Mar 2022 | Credit Decisions | Open Banking
By Posted by Colette Land

Consumers are feeling the rise in the cost of living like never-before

With fuel costs at a record high, inflation skyrocketing and increases in national insurance contributions, households are finding themselves questioning their ability to afford life’s basic necessities – should I pay for food, or fuel?

Experian’s Head of Consulting, Colette Land, takes a look at how well customers are keeping up with their payments and how Utilities companies can support.

It’s been a huge shock to many consumers these past few weeks as the reality of the increasing costs has hit home. Energy Suppliers are understandably extremely concerned, and are coming to us to discuss their approach to supporting customers who will be unable to pay, and the inevitable rise in debts that Energy Suppliers will see.

What are the latest utilities trends and are more customers struggling to pay their Energy and Water Bills?

Firstly, the ‘good’ news: Experian’s latest insights show that the percentage of customers who are falling behind on their core utilities payments, is the lowest it has been in 2 years. Lately, slightly more customers are falling behind on their water bills than previously. Considerably more are paying ‘up to date’ on their energy bills and around 90% of all energy accounts are currently up to date. However- now for the warning lights – Experian can see considerable increases in the number of customers with utilities payment arrangements. Customers that accumulate a debt on their utilities bill and are unable to repay within a reasonable period (typically 12m) have such arrangements recorded at a Credit Reference Agency (CRA). The average payment arrangement has also been rising steadily since the end of 2018, where the total payments (including both consumption and debt) for affected customers have increased by a factor of 3.5. As Ofgem has encouraged payment plans throughout the pandemic, these increases are to be expected, so some might say, “So What?”

Hear me talk about the current challenges Utilities companies are facing in our latest podcast:

More customers are repaying energy debt for bigger amounts, so what?

Everyone is acutely aware of the price cap increases announced recently. To recap it went from £1138 April 21 to £1277 Oct 21 to £1971 in April 2022. Given the current, tragic situation in Ukraine, the expectation is that it will go significantly higher, with some reporting that this could hit £3k+ in October 2022. Water bills are also expected to rise in April. There’s a lot of concern, rightly so, about the cost-of-living crisis and how many customers will be forced into fuel and water poverty come April. The Resolution Foundation estimates that there will be a tripling of households in fuel poverty (27% households up from 9% now). These figures are comparable to those produced by National Energy Action, though the latest government report, surprisingly, expects the opposite trend. It does go on to qualify this with a change in the definition of fuel poverty.

I feel the harsh reality is that there has been very little incentive for customers to repay energy debt quicker, even if they could afford to do so. Suppliers typically don’t charge interest. Recently, the industry focus has been on ensuring the payment is affordable without emphasising that debts should also be repaid as quickly as affordability allows. In my experience, this has driven to debt plans extending across decades, customers repaying at very small amounts per year and payment reviews not being well established. Sometimes debt plans are rolled into direct debit payments alongside consumption, and for suppliers who don’t share with a CRA, this debt is an emerging problem.

There’s an increasing challenge to track utilities debt. Where it is identified, there’s an increase in customers unable to repay it, and they are spreading payments for ever increasing amounts. If you layer onto this substantially increasing energy costs for future energy consumed, then the impact on customers struggling to pay will compound and the situation may deteriorate rapidly.

It’s vital that suppliers embrace intelligent use of data to better inform what you do; from understanding and tracking customers who aren’t paying enough to cover their energy costs (which isn’t easy to do for customers who aren’t on smart meters as you’re permanently estimating usage), better tracking of ‘debt’, meter reading strategies, best use of resources and support through to tailoring collections processes to separate can’t and won’t pay.

How Utilities Suppliers are leading the way in Intelligent use of Data to tailor their approach to the increase in energy prices

The power that is retrieved by lenders and utilities suppliers sharing data with a Credit Reference Data is vast. I’m delighted to say that, over the past year, I’ve seen a shift in the data that is being consumed by utilities suppliers and how it’s used to best effect.

Affordability data is generated at Experian to understand how much consumers have left at the end of the month. It is primarily calculated on incomes going into consumers’ current accounts (a source which is now shared with credit reference agencies as standard); less the amounts customers are repaying on their credit obligations for mortgages, loans and credit cards, etc. and an allowance for standard monthly outgoings. Experian continually revises the calculations to use the latest information available. More information can be found here.

Experian Affordability IQ puts the individual at the heart of affordability, helping them meet their needs and goals

Find out more

The FCA mandates that all credit agreements are assessed with an appropriate affordability lens as well as (and separately from) a credit one. This data is used as standard by most financial service providers when assessing new customers or further lending to existing customers as part of a strategy to determine affordability.

Despite the rising debt levels, as far as I can see, Ofgem and Ofwat don’t require an affordability type of assessment for new customers or when, for example, direct debit amounts are reassessed for utilities. Ofgem requires an ‘ability to pay’ assessment when a debt plan is set up. In this new world of increased energy charges, I wonder if more will be done to encourage suppliers to assess whether new utility payments, or changes to payments, are affordable.

Irrespective of regulatory changes, this new affordability data is now being embraced and used by several utilities suppliers. Many have started receiving and consuming data or have plans in place to:

  • Accurately understand which customers are unlikely to be able to withstand the price increase as they currently have less left per month than the price cap will consume.
  • Plan how much resource will be needed to support calls for those struggling to absorb the price increase over the next few months.
  • Ensure communications are tailored and support is signposted.
  • Amend meter reading strategies to prevent a gap growing where customers are at risk of bill shock for those customers whose affordability is low.

Although switching is effectively paused in the energy sector, in preparation for its return, I suspect several suppliers are looking to see whether decisions need to be reconsidered at the point of application. For example:

  • whether credit risk score cut-offs need to be revised to cater for increased bad debts (that will inevitably arise due to more customers being unable to repay energy debts and the debt values increasing), and encourage more customers to use prepayment meters or request security deposits, or
  • whether affordability data could be used to confirm that the customer can afford the regular energy payment on the price of the product offered.

Many utilities suppliers are also embracing Open Banking to help with the challenge and understand the best repayment rates, or in the case of water, identify which customers are eligible for social tariffs. I’ve blogged on this before, so won’t go into more details here, except to say that this tool is a good one for suppliers to have and will likely have an increasing role to play over the next few months as the true impact of the cost of living crisis is felt. More information can be found here.

Better working across industries – a thought for the future

Banks and financial services providers are currently grappling with changes to their affordability assessments to cater for increases in energy costs. At the same time, energy suppliers are adopting data-driven approaches to absorb affordability data in order to identify those who can’t afford the increase. Financial services providers don’t know which customers are really going to see increases in energy costs as they don’t know their energy usage or energy efficiency. Is there an opportunity to empower customers and for better cross-industry working to help customers most in need?