Does the free market hold all the answers?

Like many of you, I dread the thought of additional government regulation: Good sense and the greater good mean nothing to nearly every politician; special interests and self-interest tend to decide votes. But what option does a commoner have when the existing free-market solution gets it wrong?

Consider the big three credit reporting bureaus (Equifax, Experian, and TransUnion). These companies’ customers are not consumers, but creditors who use their services and reports to make decisions that can adversely affect consumers. The bureaus have only passing interest in servicing consumer complaints.

The government has already placed some regulation on the credit bureaus, providing for consumers to learn the factors that lead to creditors denying them. Ultimately, this introduced costs that the bureaus passed to creditors, who then passed them on to consumers. Any additional regulation would simply foist additional costs on consumers.

Worse, added bureaucracy does not foster higher levels of customer service. In fact, one of the three credit reporting bureaus has had a “page not found” error on a link to help with its security freeze service for multiple years. Consumers patronizing businesses in any other industry would otherwise leave a company with such poor web-based service for another competitor. Further regulation would likely cause the bureaus to shift funding out of various departments—possibly including web development—and into compliance. That benefits nobody but politicians, who get to claim to be heroes.

The free market should hold the answer. Should. The reason it doesn’t stems from a lethargy that has infested our society. We no longer innovate as we did not all that long ago; we no longer attack problems with the fervor of years past, but instead have become more likely to accept as unchangeable the problems of big, entrenched, opaque institutions such as these. But a clever solution could exist. Follow:

First, let an existing business offer a clever new service to replace the bureaus: Banks and credit unions could serve as both reporting sources and clearinghouses for credit transactions. A clearinghouse for checks already exists, and even the smallest credit unions have access to e-bill services. A creditor would post a bill to its bank when a privatlån (consumer loan) is taken out, which would forward the bill to the debtor’s bank. The debtor would schedule payment, completing the transaction.

The key would lie in the banks or credit unions explicitly dividing the transaction fees for, say, paying the mortgage, the rent, or the utility bill between both creditor and debtor. (Yes, the creditor will pass their fee on in the form of a higher rent or charge to the consumer, but it removes bias by making both parties pay part of the fee, and thus making both parties customers of the service.) This fee would also serve to fund the departments that these banks already operate to handle disputed transactions, which would be a necessary facet of the service.

Second, eliminate credit scores based on nebulous formulae that these agencies protect as trade secrets; let creditors make their own decisions, and let consumers see what they need to do to improve their creditworthiness. Existing e-bill systems can easily generate reports to demonstrate timeliness and completeness of payment; without disclosing any more information than the current bureaus disclose, these simple statistics can give creditors usable decision criteria.

Third, eliminate the disparity between reports (and scoring) across the big three bureaus by using the clearinghouse network to aggregate information on debtors and their debts in automated fashion from any and all banks that have dealt with a given debtor. This also makes it much simpler for a consumer to control and secure who sees what information without the convoluted (and fee-driven) security freeze mechanism the bureaus have devised.

With a bit of applied good-old-fashioned American ingenuity, these basic concepts could grow into the end of the three credit reporting bureaus, and the start of a better way to extend credit. Similarly, a bit of thought and a desire to find a remedy can be the genesis of a solution to any problem. All it takes is a rebirth of ingenuity, and a resurgence in the free market that once propelled our society to its greatness.