The Bank for International Settlements (BIS) published a working paper that examines the effects of the California Consumer Privacy Act, or CCPA, of 2020 on bank and fintech lending in the US mortgage market. The findings reveal that the Act has benefited consumers by providing fintech lenders, equipped with advanced screening technology, with improved access to data.
The California Consumer Privacy Act represents a landmark change in the design of privacy regulation as it aims to protect consumers without imposing general restrictions on information collection. Introduced in 2020, the Act grants California residents the right to control their data, even after they have shared them with a firm. The Act has reduced uncertainty around the use of personal data and has made applicants more willing to share their data. Many other states in the United States are now considering the introduction of a similar legislation and the California Consumer Privacy Act is serving as a model for the US Congress in developing federal privacy protection regulations. This paper offers an initial analysis of the impact of this Act on loan markets.
The study finds that, following the introduction of the California Consumer Privacy Act, loan applications to fintech firms increased by significantly more than those to traditional banks, leading to an increase in fintech firms' market share by up to 19%. This increase can be attributed to applicants' increased willingness to share their data. Fintech lenders, taking advantage of this data, expand their utilization of information beyond traditional credit scores during the application process. Consequently, they engage in more personalized pricing and reject a larger proportion of applications. The findings suggest that fintech firms enhance their screening process, leading to an improvement in the quality of their average borrower. Consequently, the fintech lenders are able to offer significantly lower loan rates than banks can, following the implementation of the California Consumer Privacy Act
Overall, the California Consumer Privacy Act has benefited consumers by providing fintech lenders, equipped with advanced screening technology, with improved access to data. The results of the study have implications for the policy debate on how to regulate the use of personal data. The paper also argues that data play a vital role for data-intensive firms like fintech firms, which rely heavily on personal information to screen and price borrowers. Privacy regulation could, thus, potentially hinder the growth of fintech firms and weaken competition in the financial sector. While personal data can improve the screening abilities of lenders, users value their privacy, generating potentially conflicting regulatory goals. The results suggest that a privacy protection legislation that enhances user control over data can achieve both objectives. The California Consumer Privacy Act can hence be seen as a successful regulatory initiative that holds important lessons for other U.S. states and countries designing and implementing the privacy legislation, which can be expected to have implications for the lending business.
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Keywords: International, Banking, Data Privacy, Fintech, Regtech, Lending, Credit Risk, Mortgage Lending, CCPA, Privacy Regulation, US, BIS
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