The pandemic has accelerated a number of areas across the industry including the need to focus on the use of affordability and creditworthiness. Many borrowers will soon be, or already are, coming to the end of their first deferral period and lenders are now focused on helping customers to consider their next steps this includes a range of options to ensure customers continue to be supported through the coming months, whatever their financial situation. It is hoped that borrowers who can afford to resume payments will do so. However, for those who can’t then lenders are looking at how best to support them.
The range of ongoing support offered by lenders includes a further full or partial payment deferral, a move to interest only payments for a period, or extending the term of finance to reduce payments, depending on the borrower’s circumstances.
At the same time, there are businesses and individuals who are minimally impacted by the crisis and wish to borrow, and lenders are looking to be able to identify businesses and individuals where they can extend finance appropriately.
Following the crisis, there has been a greater focus on affordability, with lenders striving to understand people’s current indebtedness and current affordability which has changed as a result of the pandemic.
That said, creditworthiness has been a focus for lenders since 2018, when the FCA published their guidelines and changed their rules. However, we’ve seen much more of a focus in recent months spurred by the FCA asking lenders exactly how they are incorporating those rules into their existing policies and procedures.
Much focus is currently on customer management, and the existing customer base. As such, we have seen a reduction, and in some cases a complete pause in lending whilst lenders get to understand more about individual’s personal circumstances and how the pandemic has, and will impact them. Lenders are trying to identify vulnerable customers who have had an income shock and understanding their debt profile and their overall indebtedness.
Key KPI’s needed to make effective checks
Being able to recognise which of the most valuable checks that you need to make at the right point in time, the right place and right frequency in which you make those checks.
- Understanding payment holidays and monitoring these
- Tracking people’s propensity to pay
- Understanding when customers can start repaying
The use of Open Banking combined with bureau-based data
Lenders have worked collaboratively with bureau data in terms of providing more recent data on income shock and indebtedness, which gives an understanding of a customer’s most recent financial circumstances and how they might have changed. However, where that data doesn’t give you the right level of granularity, we are then seeing lenders starting to use Open Banking that reveals not just information about a customer’s income and expenditure but also vulnerability.
At Experian, we try to optimise the best of both Open Banking and bureau-based data. Having balance between open banking and bureau-based data is what we are now seeing deployed in real time to give a recent view of a customer and then using that to monitor their behaviour over time as the crisis plays out.
Tools which can solve and address these challenges
Currently, all the top banks have access to transactional data in their own current account customer bases and we are seeing banks wanting to use automated categorisation engines on their existing customer data to get a granular analysis of their transactional data. We are seeing banks deploy our Categorisation as a service (CaaS) which is a batch processing engine which uses existing current account customer data to inform that analysis of customers.
Many lenders have transactional information which can give them a view of people’s credit commitments through their existing bureau data, however what is missing from this is a view of changes in income. Our bureau insights include such information as showing income shock over the last three months and how income has changed which gives a clear picture of an individual’s financial position.
Also, our bureau information means lenders can get a deeper understanding of an individual’s income to debt metrics. This allows lenders to look at areas such as whether people are using minimum payments on their credit cards and if this has changed from previously being payers in full. These are both useful indicators of whether or not somebody may become more financially stressed.
There is going to be a more widespread deployment of Open Banking because it gives this measure of granularity around a customer’s behaviour. The main challenge that exists around Open Banking is how do you deploy it on a continual basis to help monitor the changes that may occur in an individual’s income and expenditure, which is where bureau data acts as a trigger as there is no consent required. Bureau data is also low friction so lenders can deploy quite easily to help to monitor changes.
Let us help you navigate the problems:
- Join our monthly insight webinars – registration and attendance is critical, as the sessions are live and not recorded
- Browse our Covid-19 resource hub – containing assets relevant to the market, and challenges
- Book a consulting visit at Business.Enquiries@uk.experian.com – where we can work with you to share insights, and thoughts around the necessary strategies needed to help you understand your exposure to economic shock