The long-term economic effect of the Covid-19 pandemic is still largely unknown, but it’s likely to make an impact like nothing we’ve seen since the Second World War. With a few nations emerging from the lockdown and only now starting to get back on their
feet, there is still no certainty about when – and how – the economy will recover.
The IMF predicts that the pandemic will leave ‘lasting economic scars’, with the economies of most countries emerging 5% smaller than planned, even after a sharp recovery in 2021. Their predictions suggest that it could be more significant even than the
global financial crisis of 2008 and it is undoubtedly going to be a difficult time for everyone.
For consumers this uncertainty has already led to a dramatic shift in financial behaviours. The combination of the nationwide stay-at-home policy; lenders offering ‘payment holidays’; many small businesses being limited or entirely unable to operate; and
the effective closure of the high street, have led to dramatic shifts in spending patterns in a very short space of time. They may never return to what was once considered ‘normal’.
We are all more risk-averse, worried about long-term impacts on income and reducing spending wherever possible to manage for an uncertain future. Many people have already taken up the Government’s mortgage payment holidays and many others are looking for
more ways to manage the shock the pandemic has had or may still have on their employment and income.
As this continues, challenges will emerge for lenders too. Inevitably, it is very difficult to assess risk and understand financial behaviour in such unprecedented and fast-evolving circumstances. In 2008 the impact of similar uncertainty drove a dramatic
contraction of the traditional credit market, bringing it to an effective standstill. As jobs were lost and stock markets plummeted, consumers and business owners were forced to turn to higher-cost, higher-risk borrowing methods. Today, we stand at risk of
a similar situation unfolding.
However, this is not a foregone conclusion. Over the last decade, advances in technology, availability of new data and regulation have fundamentally changed the face of the financial services industry for the better. Now is the time when those changes
must be harnessed to help develop credit options for consumers to respond to this pandemic, taking steps that will make a practical difference for those people who need it the most, whilst also supporting the UK economy.
In the current situation these improvements to the way businesses can understand and respond to financial behaviour, using data and technology, take on new significance. Enabling lenders to anticipate problems with debt, helping their customers through these
tough times with affordable and appropriate products and services.
The arrival of Open Banking has enabled lenders to take into account other payments consumers are making, and to look more deeply at their payments over time, building up a picture that does more than deliver an immediate snapshot which cannot keep up with
the pace of change in individual circumstances. By viewing trended data insights over a longer period it’s possible to assess affordability more accurately. For example, understanding the difference between one borrower who makes repayments comfortably every
month and another who is making their repayments while increasing their reliance on credit over a longer-term period.
Access to more in-depth data, more frequently, can offer some much-needed clarity at a time when traditional models and assumptions are being challenged. For example, metrics like credit and debit turnover ratios, trends in minimum balances over time, and
payment delays can offer a much more accurate view of a business’s status than relying solely on traditional scores calibrated on a ‘normal’ economic cycle. In addition, machine learning models can provide deeper, smarter analyses of existing data to create
a more rounded profile of an individual or business, providing the insight and reassurance that lenders need to offer the right product at the right time.
This pandemic has taken a significant toll on people’s physical health, but we have a chance to lessen the impact on their financial health, supporting the hardest-hit consumers and businesses through the coming months. What is critical now is that all of
us in the financial ecosystem work together to protect consumers and to maintain the integrity and openness of the credit market. Using the new tools at our disposal today and drawing on the lessons learned during the 2008 experience, will help us navigate
our way forward and accelerate the road to recovery.