As the Financial Conduct Authority explains: “Consumer credit has a key economic function and is a largely beneficial activity. Most borrowers repay without difficulty and without financial distress.”
There are risks in high-cost credit or where customers seek credit but may not be able to afford the costs, as people in the industry are aware. Yet it’s right to focus on the borrower, on affordability rather than credit risk, when making decisions on creditworthiness.
It is fundamental that we always look to what’s in consumers’ interest and ensure we can minimise any risk of financial distress that could possibly occur. When making decisions on creditworthiness, we in the credit industry need to consider as not just
whether the customer can or will be able to repay, but whether they can repay
The highest quality decisions are made on affordability when there is sufficient data available. A typical credit card debt of approaching £2,500 in one household is affordable when it’s attributed to a high earner with a significant amount of disposable
income, perhaps even on a 0% deal for a further two years. Yet that figure is more problematic for someone with less than £200 left over at the end of each month, after paying for accommodation and essential monthly services. Having a 360-degree view of each
person’s financial situation is key to better decision-making.
It is encouraging that the FCA recognises the importance of not being over-prescriptive with the measures that companies should be looking to use when assessing consumer affordability. It’s clear that over-indebtedness is a key challenge for both individuals
and the economy as a whole – and it needs to be taken seriously.
The answer, we feel, lies in the data. By using new data sources and rethinking how we look at established data to make these important decisions, we should be able to improve the way we provide credit.
It was interesting that the FCA also stated that it didn’t see the need for fundamental change in our approach to assessing creditworthiness. Something which we can all agree on is the fact that consumer credit plays and important role in our society and
is mostly a beneficial activity, allowing borrowers to buy goods and services and pay them off over time. It helps consumers spread risk and live more fulfilling lives.
But the emphasis placed on putting the consumer outcomes firmly at the heart of this process needs to be considered wholeheartedly. Proportionality is the key, each consumer’s circumstances require consideration – there is no one size fits all approach to
accurate affordability assessments.
The market’s response
We are seeing in the market lenders acknowledging that they need to apply greater diligence to their lending processes and source the correct data. Digital technology, such as mobile apps, allows lenders to create new pathways to process credit applications
and source data.
There is also acknowledgement that income and expenditure data needs to be applied in association with a credit score to provide an accurate measure of a customer’s creditworthiness.
Additionally, with the implementation of Open Banking, access to bank statement data allied to automated categorisation of bank statements to identify income and expenditure offers considerable benefits to both lenders and consumers. These include speed
of processing loans, reduction in costs, and the accuracy of decision making for all concerned. Right now lenders are now actively looking at incorporating these services into their decision making process.
It’s clear, given the range of data that should be taken into account, that intermediaries are going to be an important element in this data exchange to help lenders and consumers gain the best results, safely. Lenders will not be able to manage this by
themselves. They will need solutions that can accommodate consumers who agree to share data, as well as those that choose not to share data.
All parties will need to understand and agree on automated methods of data sharing in order to present timely and accurate, holistic views, of relevant customers. Issues of categorisation, managing the data exchange, including caching and throttling of data,
and having legitimate processing grounds, will need to run smoothly.
Yet the promised rewards are considerable, in terms of creating new services to help organisations deliver new value propositions to customers, in the use of data to fuel automated decisioning for more accurate and speedy credit decisions, in mitigating
fraud risks, and in reporting and monitoring to help with customer support.
When it comes to those customers who don’t wish to share data, orthodox bureau solutions including credit score, then CATO (current account turnover) and Office for National Statistics expenditure estimates can be used to estimate an individual’s creditworthiness
where other data in unavailable.
The key take-away is that the person sits and the centre of this new world of data-driven insight, and all credit industry services need to focus on their well-being as a way to minimise risks for all parties.