Dissecting Schufa's Influence: ECJ's Decision on Credit Ratings in Germany
What's the deal with Schufa's power? This German credit agency collects and analyzes loads of data to determine individual consumers' creditworthiness. Banks, retailers, telecom providers, car dealerships, and energy suppliers all rely on Schufa to assess their clients' payment behavior before entering into contracts or handing over goods. But are Schufa's credit ratings truly decisive or merely a vital part of a broader evaluation process? This central issue forms the basis of a legal dispute that will be resolved by the European Court of Justice (ECJ) on Thursday, 09:30 am.
What's Schufa all about?
The Schutzgemeinschaft für allgemeine Kreditsicherung (SAK), founded in 1927, is the heart of Schufa's business model. The SAK collects data to create assessments that help its 10,000 contractual partners, which include banks, savings banks, mail order companies, and energy suppliers, pursue creditworthy consumers. Schufa reports that it keeps data on 68 million people in Germany, with over 90% of this data being "entirely positive." The Wiesbaden-based agency issues an average of 320,000 reports daily. Other credit reporting agencies include Creditreform and Crif.
What information does Schufa gather?
Schufa gathers account opening information, credit card issuance data, lease contract details, and loan information from its contractual partners. Alongside this, the agency stores personal data like names, dates of birth, and addresses. However, it does not have access to people's income details.
What does Schufa do with the collected data?
The collected information is used to calculate a basic score, which is updated quarterly. This score represents the likelihood of a consumer successfully honoring their financial obligations on a scale of 0 to 100%. A higher score indicates higher creditworthiness, while poor payment history and frequent reminders lead to a lower score. Schufa maintains confidentiality with regards to its scoring method, arguing that complete transparency would render the score ineffective due to potential manipulation. In reality, the formula is known to the responsible data protection authority and is monitored by both the authority as well as independent analysts.
The ECJ's legal battle
At the heart of this legal dispute is the question of whether Schufa's credit ratings in specific cases can be classified as an automated decision in line with Article 22 of the General Data Protection Regulation (GDPR). Additionally, the European Court will consider the relevance of Schufa scores in businesses' decision-making process regarding loan approvals or contract acquisition.
The controversy stems from multiple German court cases. For instance, a plaintiff who failed to obtain a loan challenged Schufa for refusing to disclose its scoring method and deleting a particular entry. More significantly, the Administrative Court in Wiesbaden referred the case to the ECJ to establish the relationship between Schufa's credit ratings and GDPR regulations.
Progress of the ECJ proceedings
In his opinion, delivered in mid-March, Advocate General Priit Pikamäe maintained that the calculated creditworthiness probability is indeed equivalent to a prohibited automated decision, according to Article 22 of GDPR. This ruling applies even if a company formulates the final decision regarding a consumer's creditworthiness based on the Schufa score. However, it's important to note that the advocate general's opinion is not binding; rather judicial instructions often rely on his advice.
Schufa's perspective
Schufa argues that it does not dictate decisions regarding loan approvals or contract settlements. The agency claims only to provide businesses with the required information to make sound judgments. According to Schufa CEO Tanja Birkholz, such decisions ultimately revert to the contracting companies. To illustrate, banks may incorporate additional factors like income and expenses in their lending decisions, while telecoms often approve contracts despite negative Schufa entries due to competition-driven incentives.
Takeaways
- The ongoing ECJ ruling may have widespread implications for businesses and consumers alike throughout the European Union, especially with regards to data protection and credit scoring practices.
- If the ECJ upholds the advocate general's opinion, it would require credit agencies to significantly alter their practices to comply with Article 22 of the GDPR.
