Feasibility of Credit Bureau in a Small Market

Feasibility of Credit Bureau in a Small Market Hakon Stefansson & Paul Randall Kuala Lumpur 26 September, 2011

Introduction Background Executive Summary Advantages and Challenges and How to Manage Them Case Studies

The Non-Icelandic part of Creditinfo Group hf was transferred in 2009 to a new company, Creditinfo SCHUFA GmbH, owned 50% by SCHUFA Holding AG and 50% by Creditinfo Group hf. In July 2011 Creditinfo purchased SCHUFA s shares in the company which then became Creditinfo International GmbH. CREDIT BUREAU OWNER We are the majority/minority owner in several credit bureaus. CREDIT BUREAU SOLUTIONS We provide software solutions for credit bureaus and lenders. ADDED VALUE SOLUTIONS We also deliver complete solutions in risk management. TRANSCONTINENTAL We are currently operating in more than 10 countries across Western and Eastern Europe, the Middle East, Central Asia, Africa and Central America.

Hakon Stefansson Senior Manager, Creditinfo International GmbH CEO, Creditinfo Iceland Chairman of the Board, Creditinfo Georgia Lawyer by Training Paul Randall Managing Director, Creditinfo Decision 25 Years Risk Management Experience Mathematician by Training

Population?......Financially Active Population Georgia 4,500,000 Guyana 750,000 Iceland 330,000 Tanzania 43,000,000 Small markets are those with small financially active populations, typically less than 5 million. GDP per capita? Georgia 5,100 USD Guyana 6,900 USD Iceland 36,600 USD Tanzania 1,400 USD Sub-markets E.g. Micro-lenders, Telecoms if they are excluded from the Mainstream Banking Bureau Credit Bureaus faciliate market expansion the market will be bigger than initially perceived.

Georgia Credit Bureau operation started in 2005 1.9 mio Records 4.1 mio Inquiries Iceland Credit Bureau operation started in 1997 163,000 Records 1.7 mio Inquiries

Small markets wish to improve their financial environment. In theory they should be no different to bigger markets if the key components that the IFC recommends are available. Where they are not all in place a step by step approach can be the best solution.

There are components that will be emphasised this week that are prerequisites for Comprehensive CBs In Kazakhstan we had all these components in place and started with a comprehenisve solution with a successful start-up

Increased costs and financial stress on the CB Lack of progress Further loss of confidence in the process and the concept itself

Ukraine Pre-crisis lacked Banking and Central Bank Support Underestimating the value of data - lack of know-how Moldova Lacked Banking Support Little progress for 4 years Financial Stress for Credit Bureau Subprime loans, high interest rates Struggled to obtain data for 2 years Eventually the Central Bank changed provision requirements to 30% for no enquiries Georgia No legislation Lacked Governmental Support Iceland Lacked Banking Support Not an ideal Legislation Lithuania Lacked Banking Support

Financial Profitability Lower investment from institutions Fewer banks less competition As long as the Banking Sector operates in a similar way the market size does not affect lender s requirements. Build up the operation in smaller steps Attitude- Related Technical A dominating bank can possibly cease the project by not participating In smaller markets the attitude is often like, It is a small society and therefore it is likely that I know the borrowers who are unlikely to pay on time Underestimating the value of data Technicality level Processes are likely to be less automated in small markets due to volumes Do not underestimate the value of data due to the market size Credit bureau data are highly valuable in a market of 300,000 habitants Less automated processes require flexible solutions when it comes to: Uploading data o XML o Excel o Hard copies Accessing data o Web interface access instead of having the bureau service integrated into internal systems (e.g. CRM)

Financial Less likely to have competition in the first couple of years Attitude- Related Closer to decision makers More attention from the media Publicity Educating the market Government support E.g. Discussing credit bureaus on morning television in Jamaica Technical Shorter means of communication

It is commonly misconstrued that small markets do not have enough data to provide accurate credit scores and other value added products. Scores are feasible for small markets. Benchmarking and supervisory reports.

In end of 2009, Creditinfo was asked to develop a credit bureau score using positive data from the Palestine Monetary Authority (PMA). The score is presented online. the individual s credit rating the probability of them defaulting within 12 months Palestine is considered a small market population of 4,048,400 GDP per capita of 1,400 USD. risk grade On July 5 th 2010, the PMA launched their Credit Bureau Scoring System. The score is now delivering benefits on three levels the state and economy, the banks, and the borrowers Regular reviews and updates of the scoring models are aiding the growth of the Palestinian economy, even in the current challenging climate.

Microfinance Institutions (MFIs) in Palestine. Each MFI and Regulatory Body provided with personalized reports highlighting the current situation in their institution compared with the benchmark (average of all MFIs). Workshops then provided the MFIs with knowledge of how to interpret the reports, with advice on the successful implementation of recommendations for improvement.

Introduction Background Key Components and Where they are Missing Advantages and Challenges and How to Manage Them Case Studies

Iceland Lithuania Georgia

Technical & Commercial Knowledge (International Support) Banking Support Iceland Lacked Banking Support Not an ideal Legislation Lithuania Lacked Banking Support Local Knowledge Central Bank/ Legal Commitment Georgia No Legislation Lacked Governmental Support

2010 Iceland Lithuania Georgia Population (000s) 330 3,500 4,500 GDP per capita (USD) 36,600 11,044 5,100 Records 163,000 452,000 1,897,000 Inquiries 1,700,000 6,600,000 4,050,000

2011, July Positive Data shared between banks 2007 My Creditinfo Direct to Consumer via Internet Banks; linkages between companies 2006 Creditinfo Predictor (Bureau Score) SME 2005 Various types of monitoring services, marketing lists 2003 Banks start sharing Negative Data First statistical rating model for SMEs 2000-2001 Access to Property and Vehicle Registry, incl. mortgage certificates, and National Registry 1998 Data from Business Registry - monitoring service - international credit reports 1997 Provides Negative Data from Courts and Gazette 1997 Established * Creditinfo is the sole shareholder

Average price for a credit report = 1 USD Revenues per capita = 30 USD Profit 1999 = 110,000 USD 2002 = 400,000 USD 2009 = 2,200,000 USD The exchange rate, ISK vs USD, has changed a lot in the last 5 years and therefore we use a fixed exchanged rate, 1 USD = 100 ISK

2010 My Creditinfo Direct to Consumer 2009 Full Positive Data Sharing Hosted Application Processing 2008 Creditinfo Predictor (Bureau Score) for Individuals and SME Monitoring Solution 2007 Agreement with Banks to extend Negative Credit Bureau to include Positive Data (Basic Level) 2006 First statistical rating model for SME s. 2004 Access to Income Tax Register 2003 Provides Negative Credit Bureau services with Consumer and Business Data 2003 Established * Creditinfo is the sole shareholder

2011 Creditinfo Predictor (Bureau Score) for Individuals and SMEs 2008 My Creditinfo Direct to Consumer 2007 Agreement with Financial institutions to extend Negative Credit Bureau to include Positive Data 2006 Monitoring services 2005 Provides Negative Credit Bureau services with Consumer and Business Data 2005 Established * Creditinfo is the sole shareholder

Started with 3 employees today we have 8 Until 3rd quarter 2010 approx. 80 % of the customers were financial institutions today financial institutions make up approx. 55% of the customer base Banks, which are holding the majority of shares, requested that Creditinfo would appoint the chairman of the board to lead the company s business development Off-shore solution, database located outside of the country No credit bureau/data protection legislation (Code of conduct)

Start with simple products Readiness of the market Start with negative data if some players are reluctant to share positive data Build up the operation in smaller steps Local and professional know-how Shareholders structure Strong credit granting partners Legislation Scalable software One-stop shop => thirst for data

Minimum Maximum Initial Cost Implementation Hardware and Hosting Know-how Transfer 400,000 USD 700,000 USD Annual Cost Labour cost Premises etc. 150,000 USD 250,000 USD Annual Cost (starting from 2 nd year) License (royalties) Maintenance/Support Management Support 90,000 USD 130,000 USD Credit Bureau s Capital = 800,000 USD + Break Even Point Lithuania, 3 years Georgia, 2 years Iceland, 2 years