Cross Border Credit Reporting
The geographical boundaries drawn by nation states are blurring in the 21st century. In many parts of the world, free movement of goods, services, and even personnel have become a norm. However, strangely, the concept of credit and loans is still dependent upon national boundaries.
The H1B visa system of America is a testimony to this fact. Each year, more than 85000 skilled personnel from around the world migrate to America in search of better job prospected. However, most of these personnel have to leave behind their credit histories in their native countries. As far as American banks and financial institutions are concerned, these individuals are aliens without any records. Hence, financial products like credit cards, personal loans, and mortgages cannot be provided to them for some time.
It is obvious that this system is simply inefficient and hence disadvantageous to all the parties involved. It is only a matter of time that banks and financial institutions wake up to the enormous market potential of selling products and services to expats all over the world. This is the reason why some countries are trying to make cross border credit reporting a reality.
In this article, we will have a closer look at the issue of cross border credit reporting.
What Is Cross Border Credit Reporting?
Cross border credit reporting is the process of enabling the flow of credit based information between different countries. Right now if American banks want to make loans to a consumer, they can only query the database of American credit rating agencies. At the moment, most banks do not have a process to initiate queries if their prospective customer has a credit history in another country like India or the Philippines!
Cross border credit reporting would enable the flow of such information. The basic idea is that financial prudence and credit history do not become invalid simply because a consumer is in a different country. Since the data can be used to assess risks and make loans, it should be made available to prospective lenders if the consumer agrees to provide this information.
Expat Credit Problems
The lack of cross border credit reporting facilities leads to many problems for expats. A few important ones have been listed below.
- Less Participation in Host Country: As mentioned above, expats are not able to fully participate in the financial system of their host country. Banks are unwilling to extend credit to them even if they do have the income to pay back this credit on time. Since credit cards and mortgages are not extended to them relatively easily, their purchasing power is reduced. This has obvious negative effects on the economy of the host country as well.
- No Leverage In Home Country: Expats are known to send money back to their home country. Expats from developing countries such typically send close to 30% of their incomes back home. This income is then invested in assets within the home country. Real estate is the most common asset class used by expats. However, there is a problem here, as well. The income records of the expats are in a foreign country. Hence, home country banks do not have information about the credit history of the non-resident borrower. As a result, these borrowers are either not given credit or credit is provided to them on unfavourable terms.
- No Credit on Returning Home: Expats have no credit history once they return to their home countries. Hence, they are unable to receive a credit to pursue entrepreneurship once they return to their home countries. This problem could be easily solved if cross border credit reporting becomes a reality.
Challenges Facing Cross Border Credit Reporting
The idea of cross border credit reporting seems like a good one on paper. However, there are some very obvious challenges that anyone trying to implement this idea will face. Some of these challenges have been listed down in this article.
Lack of Standardization: Credit reports are summaries. They do not provide a list of all financial transactions. The problem with summary reports is that they tend to miss some details. For instance, American credit bureaus prepare credit reports based on certain standards that they have agreed upon. However, British credit bureaus may use different standards. Therefore, these two reports wouldnt really be comparable.
Therefore, there is a need for all credit bureaus across the world to standardize their reports. This is not likely to happen anytime soon. Hence, a system has to be devised to enable lenders to convert foreign credit reports to domestic credit reports.
- Lack of Regulatory Oversight: Credit reporting is tightly regulated all over the world. This is because credit rating agencies have access to a wide variety of consumer data. If this data needs to be shared across boundaries, newer legal implications will come into the picture. For instance, there are laws which govern how credit rating agencies can process data and who they can share it with. However, once the data crosses national boundaries, how can these laws possibly be enforced! Even if these laws are broken, there will be no recourse for the consumer or for the agencies. Hence cross border credit reporting can only become a reality if a strong legal foundation is put into place. Regulators all over the world will have to co-operate to make this idea a success.
The bottom line is that cross border credit reporting is the need of the hour. If individuals are free to take up a job anywhere in the world, they should also be able to obtain credit anywhere worldwide.
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