UK regulator, the FCA (Financial Conduct Authority) has this month written directly to more than 3,500 lenders in the UK to “remind them of the standards they should meet as consumers across the country are affected by the rising cost of living. With household bills expected to continue to rise into the autumn, it is important that firms act now to make sure borrowers struggling with payments and customers in vulnerable circumstances can access the help they need.”
The letter stresses the importance of lenders taking the time to understand their customers’ individual circumstances. The days of a ‘one-size-fits-all’ approach to lending are behind us, and with more data and resources at their fingertips than ever before, lenders can have more personalised conversations with their customers.
Although not all BNPL products are currently regulated, the FCA included them in the recipients of the letter, stating that they encourage these firms to provide their customers with appropriate level of care and support.
With national inflation at 9% and rising, it is often the most financially vulnerable who are hit hardest. A recent survey on the fiscal impact of COVID found that 27% of the UK population have low financial resilience.
According to Reuters, the number of Britons with poor credit ratings is rising in the wake of the COVID-19 pandemic, just as many lenders who cater to them are going out of business – opening a gap in the market which may allow predatory lending to flourish.
SMEs across the nation are also facing challenges as Bounce Back Loans (BBLs) come due. During the last two years, over 1.5 million BBL’s were provided to help businesses survive the challenges of the pandemic. It is now estimated that up to 37% of BBLS may not be repaid, at a cost of around £17.5bn to the Government. However, the implications to those borrowers who default may be felt for years to come due to the impact on the credit scores.
Despite the deteriorating economic landscape, the Bank of England has this week warned lenders against “excessive” cutting in lending to households and businesses.
As quoted in The Times: “Setting lending terms to reflect the new risk environment is appropriate … Restricting lending solely to defend capital ratios or capital buffers would be counterproductive and could prevent credit-worthy businesses and households from accessing funding. Such excessive tightening would harm the broader economy and ultimately the banks themselves.”
Lenders of all sizes should place a renewed focus on the ways they evaluate credit-worthiness and what tools they leverage to understand their customers. Traditional bureau agency scores consider a limited set of historical credit data and offer little flexibility, often leaving both lenders and borrowers with limited options.
Better lending starts with better data. Alternative data such as Open Banking, Transaction and Bill Payment History are examples of third-party data sources that lenders could include in their risk assessment.
Another alternative data source, first-party character data, is created directly with the applicant through secure, privacy consented processes. Character data is an opportunity for lenders to future-proof their credit assessments, and can be considered both as part of an initial application assessment or to gain greater insight into an existing loan portfolio.
Character and behaviour data has been shown to be a resilient and reliable indicator of someone’s likelihood to repay a loan. Character assessment produces insights around an individual’s personality, skills, experience and behaviour which are predictive of risk and have also been shown to be very stable. While an individuals’ financial situation may change, their character traits tend to remain stable.
Ongoing tough economic conditions will present challenges in the coming months for both lenders and borrowers, but it also presents an opportunity to leverage new approaches to establish credit assessments which are more holistic, responsible and tailored – leading to better long-term outcomes on both sides.