Database nation: the upside of "zero privacy"

Reason, June, 2004 by Declan McCullagh

The idea proved to be a terrific success. By providing instant credit, Gateway was able to attract customers who didn't have credit cards or didn't want to use them. Its previous, manual method of approving loans took an average of five hours and resulted in $377 million a year in consumer financing. After Gateway offered instant credit, sales picked up and financing ballooned to more than $2 billion by 1999.

Gateway was able to do that by taking advantage of one of the marvels of modern American society: the credit reporting system. Every day this system churns through millions of transactions relating to approximately 1.5 billion credit accounts held by 190 million people, each with his or her own FICO (Fair Isaac Corporation) score, a rough estimate of how credit-worthy that person is. This constant flow of information lets businesses and lenders make more accurate--that is, less risky--decisions about whether to grant or withhold credit. Thanks to this system, you can log on to Gateway.com and have a custom-built computer immediately shipped to you; you can apply for a mortgage at ditech. com, Moneywarehouse.com, or LendingTree. com and receive an instant answer. Go to a shopping mall, and you'll find that nearly every store seems to be pitching its own brand of credit card. You can visit a car dealer you've never been to before, obtain a five-figure loan, and drive your new purchase home the same day. In 1999 credit cards were used in the U.S. for 14 billion transactions totaling about $1.1 trillion, with an average purchase of $76, according to the U.S. Department of Commerce.

This incredible convenience is something our grandparents never enjoyed. Just a few decades ago, applying for credit meant an in-person visit to a loan officer. If the loan officer didn't know you personally, he or she would contact your references and other creditors and eventually make a decision a few weeks later. If you had just moved to the community, you might be turned down or be approved for only a small loan. It was a slow, painful process that was hardly consumer-friendly.

Today, not only can you get a loan nearly instantly; you'll pay less for it than in countries that prevent the free flow of information. Some nations permit only negative information in credit reports, instead of the mix of positive and negative details that form the backbone of the U.S. system. Walter Kitchenman, an economist at Purchase Street Research, estimates that because of information sharing among financial firms "mortgage rates in the United States are as much as two full percentage points lower" than they would be otherwise. In the words of Fred Cate, a law professor at Indiana University, "with outstanding mortgage rates approaching $4 trillion, American consumers save as much as $80 billion a year because of the efficiency and liquidity that information makes possible. The cost of credit in the United States is also lower [than in most places in the world] because the information that credit decisions depend on is assembled routinely and efficiently, rather than at the time the consumer desires credit." That's a few hundred dollars per American every year.