Covid-19 has had a profound financial impact on everyone, with 40% of people experiencing a pandemic-related income shock. While some can fall back on their savings or access credit to soften the blow, it can be much more damaging for those who are financially excluded.

This consequence can be severe and far-reaching – affecting someone’s education, health, and housing. Often, financial exclusion can result from having little or no credit history or identity information available. Recent Experian research suggests that there’s around 5.2 million UK adults in this position.

With limited information available to make an informed decision, lenders consider this population, known as the ‘credit invisibles’, to be high risk and can only offer them financial products at higher rates, if at all.

Part of the solution is the introduction of new data sources which can help people build their credit profiles and give them a better chance of accessing mainstream financial products from major lenders. This information can offer additional insight to drive greater visibility and transparency about someone’s identity and payment behaviours.

New data sources continue to grow in importance given the rapid and ongoing evolution in the way consumers manage their money, transactions, and credit. In recent years we’ve seen data from telecoms, fintechs and other sectors being added to bolster people’s credit reports.

Further to this, Open Banking holds vast potential to facilitate authorised data sharing between financial service providers. This is already helping lenders to understand prospective customers better and make more informed decisions on their affordability.

These are certainly positive developments for the ‘credit invisibles’ population, but it will take time before financial exclusion is completely eradicated. Time that some people don’t have, as many find themselves struggling financially as a result of the pandemic.

Comparison services can play a vital role in helping the financially vulnerable find the support they desperately need.

Stepping into a digital world

Comparison services have become increasingly popular over recent years, revolutionising the way people find energy providers, take out insurance policies, switch broadband or choose a hotel. It’s also a great way to find the best credit deals based on your financial circumstance. 

Many of these services will include an eligibility tool, so it can tell someone how likely they are to be approved for a specific credit deals based on how their information matches up with the lender’s criteria. Importantly, it allows them to leave a “soft search” on their credit report and shows them which products they are more likely to be accepted for without it affecting their credit score.

Experian insight found that around 25% of customers searching for loans through its comparison services are not currently eligible for offers from mainstream lenders. When someone is unable to access affordable, mainstream credit, some feel as though they have no other option but to pursue other means such as payday loans and loan sharks.

These products often have very high interest rates and can be structured differently from mainstream offers, which can make it more difficult to calculate the cost of credit and increases the chance of customers spiraling into debt.

There are cheaper credit options available to people who find themselves in this situation though. Not-for-profit community lenders, such as credit unions and community development finance institutions (CDFIs), provide a much needed and more affordable alternative.

However, without access to the right technology, it’s always been a struggle for not-for-profit lenders to connect with the people who need their support the most.

Integrating these lenders as part of the comparison journey not only allows them to reach a wider audience, but importantly offers people with another option if they are ineligible for credit deals from traditional providers.

Combining affordability and soft search capabilities, the solution gives customers an automated decision based on their credit history to determine whether they match the loan lending criteria. If accepted, the application will be supported with details of the maximum amount they can borrow. Being part of this panel of lenders helps provide a far more accurate decision earlier in the application process.

We are already working with the leading technology supplier to credit unions, incuto, to include community lenders onto our own comparison service platform. This is actually the first-time people will be able to access not-for-profit lenders from a major comparison service in this way and an encouraging first step to ensure that community lenders are equally represented within loan comparisons.

Now more than ever, comparison service providers should be embracing the affordable loans market and helping not-for-profit lenders not only provide a seamless, digital experience to their customers, but also reach the people who are faced with the prospect of high cost credit.

It's also equally important that non-for-profit lenders accelerate their digital transformation plans, equipping themselves with cutting edge technology to take advantage of a rapidly growing comparison market. By doing this, millions can gain access to more affordable credit that will make a huge difference to their lives.