The circumstances we find ourselves in are unparalleled and changing daily. The way we prepare to weather the impact in the short term will be key to making sure its long-term effects are contained as much as possible – both for our customers and for our
However, even during these challenging conditions, across all industries we are seeing the ability to adapt to evolving markets at speed, while protecting customers, assets and reputation.
As many businesses task themselves with understanding, reacting to and learning lessons from this ever-changing situation, there are some very straightforward routes to ensure they are taking appropriate action to try and limit the pandemic’s overall impact.
Levels of affordability
Understanding how consumers are being affected by the crisis is the key to proactively provide the help and care they need – both immediately and over the coming months. The continuous monitoring of affordability will be critical, not only for identifying
stress and therefore pre-delinquency, but also for protecting the most vulnerable.
Being able to perform affordability checks ‘in-life’ will bring the value of foresight. Applying this same level of care and attention to new lending will enable a better understand of a consumers’ affordability status and the ability to offer the right
products, at the right time.
Even customers with historically good levels of affordability may be entering new territory, with many seeing decreasing incomes either because they’re self-employed or because they’ve been furloughed by businesses that can no longer operate in the same
way. It will be important for lenders to help these people understand their new financial circumstances and what products are most suitable for them.
Identifying the most vulnerable in society
Our analysis shows that in the current crisis, people who are already classed as vulnerable and financially stressed are likely to become more so. However, others who rely on businesses with poor cash reserves will also undergo stress – many at a level they’ve
never experienced before. Along with a lack of savings to fall back on, this is likely to lead to a much more financially stressed society, with a growing number of at-risk and vulnerable consumers.
Data on the demographic profile of customers can facilitate the creation of regional-level vulnerability and risk heatmaps, which can provide insight in terms of the most vulnerable postcodes and households. Combined with more frequent feeds of bureau data,
which will alert to any changes in a customer’s situation, these can provide a richer view of their profiles.
Inevitably, credit portfolios will feel the impact of the virus, and having access to the very latest macroeconomic trends will allow organisations to run more accurate stress testing and gain a clearer picture of what that impact is likely to be.
Due to the rapidly evolving impact of the crisis, scenario models that have worked in the past are unlikely to be relevant today. Therefore, a new response is needed to develop appropriate, effective models to consider the different variables in play, the
progression of the pandemic, regulatory change and new shifts in supply and demand.
It’s also fair to say that the assumptions made when calculating expected credit loss as part of IFRS9 will need to be re-thought based on the latest insights to make sure that they’re accurate and robust.
Recalibrating to grow your business
Existing customer management strategies will need to be re-evaluated to understand what changes should be made to balance extra customer assistance with acceptable risk. It’s likely we’ll see a shift in lending types, with the demand for sub-prime credit
growing and demand for prime credit reducing. Therefore, a scorecard and segmentation review, together with analysis of cut-off criteria, can help to make sure lenders are accepting the right customers for their risk appetite, even in a potentially reduced
It’s likely the foreseeable future will present great challenges for people and small businesses everywhere. However, by taking into consideration some of the responses outlined above, the financial services industry can play a vital role to act and provide
welcome relief to those we know will struggle the most.