The ramifications of the Equifax breach are going to reverberate for some time. The full extent of the harm — while not known for several months if not longer — will definitely touch consumers, nonfinancial companies and other areas of the economy.
But make no mistake: Banks are going to pay the most of anyone.
While consumers are understandably worried about fraud and identity theft, it is financial institutions that will ultimately be on the hook for any loans they make to identity thieves.
True, fraud rates for consumer borrowing are near historic lows. However, identify thieves could use additional consumer information that they obtained from the Equifax breach (think Social Security numbers and addresses) to more accurately impersonate a consumer and, in turn, make a fake credit application look real.
As a result of that risk, banks will have to institute stricter authentication procedures.
While some lenders may choose to experiment with new ways to authenticate consumers, such as using biometric information, in most cases lenders will likely interpret “better authentication” as requiring more data from consumers to help ensure that the applicant is indeed who he says he is. For example, lenders may ask consumers to respond to more out-of-wallet questions during the application process that are more difficult for an identity thief to answer, like, “What is your mortgage payment?” or “Did you own a certain type of car?”
This process will require consumers to provide more information to prove their identity. More disclosure of information from consumers will slow down the lending process because consumers may need to gather more information to complete the process and because it will also take them more time to fill in lender requirements.
Requiring consumers to disclose more information could lead consumers to abandon credit applications that are otherwise supposed to be quick and painless, such as the process for obtaining instant retail credit. Specifically, a less convenient process in addition to heightened consumer fears about their data being hacked could discourage consumers from completing a loan application unless it is a credit line they absolutely must have.
Meanwhile, more credit freezes will also mean more hassle for consumers and less advertising for lenders.
One of the most commonly suggested ways for consumers to protect themselves from the Equifax breach is for consumers to place a credit freeze on their files. While there have been stories and complaints about the difficulty of doing so, it is widely anticipated that the number of credit freezes will go up once those kinks are worked out.
If that does occur, credit freezes will be problematic for lenders, particularly in the instant retail credit space. Consumers, after all, will have to understand and implement the process for removing a credit freeze — a requirement that will slow down a credit application and increase the hassle that consumers will have to endure. Credit freezes will also temporarily block some consumers who forget how to unlock their credit file to get more credit.
A rise in credit freezes will also inhibit various forms of financial services marketing that benefits consumers and lenders. Prescreening, one of the marketing areas that credit freezes will affect, enables creditors to send unsolicited, preapproved credit offers to consumers for products and services. Lenders may target prescreen offers to consumers who are already shopping for that particular type of credit, such as a mortgage or loan consolidation help, and who would welcome such marketing offers. Credit freezes block those opportunities; a spike in credit freezes could have an appreciable impact on that type of effective lead generation.
Regulatory changes that result from the Equifax breach will also likely fall most heavily on lenders.
While it is unclear what, if any, legislative and regulatory changes will be made as a result of the Equifax breach, some changes are clearly coming at the state level, and potentially, the federal level.
At the federal level, Rep. Maxine Waters, D-Calif., has proposed the Comprehensive Consumer Credit Reporting Reform Act. Sen. Elizabeth Warren has also introduced legislation to reform the credit reporting industry. It is unclear whether these bills could garner enough bipartisan support to be enacted, but banks should be on notice. For example, while Waters’ bill would impact business practices at the credit bureaus, the bill would impose additional data furnisher responsibilities and liabilities on financial institutions that provide data to the credit bureaus.
Bottom line: We have not yet seen all of the fallout from the Equifax breach. However, the ripple effects on financial institutions are likely to be significant.