The circumstances we find ourselves in are unparalleled and changing daily. The way we prepare to weather the impact in the short term will be key to making sure its long-term effects are contained as much as possible – both for the customers in our care and for our own businesses.
We know that data has the power to protect and preserve economies, and that by monitoring the relevant KPIs and taking the appropriate actions, we can all work to limit the pandemic’s impact. As your partner, we’re here to help you do just that, by offering you the best of our experience and expertise through our expert consultancy services and suite of relevant solutions. We cover some of these in the following section.
Our initial analysis has highlighted the following five areas to watch:
- Declining levels of applications and credit quality
- A need to monitor affordability across the lifecycle
- Deterioration of asset quality
- Changing portfolio dynamics
- Increased pressure on collections processes
1. Declining levels of applications and credit quality
With a reduction in the number of new applications for credit, it will be important to look to the existing base for growth. Existing customer management strategies will need to be re-evaluated to understand what changes should be made to balance extra customer assistance with acceptable risk.
It’s likely we’ll see a shift in lending types, with the demand for sub-prime credit growing and demand for prime credit reducing. Therefore, a review of your scorecard and segmentation, together with analysis of your cut-off criteria, can help to make sure you’re accepting the right customers for your risk appetite, even in a reduced pool.
2. A need to monitor affordability across the lifecycle
Understanding how consumers are being affected by the crisis is the key to proactively provide the help and care they need – both immediately and over the coming months.
As we’ve seen in this paper, the continuous monitoring of affordability will be critical not only for identifying stress, and therefore pre-delinquency, but also for protecting vulnerable consumers. Being able to perform affordability checks ‘in-life’ will bring the value of foresight. Applying this same level of care and attention to new lending will enable you to better understand consumers’ affordability status and offer the right products, at the right time.
Experian’s affordability solutions can bring you the technology and insight made possible by Open Banking. This includes categorised bank transaction data that can be used to understand the income and expenditure of an individual in real time. Armed with this information, you can proactively identify stress and pre-delinquency, support your customers and monitor the effect on your portfolio.
Even customers with historically good levels of affordability are entering new territory, with many seeing decreasing incomes either because they’re self-employed or because they’ve been furloughed by businesses that can no longer operate. It will be important for you to help these people understand their new financial circumstances and what they’re now eligible for.
3. Deterioration of asset quality
Our analysis shows that in the current crisis, people who are already classed as vulnerable and financially stressed are likely to become more so. However, others who rely on businesses with poor cash reserves will also undergo stress – many at a level they’ve never experienced before. Along with a lack of savings to fall back on, this is likely to lead to a much more financially stressed society, with a growing number of at-risk and vulnerable consumers.
Data on the demographic profile of customers will allow for the creation of regional-level vulnerability and risk heatmaps, which can provide insight in terms of your most vulnerable postcodes and households. Combined with more frequent feeds of bureau data which alert you to changes in a customer’s situation, these can provide a richer view of the profile of your book.
4. Changing portfolio dynamics
Inevitably, your credit portfolios will feel the impact of the virus and having access to the very latest macroeconomic trends will enable you to run more accurate stress testing and gain a clearer picture of what that impact is likely to be.
Due to the rapidly evolving impact of the crisis, scenario models that have worked in the past are unlikely to be relevant today. A new response is needed and at Experian we can support you in developing appropriate, effective models. These will consider the different variables in play, the progression of the pandemic, regulatory change and new shifts in supply and demand.
It’s also fair to say that the assumptions made when calculating expected credit loss as part of the International Financial Reporting Standard 9 (IFRS 9) will need to be rethought based on the latest insights to make sure that they’re accurate and robust. Again, we’re here to guide you through this process, with expert advice and practical tools.
5. Increased pressure on collections processes
Lenders are working hard to proactively help consumers, but it’s inevitable that many people will fall into the collections process, putting stress on its existing resources.
While the volume of consumers pulled into the process will increase, the immediacy of their needs will be no less. It will, therefore, be immensely challenging to serve them fast enough, especially if the number of underwriters available to make manual decisions reduces further due to illness.
Automating current manual processes could help to alleviate this challenge, especially when combined with more regular feeds of data from the bureau, and access to consumers’ own consented data through Open Banking. Together, these factors can help you base lending decisions on the best available data, in these rapidly changing times.
Strategies and collections scorecards that were applicable before the crisis may need to be recalibrated, and with a potentially reduced number of employees available to take and make calls, other digital ways of communication may need to be sought. Once more, our teams are ready to discuss, advise and help you put effective systems in place.
To learn more about managing consumer credit risk, download the full guide today.