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How to Ensure GDPR Compliance When Using Alternative Data in Credit Scoring

Discover how credit institutions can ensure GDPR compliance when using alternative data for credit scoring.

Anastasiya Shitikova
Marketing Manager @RiskSeal
Table of contents

Credit organizations engaged in credit scoring collect large amounts of data about potential borrowers to assess their creditworthiness.

The development of innovative technologies allows lenders to use alternative data for credit scoring. It is an excellent opportunity for credit institutions to expand the coverage of their services to the population and for unbanked people to gain access to lending. 

However, technological progress also has a downside, as there is a risk of data confidentiality violation.

In this article, we will talk about how compliance with GDPR – General Data Protection Regulation – helps credit institutions use information about borrowers ethically and legally.

What does GDPR stand for

The GDPR is an important piece of legislation that protects the personal data of all individuals in the European Union. This regulation allows citizens to gain control over their personal data.

The General Data Protection Regulation imposes certain obligations on credit institutions. 

To comply with this regulation, lenders are forced to pay greater attention to the privacy of their customers' data and manage borrowers' consent to its use.

To keep up with GDPR compliance requirements, credit companies should introduce the position of data protection officer. 

Also, their work processes should include thorough verification of third-party contractors and measures aimed at preventing the leakage of confidential information, including during data transfer.

Importance of GDPR in the lending industry

GDPR plays an essential role in the activities of credit institutions, as this regulatory act strictly regulates the issue of protection and processing of personal data.

About the importance of GDPR in the lending industry

GDPR impacts the following aspects:

1. Data processing. Lenders must have a legal basis for using personal data and inform borrowers how their personal information is processed.

2. Client consent. The credit institution must obtain consent from the borrower to collect and process their personal data. In particular, such consent must be obtained before assessing the applicant’s creditworthiness – credit scoring.

3. Data security. Companies operating in the lending industry must take appropriate technical and organizational measures to ensure data security. This includes encryption, access control, and regular security assessments.

4. Data subject rights. Lenders are required to guarantee their clients that their rights regarding personal data are respected. In particular, the right to request access to personal data, correct inaccuracies, and request the deletion of data in some circumstances.

5. Data transfer. The GDPR compliance checklist includes some restrictions on the distribution of personal data outside the European Economic Area. It may cause difficulties when conducting international credit checks or when exchanging data with credit bureaus located outside the EEA.

6. Reporting. Lenders must maintain detailed records of data processing activities. It will help them demonstrate compliance with the GDPR principles. 

Key GDPR principles

Here are the basic GDPR principles that all credit institutions are required to comply with:

The basic GDPR principles diagram

Legality, fairness, and transparency. Lenders must use personal data with the borrower's consent and for lawful purposes, such as performing credit assessments. Also, clients of credit institutions must understand how the information will be used.

Limited goals. The personal data collected must be used for a specific purpose, e.g., digital credit scoring. The use of such data for any other purpose, including marketing, is unacceptable.

Data minimization. Credit institutions should collect only the data necessary to achieve their goals: for example, assessing the creditworthiness of a potential borrower.

Accuracy. The data used by the lender must be accurate and kept up to date. It is often crucial when deciding on a loan application.

Storage limitation. The creditor may store personal data no longer than required by the purposes for which they are processed.

Integrity and confidentiality. Credit institutions must ensure the security of borrowers’ personal data during their processing or transmission.

Challenges of GDPR compliance in the lending field

GDPR compliance may cause some difficulties in the work processes of credit institutions. 

Challenges of GDPR compliance in the lending industry

The reason for this is the nature of their activities and the high confidentiality of the personal data with which they work. 

Here are some of them:

1. Complex data structure. Credit card companies collect information from various traditional and alternative sources. Managing such a complex data ecosystem while complying with GDPR principles can be a daunting task.

2. Technical implementation. Lenders must ensure the security of processed personal data, which involves using the latest data encryption technologies and constantly improving security systems.

3. Additional expenses. Technical and human resources required for compliance with GDPR is an additional expense item in the budget of a credit institution.

4. Third-party risk management following GDPR. By using third-party providers to perform various functions, lenders are responsible for ensuring they comply with the GDPR. For example, a credit institution may be held liable for a data breach that occurred at a third-party supplier.

5. Obtaining consent to data processing. Credit institutions must ensure that they have the consent of individuals to process their confidential data. Obtaining such consent through various channels may be difficult.

Benefits of GDPR compliance for credit institutions

Compliance with the principles of GDPR is associated with more than just difficulties for financial companies. But this also brings them obvious benefits.

Benefits of GDPR compliance for lending institutions

Establishing trusting relationships with clients. The confidence that their personal data is reliably protected and used exclusively for legal purposes gives borrowers confidence in the credit institution.

Standardization of security procedures. The GDPR applies throughout the EU and provides uniform data protection standards. Thanks to this, financial organizations have a clear algorithm of actions in processing personal data.

Reducing legal risk. Credit institutions that comply with the GDPR reduce the risk of violating personal data protection rules and imposing associated fines and other sanctions.

Better data management and quality. Compliance with the GDPR allows you to better manage the data you use and pay more attention to its quality. It is facilitated by the requirement for their accuracy and relevance.

Key considerations for processing personal data in credit institutions

To comply with the General Data Protection Regulation, credit institutions must perform a set of actions:

1. Resource analysis. Financial services companies should regularly review whether they are collecting inappropriate data and control the permissible storage period of information.

2. Monitoring the reliability of data protection. It is important to review and improve security systems and control who has access to borrowers’ personal data.

3. Maintaining a register of activities related to the processing of personal data. Credit institutions must, where necessary, demonstrate compliance with the principles of the GDPR, as well as provide evidence of consent to data processing.

4. Respect for the rights of data subjects. The financial institution must record and respect the borrower's right to withdraw consent to data processing or make changes to it.

5. Obtaining consent to data processing. It is a prerequisite for compliance with the GDPR. Such consent must be given freely, specifically, and unambiguously.

How credit organizations should comply with the GDPR

Below, we present the most critical points that a credit institution's GDPR compliance policy should contain.

1. Explain to customers why you collect their data

For credit institutions, these goals can include:

  • Account creation and management
  • Provision of requested services
  • Personalizing experiences and improving services
  • Assessing creditworthiness and eligibility for financial products or services

2. List the types of data you will collect and process

Lenders may need the following information:

  • Personal identification information
  • Contact details
  • Financial information
  • Demographic information
  • Technical characteristics of the device used
  • Data on use (of the website or services of a credit institution)
  • Biometric data
  • Location data
  • Socio-economic data

3. Indicate to whom the borrower's personal data may be transferred

Lenders most often provide information to:

  • Third-party providers who assist the lender in providing services
  • Business partners
  • Regulatory authorities in accordance with legal requirements

4. Emphasize the consequences of consent to the processing of personal data

For the borrower, such consent confirms that the data can be used to assess creditworthiness and determine eligibility for financial products or services.

5. Report the types of data the credit institution is not required to delete

According to the GDPR, such data includes:

  • Credit history and defaults
  • Fraud and criminal activity
  • Regulatory requirements
  • Contractual necessities
  • Archiving purposes

How RiskSeal complies with GDPR

RiskSeal, as a third-party processor, fulfills all the requirements of the GDPR and other legislative acts that regulate the processing of personal data.

Credit institutions that contact us to assess the creditworthiness of potential borrowers should take care about how to manage third-party risk data protection following the GDPR principles. 

Lenders must obtain permission from their clients to collect and process personal data, ensure its security and proper storage, and respect the rights of borrowers.


How does RiskSeal comply with GDPR?

RiskSeal's activities fully comply with the principles of the GDPR. The financial institution must ensure the legal compliance of processing personal data. It is essential to verify that the user has consented to the use of their data in this way. By doing so, companies take responsibility for complying with the principles of the GDPR in matters of collection, processing, and storage of personal data.

How does GDPR specifically affect the credit industry?

The GDPR regulates several aspects of the lending industry, including the processing, transfer, and security of data, obtaining customer consent to use it, respecting the rights of data subjects, and accounting for data processing activities.

To comply with the GDPR, credit institutions must comply with the basic principles of this regulation: legality, fairness, and transparency of data processing, limited purposes for their use, data minimization, etc.

What are the major challenges the credit industry faces with GDPR compliance?

Here are the main challenges credit institutions face when introducing GDPR compliance into their processes: complex data ecosystems, problems with technical implementation, additional costs, third-party risk management, and the difficulty of obtaining consent to data processing.

What are the long-term benefits of GDPR compliance for the credit industry?

The long-term benefits of GDPR compliance for credit institutions include better data management and quality. Thanks to the clear regulatory requirements for the accuracy and relevance of data, credit institutions pay more attention to their quality. The principles of security, limited purpose, and retention duration promote effective data management.

Who has overall accountability for compliance with the GDPR?

In the lending industry, credit institutions are responsible for compliance with the GDPR. They may be held liable even if the data breach occurred at a third-party service provider.

What is the maximum fine for GDPR non-compliance?

According to official data, the largest fine for non-compliance with the GDPR can reach €20 million, or 4% of the company's turnover for the previous financial year.

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