borrowers and with ensuring that the credit reporting system covers all potentially relevant data sources and produces sufficient, high-quality data for use by lenders and other creditors.

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M&SE Finance Challenges

Poor customer

knowledge

M&SE skills and literacy

Low profitability

Lack of credit data

Lack of collateral or

capital

Poor business enablers

Box 3: Key challenges for Credit Reporting Systems to be able to facilitate improved access to credit for M&SEs

1. Different from IDs of individuals, ID numbers for firms are subject to the dynamics of business activity, and are therefore affected by events like mergers, acquisitions, etc.14

2. Financial statements and projections or even some barely equivalent financial information are not always available in the case of M&SEs, or may not be reliable. For microenterprises, very often the only standard information that is available to assess their creditworthiness is the personal credit file or history of the owner(s) of the firm.15

3. Leasing companies, factoring companies, other NBFIs and also trade creditors are relevant financers of many M&SEs. In many countries the majority of these entities do not share the credit-related data they hold on M&SEs with CRSPs.

4. Other data sources for assessing a firm’s creditworthiness include industry associations or representative bodies (e.g. chambers of commerce), the courts of law system and other public records. These sources are not always accessible, or readily available to CRSPs.

5. Lenders using CRSP services (e.g. credit reports and other value-added products) in order to make better informed credit decisions regarding M&SEs.

Additional legal challenges

In contrast to consumer credit reporting, a specific legal framework (i.e. in the form a credit reporting act or equivalent) has not been developed in most countries to regulate commercial credit information collection and distribution. This is because most of the relevant concerns in connection with consumer credit reporting are not equally relevant when it comes to commercial credit reporting. A clear example of this is the issue of ensuring an adequate protection of the privacy of individuals as data subjects and other consumer rights.

A negative side to this situation is the lack of legal certainty on the side of CRSPs, data providers and data users when it comes to collecting, processing, distributing and using data and other credit information on M&SEs. For example, establishing the frontier between individual and businesses’ interest, or determining whether there is fair economic interest over some data due to the societal and individual benefits that derive from its usage may not be straightforward without clear regulatory guidance.

In addition, the absence of such a specific framework in the case of commercial credit reporting would also most likely mean an absence of oversight powers by a national regulator to induce change in this segment of the credit reporting industry.

14 Tax authorities, CRSPs and others may try to associate a firm’s new ID number with that of its predecessor(s). The outcome may not always be reliable. On the other hand, a firm that for any reason changed its official ID number and that has had a good credit history has incentives to bring this history to the attention of lenders.15 In addition and linking also with the first point in Box 3, the ability to ascertain whether a sole proprietorship, co-ownership, cooperative and even a limited company, remains active is crucial to assess creditworthiness.

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5. Use of credit data from CRSP for developing indicators that reveal the tendency, level of indebtedness and the source of credit to vulnerable and otherwise disadvantaged individuals.

In contrast to the benefits that financial inclusion brings to the vulnerable and otherwise disadvantaged individuals, problems originated by irresponsible lending such as over-indebtedness need to be prevented as these problems have been associated to financial inclusion as a barrier and frequently a negative by product of the process. In this respect, the measurement of the financial burden of individuals in the system, through the creation of indicators for the analysis of the sources of credit and the tendency and level of indebtedness of the population is important.

Credit bureau information is a valuable source for identifying the capacity of payment of individuals, using the information (micro-data) segmented by type of provider or financial characteristic of the loan. It provides an essential input for the construction of an indicator of capacity of payment of individuals.

Simultaneously an estimate of the income of individuals is necessary to build a financial burden measure. This information is usually not collected in granular nor aggregated form by CRSP. Nevertheless, there are some cases where CRSP collect this data during the credit origination process, with the inconvenience that this information is not updated in a periodical way. Usually this information is renewed until the individual submits another credit application. To overcome this lack of information, government held information (e.g. social security database or tax information).

Conclusions and Policy Recommendations

1. Adoption of General Principles for Credit Reporting

The General Principles for Credit Reporting (herein the “General Principles”) lay out the conditions that enable an effective credit reporting system. The cornerstone of every system is the quality of its credit data. Only if data covers positive as well as negative behavior, is obtained from all relevant sources, and is current and accurate will it be valuable to users. Secure and efficient data processing and robust governance and risk management arrangements are enablers of high-quality data. Confidence in the system is supported by a clear and predictable legal environment that balances legitimate interests for the collection and sharing of credit data with consumer and overall privacy rights.

The ICCR reaffirms the role of the General Principles as a robust general framework for the continued development of credit reporting systems throughout the world. For further facilitating access to credit and supporting financial inclusion more generally, the ICCR believes that special emphasis must be placed on ensuring observance of General Principles 1 (data), 2 (data processing: security and efficiency) 4 (legal and regulatory framework), and 5 (cross-

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border data flows)16 together with the Roles identified in the General Principles report for stakeholders of a credit reporting system (i.e. data providers, other data sources, CRSPs, users, data subjects and authorities).

The General Principles report also stresses the importance of oversight, supervisory and regulatory activities exercised by the relevant authorities. It also defines some of the criteria for these activities to be effective, namely counting on proper legal and statutory powers, clarity of direction in policy objectives, appropriate resources and sufficient level of cooperation among relevant stakeholders. The role of authorities involved in credit reporting is, therefore, also important in ensuring that credit reporting systems help facilitate the broader financial inclusion objectives.

To this end, this last section discusses four areas and related specific actions derived from the experience of ICCR members and other relevant parties. Where relevant, an indication of the main actor to which the action is accessed is explicitly specified. It should be noted that many of the proposed actions have already been described in the General Principles report. This is a clear indication that an effective credit reporting systems is relevant for all individuals and firms, and not just those that face difficulties in accessing credit.

2. Additional Action points

I. Ensure that individuals and M&SEs can be identified unequivocally and at a reasonable cost by CRSPs

For individuals, government authorities to ensure efficiency and consistency of National ID systems, as well as other public agencies like tax authorities and social security agencies that can play an important role.

In the case of firms, government authorities to devise effective and efficient methods to register new firms and, also, link a new ID key of a firm with any previous ID key(s) that that firm or its predecessors may have had in the past. The Legal Entity Identifier (LEI) as the "central hub identifier" may be especially useful for this purpose, allowing to connect data from different sources (e.g. credit reporting, financial statements, payment systems)

Develop guidelines to allow CRSPs access to a wider set of information sources for establishing identities, including ID validations

II. Achieve more comprehensive, granular and efficient coverage of CRSPs Broaden credit history coverage, in terms of number and variety of reporting

institutions, for disadvantaged individuals and for M&SEs

Regulators to enable, or eventually require, all financial service providers, including those that are not unregulated by a financial authority, to report credit data and other relevant information to CRSPs in their jurisdiction

16 Principle 5 applies to migrants, in particular.

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Overcome cost, technical, technological and other barriers that limit participation of microfinance institutions (MFIs) and other similar lenders as data providers and data users

Reduce or eliminate minimum thresholds for reporting loans/debtors to CRSPs

Government and its agencies to pro-actively ensure efficient and cost effective access by CRSPs to datasets they manage, including but not limited to ID datasets, corporate registries, court of law systems data, property and collateral registries, etc.

Authorities to work with the market to encourage competition and innovation while avoiding fragmentation and duplication which might increase costs and reduce coverage of CRSPs.

Ensure that CRSPs use of de-personalized data for development of analytics which help lenders assess risk and ensure individuals are treated fairly.

Ensure CRSPs can fund future system development, data quality efforts, investments in new data sources including MFIs and relevant alternative data.

III. Enhance “thin files”

” Regulators to enable relevant “alternative data” for credit reporting, if necessary by amending laws and regulations to clarify how such alternative data may be sourced, analyzed and distributed

Examples of alternative data to act upon might include;

Reporting of data on payments made by disadvantaged individuals and M&SEs (e.g. utilities, mobile phone, and certain other obligations like rental information, taxes, tuition, etc.). Data on crowdfunding transactions, factoring, leasing and credit insurance are also relevant for M&SEs

Reporting of relevant data associated to assets (movables and fixed) that belong to disadvantaged individuals and M&SEs

Reporting of data on other payment flows received by disadvantaged individuals (e.g. subsidies, pensions, domestic and cross-border remittances, etc.)

Innovative approaches to be considered and, if appropriate encouraged. For example, explore the possibility of using behavioral data, social media data and the like sources to evaluate the creditworthiness of individuals with no previous credit records.

IV. Guarantee that individuals and M&SEs are not exposed to excessive and unmanageable risks through the CRS when they enter the financial sector

Adopt a data protection framework that guards disadvantaged individuals’ data by limiting its uses and access considering also the range of data uses which can benefit individuals. The specific sensitivities in each country when it comes to privacy issues to be considered when putting together this framework, although a minimum general

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understanding on these issues should be sought in order not to hamper cross-border activities.

Public and private sector stakeholders to launch initiatives to educate and empower disadvantaged individuals and M&SEs on credit reporting (e.g. on the relevance of a good and complete credit history, consequences of providing consent for data usage by third parties, etc.)

Ensure that dispute resolution mechanisms be accessible and understandable by all segments of the population and enterprises.

Once included in the system, strive for "sustainable" financial inclusion by enacting proactive measures regarding credit reporting systems in order to minimize the risk of over-indebtedness. For example, authorities could develop over-indebtedness indicators for vulnerable and disadvantaged individuals17.

17 For concrete example regarding this measure see the case of Mexico under Annex II.

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ANNEX 1- CPMI-World Bank Task Force on Payment Aspects of Financial Inclusion

There is broad recognition that financial inclusion can help people get out of poverty as it can help them better manage their finances. Access to a transaction account is the first step in that direction. A transaction account allows people to take advantage of different (electronic) ways to send or receive payments, and it can serve as a gateway to other financial products, such as credit, saving and insurance.

Payment services are usually the first and typically most often used financial service. Understanding how payment aspects can affect financial inclusion efforts is important not only for the Committee of Payments and Market Infrastructures (CPMI) of the Bank for International Settlements and the World Bank Group (WBG), but for all stakeholders with interest in increasing financial access and broader financial inclusion. This is why the CPMI and the WBG created a task force to analyse the role of payments and payment services in financial inclusion: the Task Force on Payments Aspects of Financial Inclusion (PAFI Task Force).

The PAFI Task Force - co-chaired by the WBG and the BIS - commenced work in 2014, with senior representatives from CPMI central banks, non-CPMI central banks active in the area of financial inclusion, the WBG and the IMF, and international development banks as task force members.

The PAFI task force’s mandate was to examine demand- and supply-side factors affecting financial inclusion in the context of payment systems and services, and to suggest what measures could be taken to address these issues. The demand side is comprised by payment service users, like consumers, businesses, and government agencies and the supply side are payment service providers, like banks and authorized and/or regulated non-banks, as well as payment system operators.

The task force’s objectives were to:

Support the efforts of authorities to expand access to transaction accounts and the use of electronic payment services

Contribute to the recognition that safe and efficient payment services are important for the well-being of individuals, households and businesses, as well as a gateway to a broader range of financial services

Advance market efficiency, flexibility, integrity and competitiveness to support financial inclusion and stability

Facilitate the establishment of a balanced and proportional regulatory environment to facilitate effective, reliable, safe and cost-efficient access to payment services.

The PAFI work is essential to worldwide financial inclusion efforts, particularly to the World Bank Group’s UFA2020 initiative, whose goal is ensure that by 2020, adults globally have access to a transaction account. These transaction accounts should be issued by an authorized and/or regulated payment service provider and allow account holders to:

Perform most, if not all, of their payment needs Safely store some value

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Serve as a gateway to other financial servicesThe PAFI Task Force developed guiding principles and key actions that are essential for universal access to and usage of transaction accounts and published them in a consultative report in September 2015 for a three months period of public consultation. The final report was published in April 2016. The report provides an overview on the retail payments landscape as a prelude to its analysis of how payment systems and services promote access to and use of financial services.

The report draws upon the experiences and approaches of a diverse range of countries and jurisdictions to increase access to and usage of transaction accounts, particularly with regard to measures that fall within the scope of financial sector authorities and other stakeholders, including service providers and users. The report features numerous concrete measures and successful examples from around the world.

The main findings of the PAFI Task Force are summarized in seven guiding principles and suggests key actions countries could take to advance access to transaction accounts – all of them featured in the report. These are: Guiding principle 1: Public and private sector commitment: Commitment from public and

private sector organizations to broaden financial inclusion is explicit, strong and sustained over time.

Guiding principle 2: Legal and regulatory framework: The legal and regulatory framework underpins financial inclusion by effectively addressing all relevant risks and by protecting consumers, while at the same time fostering innovation and competition.

Guiding principle 3: Financial and ICT infrastructures: Robust, safe, efficient and widely reachable financial and ICT infrastructures are effective for the provision of transaction accounts services, and also support the provision of broader financial services.

Guiding principle 4: Transaction account and payment product design: The transaction account and payment product offerings effectively meet a broad range of transaction needs of the target population, at little or no cost.

Guiding principle 5: Readily available access points: The usefulness of transaction accounts is augmented with a broad network of access points that also achieves wide geographical coverage, and by offering a variety of interoperable access channels.

Guiding principle 6: Awareness and financial literacy: Individuals gain knowledge, through awareness and financial literacy efforts, of the benefits of adopting transaction accounts, how to use those accounts effectively for payment and store-of-value purposes, and how to access other financial services.

Guiding principle 7: Large-volume, recurrent payment streams: Large-volume and recurrent payment streams, including remittances, are leveraged to advance financial inclusion objectives, namely by increasing the number of transaction accounts and stimulating the frequent usage of these accounts.

The report suggest accompanying key action and also addresses a number of issues in connection with measuring the effectiveness of financial inclusion efforts in the context of

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payments and payment services, with a particular emphasis on transaction account adoption and usage.

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ANNEX 2 - Developing Indicators on indebtedness for vulnerable and disadvantaged individuals; The Case of Mexico

The Mexican Central Bank has obtained individuals income based on the income reported by employers to the Social Security database (SS). This SS database accounts for approximately 16-18 million of active Social Security Numbers associated to individuals whose income is updated every two months. The resulting measure consists on taking the cash flow that is destined to pay debts on a monthly basis with respect to monthly income. Where monthly debt payments correspond to the total amount that has to be destined to debt service on a monthly basis.

Financialburdeni=∑ Monthly Debt Payments

Monthly Income i

A random sample from the social security (SS) data base of one million individuals (5.5%) was obtained and matched with Credit Bureaus in order to integrate a granular database with information on the credit record of each individual with his or her income reported to the SS.

The analysis showed evidence of the consistency in the use of this indicator for monitoring the health of the financial system as it confirmed several hypotheses regarding the relationship of a high financial burden and i) days past due, ii) product type, and iii) type of institution granting credit. Some of these results are shown in the following figure:

The population is ranked by deciles where the first decile is integrated by the poorest individuals and the 10th decile by the highest income population. As can be seen, there is a coherent pattern between the financial burden and the monthly income, as the poorer is the individual, the higher is the financial burden with respect to his or her income. In the case of the first (poorest) decile, 80 percent of their monthly income is bestowed to pay its debts. On the contrast, the monthly cash flow to pay debts of the people that belong to the richest decile represents only 16 percent of their income. Likewise, the people at the bottom decile has a

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higher average days of past due loans (63), in comparison to the top income decile who has an average of only 8 days of past due loans.Finally, the conclusion reached is that although this indicator should not be used as an absolute measure of financial burden on households, it is useful to monitor its tendency and association with relevant phenomena of over indebtedness by financial institution and type of loan. It could also be eventually linked to diagnosis of financial stability.It may also represent a valuable tool to improve early detection and reaction to risk accumulation through its use as a prudential tool and guide to consumer protection measures.

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ANNEX 3 Acronyms

BIS Bank for International SettlementCGAP Consultative Group CPMI Committee on Payments and Market InfrastructuresCRS Credit Reporting SystemCRSPs Credit Reporting Service ProvidersGPFI Global Partnership for Financial InlcusionICCR International Committee for Credit ReportingICT Information Communications TechnologyID Identification DocumentLEI Legal Entity IdentifierMFI Micro Finance InstitutionM&SE Micro and Small EnterprisesPAFI Payments Aspects of Financial InclusionSME Small and Medium EnterpriseUFA Universal Financial Access

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ANNEX 4 References

Center for Financial Inclusion (2013), “Credit Reporting for Full Financial Inclusion”, prepared by the Financial Inclusion 2020 Credit Reporting Working Group

Committee on Payments and Market Infrastructures and World Bank Group (2016); “Payment Aspects of Financial Inclusion”, Bank for International Settlements, Basel. Available at http://www.bis.org/cpmi/publ/d144.pdf

Consultative Group to Assist the Poor and International Finance Corporation (2011), “Credit Reporting at Base of the Pyramid: Key Issues and Success Factors”, Access to Finance Reports by CGAP and Its Partners, No. 1 September 2011, Washington DC.

De Olloqui, F., Andrade, G. y D. Herrera (2015), “Inclusión Financiera en América Latina y el Caribe: Coyuntura Actual y Desafíos para los Próximos Años”, Inter-American Development Bank, Washington DC.

International Committee on Credit Reporting (2014), “Facilitating SME financing through improved credit reporting”, The World Bank, Washington DC.

International Finance Corporation (2010), “Scaling-Up SME Access to Financial Services”, Report of the G20 Financial Inclusion Experts Group, SME Finance Sub-Group, Washington DC.

Kshetri, N. (2016), “Big data’s role in expanding access to financial services in China”, International Journal of Information Management, 36 (2016) 297-308.

Organization for Economic Cooperation and Development (2013), “The OECD Privacy Framework”, Paris.

The World Bank (2011), “General Principles for Credit Reporting”, Washington, DC.

The World Bank (2014), “Facilitating SME Access to Credit through improved Credit Reporting”, International Committee on Credit Reporting, Washington, DC

Turner, M., Varghese, R: and P. Walker (2010), “Financial Inclusion through Credit Reporting: Hurdles and Solutions”, a Policy Brief by the Political and Economic Research Council (PERC), Chapel Hill, North Carolina.

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