Relevant or not? ECJ rules on credit ratings

Schufa - Relevant or not? ECJ rules on credit ratings

How powerful is Schufa? The credit agency uses huge amounts of data to calculate how creditworthy it considers individual consumers to be. Banks, online retailers, mobile phone providers, car dealerships, energy suppliers - they all want to know how good their customers' payment behavior is before contracts are concluded and goods are handed over. Are the credit ratings from Wiesbaden decisive for this or just a building block in a complex verification process? This question is at the heart of a legal dispute on which the European Court of Justice will rule this Thursday (09:30).

What is Schufa?

Part of the business model of the "Schutzgemeinschaft für allgemeine Kreditsicherung", founded in 1927, is to collect data. On the basis of this data, Schufa provides its approximately 10,000 contractual partners - including banks and savings banks, mail order companies and energy suppliers - with an assessment of the creditworthiness of consumers with a legitimate interest. According to its own information, Schufa has information on 68 million people in Germany. More than 90 percent of this information is "exclusively positive". The credit agency issues an average of 320,000 reports to companies every day. In addition to Schufa, there are other credit agencies such as Creditreform and Crif.

What data does Schufa collect?

Schufa receives information from its contractual partners about the opening of current accounts, the issuing of credit cards, the conclusion of leasing contracts and loans. Schufa also stores personal data such as name, date of birth and address, but has no information about a person's income, for example.

What does Schufa do with this data?

The data is used to calculate the basic score, which is updated on a quarterly basis. On a scale of 0 to 100 percent, this describes the probability of a consumer being able to meet financial obligations. The higher the score, the higher the creditworthiness. Anyone who regularly pays bills late and often receives reminders is rated lower.

Schufa does not disclose exactly how the score is calculated. Their argument: "If the calculation model were completely open, the score could be manipulated and would no longer have any value." However, the formula is "known to the responsible data protection authority and is monitored by it and independent scientists". Companies and individuals such as landlords can obtain information from Schufa.

What are the proceedings before the ECJ about?

Essentially, it is about the question of whether scoring in certain cases is equivalent to an automated decision that affects the data subject - in accordance with Article 22 of the European General Data Protection Regulation (GDPR). And how relevant a Schufa score is for a company's decision to grant a loan or contract or not.

The background to the proceedings before the ECJ are several cases from Germany. In one of them, a plaintiff who was refused a loan asked Schufa to delete an entry and grant her access to the data. Schufa informed the woman of her score value and general information on the calculation, but not the exact calculation method. The Wiesbaden Administrative Court referred the case to the ECJ in order to clarify the relationship with the GDPR. The regulation stipulates that decisions that have legal effect for data subjects may not be made solely by automated processing of data.

How have the proceedings before the ECJ gone so far?

In his opinion delivered in mid-March, ECJ Advocate General Priit Pikamäe did not object to the way in which the Schufa score is calculated. The CEO of Schufa Holding AG, Tanja Birkholz, clarifies: "How we score is not affected by the ruling." It is not about the scoring algorithm. However, the ECJ judge found that the automated creation of a probability value for creditworthiness already constitutes a prohibited automatic decision. This also applies if third parties such as banks then make the final decision as to whether the consumer in question is creditworthy. The expert opinions are not binding for the judges at the European Court of Justice, but they often follow them.

What is Schufa's position?

The credit agency argues that it does not make any decisions itself, for example on the granting of loans or the conclusion of a cell phone contract. Schufa supports its partners with information when making decisions. "Just because a score is important does not mean it is decisive," says Schufa boss Birkholz. The decision for or against a transaction is made by the company with which a consumer wishes to conclude a contract. According to the credit agency, this is also confirmed by the contractual partners: the score is "a valuable component of the risk assessment", but not decisive.

When banks and savings banks grant loans, for example, other data such as regular income and expenditure as well as assets are taken into account. In the online and mail order business, it plays a role whether the customer is a new or existing customer, the composition of the shopping basket and the value of the order. In view of the intense competition in this sector, telecommunications companies often award a contract even with a negative Schufa entry and a lower score - which Schufa also sees as proof that its data is not omnipotent.