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Helping people to build their financial resilience

What can you do to support financially stressed customers? That’s the big question facing financial services right now, as rapid changes to millions of people’s incomes, triggered by the Covid-19 outbreak, mean lenders are being looked to for additional help over the coming months.

Latest figures from the Office for National Statistics revealed almost one in five people experienced a reduction in household income during the first full month of lockdown in April. With the UK slowly emerging from this lockdown and only now starting to get back on their feet, there is still no certainty about when – and how – consumer’s financial situations will improve.

Inevitably, it is very difficult to assess risk and understand consumers’ financial behaviour in new and fast-changing circumstances. So, as a lender, what should you be looking out for, what strategies can you implement, and what support is available to help you protect your customers?

Consumer contributed data to improve service

Understanding what individual consumers can afford, both now and as the crisis unfolds, will be essential if firms are to provide the support existing customers need, and the fast, affordable lending new customers are looking for.

Real-time access to bank transaction data via open banking is seen as the solution to help solve many of the problems we’re seeing as a result of Covid-19 and the economic downturn. Undoubtably, open banking can help, but credit bureau and lenders are rising to the challenge by sharing insight on changes in consumer credit behaviour and current account turnover more frequently to provide more comprehensive insight.

Combining insight from the consumption and use of credit, with the income and spending behaviour revealed in open banking is key to protecting consumers and your business.

Measuring affordability

Unfortunately, unprecedented situations like this turn convention on its head, and the historic expenditure metrics so many lenders rely on are likely to prove problematic. Statistical data such as the ONS Family Spending Survey, which measures a customer’s affordability based on a set of modelled averages, is no longer a suitable metric on which to measure affordability in these rapidly changing times. It limits your ability to access accurate or timely insight on what a customer can afford.

To compensate, we’re already seeing some lenders asking for far more in-depth income and expenditure checks than in pre-Covid-19 times. In our view, understanding how the pandemic impacts consumers’ incomes will be pivotal here, and a number of key metrics are emerging which lenders should be tracking in their existing customers over the coming months.

Deeper understanding with more insight

Firstly, look out for signs of income shock. These are sudden, significant drops in an individual’s income, most likely caused by loss of employment, and certain to have an impact on their ability to afford existing and new credit. Secondly, make sure you’re tracking customers’ income stability to understand emerging increases or decreases, and their probable causes and durations. Finally, understanding  which industry sector your customers are employed in will help you identify any increased risk exposure your portfolio is carrying, and to develop customer treatment strategies.

Tools that provide regular updates of current account turnover data, and real-time snapshots of income using open banking, can be beneficial in providing immediate insight into a customer’s financial health.

It’s also worth taking note of indebtedness measures, such as income ratios versus debt and expected payments, and watch for signs of growing debt stress. These can include a number of new loans, balance increases, revolving credit use, cash advances and minimum payment activity.

Protect and provide for your customers

This continuous monitoring of affordability will be critical not only in identifying stress, and therefore pre-delinquency, but also for protecting increasingly vulnerable customers. Bureau-based triggers and tools such as open banking are invaluable aids to protecting you and your customers.

Being able to perform affordability checks ‘in-life’ will bring the value of foresight, while applying this same level of care and attention to onboarding new lending will enable you to better understand customers’ affordability status and offer them the right products, at the right time.

These insights will also give you a firm foundation from which to review your eligibility rules, tightening restrictions where you need to, and seeing new targets in a more informed light.

If existing customers do fall behind with their payments, data insights can be combined neatly with a digital customer journey to empower people to map a way forward.

Few customers relish the awkward talks on the phone with a collections department. It’s much better for all parties when there’s a digital journey, using data insights to allow people to privately assess their situation, work out what they can afford and then pick the appropriate repayment plan.

Looking to the future

The challenge posed by the pandemic for lenders cannot be overstated. Addressing new and existing customer’s urgent needs now through the use of new data and advances in technology, along with meeting the longer-term issues head-on, will allow the industry to thrive in the months and years to come.

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Lisa Fretwell

Lisa Fretwell

Managing Director of Data Services

Experian

Member since

31 Jan

Location

Nottingham

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