According to an FCA survey, in 2020, 81% of UK adults had used a form of regulated credit within the last 12 months. As consumers move away from traditional, regulated forms of credit (like credit cards), how is the unsecured credit market shaping up?

It’s changing rapidly — with fintech products becoming more easily accessible than ever before. While this benefits many consumers, it can also have an impact on consumers who are more vulnerable or who have been in financial difficulties before.

The FCA’s Woolard Review revealed that changes need to be made to the way in which consumer credit is regulated to improve outcomes for customers. Areas such as affordability assessment, forbearance and levelling the treatment between different types of financial products are high on the agenda for change. In addition, regulating products such as BNPL will help to provide more transparency throughout the industry and help lenders to provide the best outcomes and products for customers.

Let’s take a deeper look at the review and the recommendations the FCA have put in place to help improve consumer credit in the future.

A quick recap: How should credit providers support those most in need of credit?

Rising costs of living and economic pressures from recent events such as Brexit, the coronavirus pandemic and the impact of the Ukraine war means that UK consumers are facing more financial pressures.

As a result, more and more consumers are getting into financial difficulties and relying on help from a variety of credit products, both regulated and unregulated. And that’s why the FCA’s report is so crucial in outlining how important it is for credit providers to support borrowers who are most in need of credit.

1)   Understand how consumers are using products and services

More consumers are accessing credit but the costs of providing and obtaining it will make it less affordable for those who need it.

Understanding customer current use of credit products and services allows credit providers to offer the best products to suit their needs and prevent them from falling into further debt. Moreover, credit providers need to give their customers clear and transparent information about the products and services available so they can make the right choice.

2)   Recognise vulnerability

With many more consumers falling into financial difficulties, organisations must be able to recognise a vulnerable customer and have the tools available to deal with their specific needs.

Vulnerable customers are often most in need of credit but are unable to access it so credit providers having a better understanding of what they’re spending and how will allow them to offer better support. In recent news there’s a lot of coverage around consumers using credit cards and other methods to pay off their BNPL loans - which means individual affordability statuses provided by Bureaux will be inaccurate and will lead to a wave of additional people in debt and late identification of vulnerability.

3)   Provide help to consumers who are unable to access credit

For some consumers, high-cost credit products allow them to get instant credit. But it’s risky for all involved as they may not be able to afford to pay it back. Again, understanding these customers and being able to offer tailored support and products can help to prevent them from falling into a cycle of debt.

How credit information and Open Banking can help to improve consumer credit

And this is where innovations like Open Banking come in.

Before Open Banking, it was difficult for credit providers to get a clear view of how consumers were spending due to gaps in transaction data and a lag in receiving it. With it, credit providers have a clearer view of financial behaviour and a more detailed view of their current financial situation.

Being able to extract insights from data, and often in real-time, allows credit providers to make more accurate affordability assessments in seconds. Thus, it helps to increase acceptances, reduce defaults on payments and make faster credit decisions.

Ultimately, it allows them to offer customers the right support at the right time, as well as highly personalised products and services.

Innovations and the unsecured credit market

Innovations such as Open Banking and unsecured credit products like BNPL can be highly beneficial to many consumers. But, for consumers who are more vulnerable, they can cause significant risk and lead to poor customer outcomes.

The pandemic accelerated the trend towards tech enabled consumer credit products which can increase risk for some borrowers and leave them unable to access the credit they need.

And that’s why the FCA has called for innovations such as BNPL products to be brought within the scope of regulation so that consumer data can be shared and provide a better picture of affordability. This will help credit providers to understand exactly where consumers are borrowing and allow them to improve customer outcomes.

As part of regulating the unsecured credit market, BNPL providers would need to share new and historic lending data with Credit Bureaux. Sharing data will provide complete transparency within the credit industry which allows credit providers to offer more responsible decisions for their customers.

📕Find out more about BNPL and choosing the right data in our recent article.

In the future, this transparency will be essential for allowing credit providers to offer customers the best products, market fairly to customers, make better informed decisions and reduce risk. This access to affordability data will also help providers to support vulnerable customers.

Wrap up

As the demand for instant access credit options grows, fintechs will need to take more precautions to protect customers, themselves and help to support economic growth. All this as well as provide customers with the credit products they need and want.

This requires greater transparency between credit Bureaux, credit providers and customers to ensure they have a better view and understanding of spending across both regulated and unregulated consumer credit products.

Following the FCA’s recommendations will help to improve the consumer credit market as a whole for both fintechs and their customers. Customers can expect better decisions and access to the products and services that suit their needs.