Adult man and girl sitting at a dining table

Lenders are currently facing the challenge of understanding the changing of a consumer’s affordability and being able to identify income shock.

As the effects of the COVID-19 pandemic ripple through the UK economy, income shock is felt by a significant proportion of the population. Business closures, job losses and massive income uncertainty is the reality many are facing throughout this time.

Applications for Universal Credit have also soared since the UK lockdown. For those who were financially vulnerable before the crisis, they have started seeing their situation worsen, while others with stronger financial track records are looking unemployment and hardship in the eye for possibly the first time. As the crisis develops and income shock kicks in, it looks inevitable that outstanding consumer credit balances will rise, and more people than usual will reach the limit of their agreed credit. In turn, this could see inflation rise further, with longer, deeper levels of unemployment significantly impacting affordability, vulnerability and need.

What do we mean by income shock?

These are sudden, significant drops in an individual’s income which can have an impact on an individual’s ability to afford existing and new credit.

This can be due to factors such as (but is not limited to):

  • Short term furlough, with reduction in Income but not series i.e. only 80% of income is still being payed
  • Reduced income through partial loss of job i.e. have more than one job, have kept income coming in from one and not another
  • Loss of income due to being unemployed

How can businesses respond?

Understanding impact on your portfolio

To adapt, a high-level understanding of how your portfolio has changed is critical. At an account level, the sooner you’re able to identify signs of stress in a customer, the greater your chance of taking fast and appropriate action to minimise losses.

Identify vulnerabilities

Understanding vulnerability extends beyond a measure of an individual’s financial wellbeing into our metrics such as disabilities, benefit dependency, accessibility, mental health. The dynamics of vulnerability hinge upon these four key areas.

  • Place: Regional variations in economic performance will influence affluence and accessibility to services
  • Person: Vulnerability is highly personalised. It is unique to an individual and changes frequently
  • Product: Access to financial products influenced by affluence, accessibility, health and mobility
  • Regulator: Organisations have the regulatory responsibility to protect consumers

Personalise treatments using better data

Having the correct data is critical. Non-traditional data attributes such asbank account data now available through open banking APIs, can provide a detailed look at a person’s income and expenditure – the day-to-day reality of their financial situation. This will provide you with a much more robust view of a person’s affordability and the ability to offer consumers the best products for their needs.

Manage vulnerability proactively to protect customers and be compliant

Lenders need to continue to make decisions which are not detrimental to portfolio risk and losses, but also in the best interests of the consumer. This is likely to lead to gaps in services available for financially vulnerable customers.

Experian are here to help

With Experian’s Affordability solutions, we make sure you can treat every customer as an individual; helping them meet their needs and goals by better understanding their individual circumstances.

Affordability IQ provides access to personalised affordability insights created from the Experian bureau,our insight allows you the flexibility to be able to tailor your customer experiences with the minimum amount of friction in your journey. Our Affordability IQ Income Shock & Stability Metrics can monitor any changes in a customer’s financial circumstances to understand their ability to continue to afford a loan. We can help you identify changes such as loss of income to provide an early warning and risk of a customer falling into debt.

We do this through a series of red, amber or green flags that highlight changes in current account turnover by comparing the median account turnover values over time, with separate metrics for identifying increase or decrease in turnover.

Understand the volatility in consumers’ financial capacity, it’s now critically important that firms have the ability to recognise signals from their data, quickly and effectively. Affordability can help you determine which patterns are common for each individual, and which are indicators of impending stress, will help you manage your customers and wider portfolio far better.