Consumer Protection, But Which Consumers?

by Steven van Groningen on 10 August, 2010

Recently we attended a wedding in Bucovina. The young couple lived in the USA but both were born in Romania and wanted to celebrate their religious wedding in Romania with their friends and relatives.

At a moment during he day, the subject of housing came up. Proud and enthusiast the young couple told us that they had just managed to buy an apartment in Chicago with a very advantageous financing.

Good Score Means Cheaper Credit

They explained that for years they had carefully managed their credit score so that they could benefit from a better interest rate. They took care to pay all their bills on time and would only take a few credits cards from the major providers. They made sure not to use them up to the limit and always repaid more than the minimum on their monthly installment. This way they had managed a good credit score and had access to cheaper credit.

Not The Same In Romania

They were surprised to hear that their strategy would have worked only partially in Romania. Here banks don’t have access to information about payment behavior of (potential) clients outside the banking sector. Payment behavior is – not surprisingly – constant over different industries. Someone who has a bad track record in paying bills is also more likely to have problems with repaying loans and the other way around. For that reason someone who takes a credit risk on a person (or company) would like to know what payment behavior history this person has. This is not only the case of banks, mobile phone operators and many others also take risk on individuals and companies. If they don’t get paid they have a loss. These losses are taken into account when setting the pricing of products. For that reason in the USA and many other countries people with a good payment behavior are considered lower risk by banks and get lower interest rates on their credits.

What About The Credit Bureau ?

In Romania, banks use the credit bureau to share information about the payment behavior of their clients. Mobile phone operators have their own system and there are vast amounts of data available about payment behavior at utility companies. So, all the information is available. The problem is that in Romania banks and utility companies are not allowed by the regulators, in this case the Consumer Protection Agency and The National Supervisory Authority For Personal Data Processing, to access information about payment behavior in each others businesses.

The question is now why the regulators in Romania have decided that responsible individuals with a good payment behavior, – like our young couple in the USA – may not benefit from this and on top have to pay also for the bad behavior of others.

Romania Needs Lower Rates

I cannot open a newspaper without being told that we need lower interest rates in Romania. Indeed, I agree, especially for the 80+% that is paying on time and producing and will have to pull the country out of this crisis. It is clear that it would be better for the economy to have a lower cost of credit for those that deserve it and to stimulate others to have a correct payment behavior. So why aren’t banks, mobile phone operators and others allowed to share payment behavior information ?

Sometimes I hear the argument that it is not fair to punish someone for not paying a bill late once. That is of course not the issue. Banks are interested in behavior and not in incidents and even then, it doesn’t mean that those with less than perfect payment history are cut off from credit, they just have to pay a bit more.

I have my ideas about this approach for Romania in the current state of development. But it is not up to me to decide that people with good payment behavior should pay more in order to cover the losses caused by the ones that are not paying. This decision is up to the regulators. I can only point out that there is a cost to this and that this doesn’t seem to be aligned with the declared interests of the country.

Which Consumers To Protect ?

Consumer protection is of course needed in Romania but we need to make up our mind about which consumers need protection. Maybe one day politicians will find out that it is better for the economy and the majority of their voters (the 80+% that pays on time) to have lower interest rates, made possible by lower risk costs.

{ 6 comments… read them below or add one }

Stefan August 10, 2010 at 21:34

I fully agree on registring payment behaviour in various domains (household bills, telecom bills, bank loans) in a central database in order for those who keep up with their payments to be rewarded with a cheaper banking products and those who dont pay their bills to be subject to a different pricing of a banking product.

It is true, that one who cannot pay the most simple bill of 50 RON to a telecom company for months on end, is most likely to default on a credit installment of 50 or 100 or 200 RON as well.

It is though possible (by change of law in Romania) to include the payment data of mobile phone operators into the Romanian “Biroul de Credit”. Where there is a will … there is a way. In the UK (as as well as the Netherlands where you’re from) phone bill data is communicated to either commercial credit bureaus (Experian, Equifax) or to public credit bureaus (like “BKR” in the Netherlands). Why wouldnt this be possible in Romania? If they can change VAT during a fiscal year (unconstitutional in my opinion), then they can change the law on including payment behaviour in Biroul de Credit! Why not lobby for this?

On another note: even though Romania cannot be compared to the US when it comes to reporting payment behaviour in order to reward good clients, it is indeed odd to see that Romanian banks hardly make any difference on pricing when it comes to good, average and mediocre clients (based on internal credit scoring)

As a comparison:

1) client1
24 years old, single , from a small town near Constanta, 7 months employed, 2000 RON income, qualified worker, employed at local SRL started 3 year ago, employer at low profit, turnover 250.000 RON, no debts towards the state

2) client 2
34 and 35 years old couple, living in Bucharest, married, 1 child of 4 years told, both 10 years employed, family income 10.000 RON , bot have had loans in the past, paid in full, with a good credit history in Romania,employer multinational company semi-executive job position.

Let’s assume that either client pre-qualifies for a mortgage loan of 35.000 EURO. Client 1 gets the same rate as client 2 (at the majority of Romanian banks). This is odd! A bank in Romania will not actively offer a discount to a superb clients like client 2 (with a superb client profile) while in my opinion “risk” has its “price” and should be applied as such.

A bank can apply internal credit scoring to see if a client can qualify (like at Raiffeisen), but this is never seems to be directly linked to the cost structure of a mortgage loan.It seems you either pass the scoring (and you get the loan at the standard rate) or you don’t qualify and don’t get the loan.

Another example whereas low risk should mean a lower rate in Romania

Client X (with superb profile) wants to finance 35.000 EURO, contributes with 80.000 EURO in cash to buy a 115.000 EURO property. LTV = 30,43%

Client X (with superb profile) wants to finance 35.000 EURO, contributes with 15.000 EURO in cash to buy a 50.000 EURO property. LTV = 70%

In both situations the interest rate is currently in Romania the same for the mortgage loan in both situations, while the risk in the first situation (30,43% LTV) is substantially lower, therefore this should lead to at least an interest discount on the proposed loan.But does this happen in Romania? Unfortunately not.

Maybe I am “dreaming” too much of a perfect banking world in Romania, but a bank like Raiffeisen can make a huge difference by introducing “risk related interest rates” and offer those who are seen as low risk clients with a lower rates, and apply the standard rate (or a higher rate) to clients which a bank considers of higher risk.

Or is this idea really too odd to apply? (I sincerely don’t think so)

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Yndy August 12, 2010 at 07:25

Agree with your post. I have a couple of points myself on this topic.

1. I have recently checked my credit track record with Biroul de Credit (free for anyone, once per year, I wonder how many people are doing it?). My Flexicredit loan from Raiffeisen is there, my Raiffeisen credit card payment history is there, looks great, banks should love lending me money. I could see my loan application request from another bank and my old BRD debit card with overdraft. However my Unicredit credit card payment history is not there! How can this be? Are they not part of the system? Also I am no longer working for the employer listed at Biroul de Credit for 6 years! Raiffeisen knew that when they approved my credit so did the other bank when I made a loan application. Why did they not changed it?

2. This one is less favourable for RZB ;). I requested the maximum amount EUR 10k for a personal loan Flexicredit from Raiffeisen and my salary was enough to qualify me. However at the scoring interview I admitted I do not own a personal mobile phone. My employer kindly allows me to use my office phone for personal use every once in a while. She told me I would not qualify for the maximum loan! As advised by your officer I bought a 5 euro prepaid card, used a borrowed terminal and answered when my phone number was cross-checked against my statement. Weird criterion, I must say.

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boldfrank August 14, 2010 at 14:23

I loved the post, it is a valid argument, but I loved more the comments of Stefan and Yndy, very pertinent – showing that not only regulators but also the banking system has a lot to do in terms of improving.

For Stefan, I would say to him that there is a financier in Romania, a Fin Co specialised on mortgage loans, which makes the difference between the cases that you have mentioned and provides different pricing, recompensating the lower risk (better credit score, lower LTV etc.)

For Yndy – how can someone check its own registrations in Biroul de Credit?

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Calin August 17, 2010 at 16:53

Good post indeed. Talking about protection and whom to protect, and being a small entrepreneur, I have always asked myself why in Romania it is not possible to have access to a company credit history very fast in real time, since all the companies with credits at the banks must show on a quarterly basis their balanace. E.g. my customer issues a promissory note, due in 40 days. The only way to his real situation is via CIP (Centrala Incindentelor de Plati) which in 40 days from now could be out of date. So I would agree to a complete transparency to all the payment behavior of the Romanian companies which could help the other players to take the right measures.
Last week I opened an account to Raiffeisen, all went very smooth, but the procedure to open the accounts in Euro and other currencies. I found the requirement to fill with the same data the applications with the signature specimen for each account too much time consuming and annoying , since I gave to 2 other person full power to all the accounts. Also, regarding the debit card for the account, it would be wiser to have the choice to be linked to the main account or to exist as a separate account as it is now. For every small amount I need on the card I must call my office to have the funds transferred on the card. I hope this input will help you…

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Luminita September 2, 2010 at 17:24

Ma enerveaza aceste discutii,zau! In ce tara traiti? Nu e rau sa visati, nu e rau sa va comparati cu tari ca Olanda sau SUA,dar voi chiar credeti ca in urmatorii zece ani vom avea parte de situatiile ideale de care vorbeste seful RZB? Iar BIROUL DE CREDIT e o institutie de tot rasul! Sa ne povesteasca dl van Groningen despre ‘lista neagra” a bancii!poti sa fi declarat clean de BIROU, dar daca esti pe black, adios credij! Dar despre clientii care ajung in BIROU din cauza greselilor celor din sistemul bancar,ce parere aveti dragii mei? Ca poate nu stiti,dar nicio banca nu va recunoaste ca a gresit,sau ma rog doar daca aveti curaj sa-i dati in judecata! Stiati ca pentru a iesi din biroul de credit trebuie sa te adresezi bancii care te-a bagat acolo,chiar daca din vina lor? Ca mai au si tampitul obicei, sustinut de legea romana, de a efectua cesiune de creanta fara sa treaca acest aspect in contractul de creditare? Ce inseamna asta? Ajungi pe mana recuperatorilor,care iti calculeaza alte penalitati, peste cele ale bancii! Abuz de drept? Daaa…! Protectia consumatorilor, haida-de, functionari la stat care toata viata lor au transpirat mutand o hartie din stanga in dreapta! Dl van Groningen and CO viseaza la clienti ideali, dar si eu visez la banci cu comportament ideal sau macar cu bun simt! D-le van Groningen,de cate ori v-ati cerut scuze cand ati gresit?stiati ca la cursurile de vanzari, indiferent cine le organizeaza,viitorii consultanti sunt invatati sa nu spuna niciodata “imi pare rau” sau “am gresit”? Suna neprofesionist,se spune! adica un PC poate da mesaje de eroare,dar un om nu poate gresi. Inteligenta artificiala nu se compara cu prostia naturala! (legea lui MURPHY).

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bizzar September 12, 2010 at 15:54

How come no bank in Romania uses the information that they already god about customer behaviour and use it in order to lower the interest ? I’ve got a salary account, I pay all my bills every month from this account so there is a record that I paid them (every month), but this information is not used by my bank in order to lower my interest on my credit. Can’t you start with the information you already got about your customers payment behaviour and then ask for more information from other sources ?
I see that more and more banks have 2 types of interests, one for new customers and another for exiting ones. This is a good start, but the intention is to achive customer loyalty …I don’t get a better offer if I have a better ‘credit score’ than another fellow, at most I get a larger sum of money as credit, but that’s it.
I wait to see if Raiffeisen will take this into account and bring some new product on the market, with interest customed based on internal customer payments/information. It will be a good way to do business and a nice signal to the Romanian banking market.
This will also signal customers to move from using ATM to paying from their accounts, adding more information on which you can give them better interests and building their good ‘score’. Without an incentive the customers will do the same thing they always do, go for the best offer available on the market.

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