Three Equifax executives sold shares worth almost $1.8 million just days after the company discovered a security breach that compromised information on about 143 million U.S. consumers.
This unprecedented data breach exposed home addresses, phone numbers, Social Security Numbers, driver's licenses, credit history, household composition, and a long list of personal information that was given to Equifax by us – you and me. More accurately, we have allowed this trusted authority to compile, manage, score and monetize our personal data. We do the same thing with Transunion, Experian and other Credit Reporting Agencies (CRA’s). For this trust, they earn a lot of of money. I know firsthand exactly how this process works and how profitable it is. I used to compile, build and monetize the Experian Consumer Database.
So, when things go bad and our very personal information gets stolen from Equifax, the firm we have entrusted to keep our personal information safe, what do those in positions of authority and responsibility do? Notify us immediately? Offer us comfort that they will take strong measures to staunch the bleeding and protect us? Give assurances they will cover any personal financial trouble that results from their failure to protect our information? No - not a chance. This trusted central authority did none of these things. Instead, they sat on their insider knowledge of this historically massive hack for weeks. Then, the Chief Financial Officer and other executives sold portions of their shares before the stock price predictably tanked.
It usually takes a big event to shine light on an area that needs attention, and this Equifax breach is it for CRA’s. This event demonstrates that these guys can no longer be trusted to protect our privacy and why we should begin looking for an alternative.
Because of this hack, this shameless audacity and greed, because of this obscene use of insider knowledge, the CRA’s are now under the microscope. And, very importantly, due to the emergence of Blockchain technology, these centralized repositories are now the equivalent of a large ship taking on water from many ruptures. We have the confluence of two big events – a breech and a competitor; the furry little animals are bringing down the dazed and stumbling brontosaurus.
Equifax and the other CRA’s should prepare for terminal disintermediation. I’ll give the CRA’s ten years and then - RIP CRA’s.
Today, credit-reporting agencies are an essential piece of our financial services systems and they have historically played an important role. In the late 1800’s the CRA’s were established and provided good value to those who extended credit to consumer borrowers – retailers, car dealerships, credit card issuers, mortgage lenders and so on. Compiling these files was a complex and labor intensive set of processes and remained so for 80 years. In the 60’s computer processing made these tasks easier and significantly less expensive to perform. The CRA’s became tremendously profitable businesses. They made very good money on their core service – selling credit worthiness scores.
But, it was the data exhaust – the details about an individual or family – that provided the foundation for the CRA’s ultra-high margin product lines. They compiled more and more data and moved into businesses far beyond credit reporting. They developed massive marketing databases. Details such as consumer addresses, marital status, phone numbers, length of residence, children in the home, ages of children, number of cars, types of cars, pets, propensity to move, and so forth are each sold thousands of times. It is this marketing data that made these firms really wealthy. Equifax, Experian, Transunion each became the preeminent repositories of marketing data. They were (and still are) the trusted central authority for marketing data and credit scores. This position of dominance is about to change. Soon, the chickens will to come home to roost.
Just as brick and mortar retailers thought online shopping wouldn’t take off, that stationers believed that email would never replace the stamped letter, that print-based publishers believed that digital news could never replace the newspaper, one can surmise the CRA’s believe their niche is too important and too widely accepted to be usurped by renegade software. Gotta love it.
A Blockchain-Based Credit Reporting System
With frictionless, Blockchain-enabled peer-to-peer transactions, third-party CRA authorities face certain obsolescence. A decentralized credit ecosystem can be realized by end-users leveraging a self-sovereign wallet to manage their [own] data. The table below illustrates the simplicity of implementing an effective alternative to CRA’s.
In this system, individuals own their own data. They own their transaction history. They put themselves in a position to monetize their information if they care to do so. This is a very big deal. In this environment people become a “node of content” by taking control of what is already theirs. It is s not a question of whether or not this shift it will happen, but rather a question of when it will happen. Shift happens. Once it happens, a breach of the system as we have just seen with Equifax will not happen. Why not? Because it can’t. The data is no longer in one place. Instead of robbing just one store or one house, the criminal needs to rob all of the stores or homes.
One can surmise the CRA’s believe their niche is too important and too widely accepted to be usurped by renegade software. Gotta love it.
The perfect operational tactic to interrupt, hobble and tumble a hierarchical centralized credit reporting system (or most other similarly constructed systems) is to lay bare the details and reveal the value of what has been compiled and monetized. Once revealed, Blockchain can replicate the records and the value with full transparency and with a bulletproof audit trail. Why then, the need for any third party? No need.
A credit score is nothing more than the result of some predictive statistics – multiple regression, multivariate analysis of variance or one of their many variants. It uses past behavior – financial and other data, to predict future behavior. In this case the predicted outcome is paying bills on time. An obvious business opportunity is the “Score App.” It does the same thing Equifax does, but it’s yours. The CRA’s have an opportunity to enjoy even higher margins by licensing their scoring algorithm to end-users. For example, an individual would provide their Blockchain detail, “scored by CRA(R).”
With transactions publicly available through a Blockchain system, standardized data will become a part of any transaction requiring credit, payment or financing. An individual’s account or history will be available in its entirety, providing a much more thorough basis and relevant basis upon which to make a judgment. These account summaries, let’s call them Personal Credit Summaries (PCS’s) will be stored in a cold wallet, hot wallet or in some cloud-based storage system. A prospective lender will receive access to the history in a manner similar to providing a fingerprint to verify identity.
There are two constructs in technology that come to mind in the context of this subject. The first is that technology always migrates closer and closer to the end-user. As the phone was once tethered to a wall, it is now on our wrist, or in our pocket. The other construct is that full-blown technology adoption always takes longer than people think it will, but once adopted, has an impact far greater than anyone anticipated. Again, look at the mobile phone. We had them for decades with marginal impact – until about ten years ago when they really began to take off. Now, the world has been fundamentally transformed.
I’m sticking to my forecast – I’ll give the CRA’s ten years. Then, the PCS’s will be in our pockets as part of whatever the phone looks like in 2027s.