How to cope with declining credit applications and quality

The COVID-19 outbreak is hitting new credit applications hard, with huge falls in new business and increasing risk within both prospective and existing customer pools. So, as a lender, what should you be looking out for, what strategies can you implement, and what support is available to help you protect yourself – and your customers?

These are hugely challenging times. At Experian, our teams work with major lenders across a whole range of sectors and, as the pandemic unfolds, clear trends are emerging, impacting different organisations in the same substantial ways.

Look to your existing base for growth

With new business thin on the ground, now’s the time to look after your existing customers – for your sake as well as theirs. Helping them manage payments effectively will stop them falling into arrears, keep your portfolio healthier and build loyalty that pays back further down the line.

An important part of this will be monitoring and understanding their behaviour. Our analysis indicates that customers already classed as vulnerable are likely to become more so as the coronavirus crisis deepens. Meanwhile, others with insufficient savings, or who depend on businesses that hold poor cash reserves, may become financially stressed for the first time.

So it’s vital to understand whether, when customers ask for payment holidays or extended terms, they’re suffering from pandemic shock, or economic shock. In other words, are they being cautious and pulling in their purse strings before things get tough, or are they about to default on credit agreements because they’ve already hit hard times? 

Deepen your consumer understanding

The better you know your customers, the better you’ll be able to make that call – which is where in-depth insights such as those available through Open Banking really come into their own.

Our research tells us consumers are happy to consent to sharing this data when they see a clear benefit to doing so – and if it helps you tailor your service, support and product offering to more accurately match their needs, you’ll be ticking that box. At the same time, you’ll be helping them understand what they can afford, and what opportunities are open to them.

Gathering data on the demographic profile of your customers can help you create regional vulnerability and risk heat maps, building a picture of your most vulnerable postcodes and households. Tapping into information sources such as Experian’s bureau feeds can alert you to changes in a customer’s situation, giving you a richer view of your portfolio, in real time.

 

Increase your awareness of approaching trends

Strong, up-to-date market insights can also help you look after your existing base better. It’s likely we’ll see a shift in lending types, with the demand for sub-prime credit growing (driven by need, in turn driven by economic shock) and demand for prime credit reducing (driven by choice, in turn driven by pandemic shock). If you can see these trends unfolding, you’ll be able to respond faster, with products that match your customers’ changing needs.

Track your most powerful KPIs

Rich data sources, such as those we unlock at Experian, are out there and available, but it’s also important to harness the data you have, and monitor it for unfolding change. Track the value and quality of new applications, and the risk they bring. Build a picture of your customer demographic as it changes, and of the credit types customers are seeking, or willing to accept.

When it comes to new lending, tracking volume and conversion rates enables you to be proactive rather than reactive – offering products and terms that appeal, and fit current risk appetites.

Finally, keep a close eye on the effects of tightening criteria for new customers. How is this impacting volume? Is it really reducing arrears? On balance is your policy effective, or does it need to evolve as customers’ challenges do?

Make sure your scorecard’s fit for purpose

Using scorecards can be hugely beneficial when credit decisions are straightforward – whether they’re about new customers or existing ones. But in the current economic climate, few decisions really are that simple, and trusted scoring models are quickly becoming irrelevant.

To make sure you’re making accurate, insight-led choices about whether people can afford your products, it’s essential to review your scorecard and cut-off criteria – not just now, but on a regular, ongoing basis. It’s a powerful but complex process, and you don’t have to do it alone. We can help you tap into advanced, enriched scoring through access to up-to-date, trended data.

Strengthen your customer-management strategies

As we’ve seen, there are several ways you can deepen your understanding of customers – on an individual basis, and through regional and national trend analysis. What you do with that richer data is what will define your response to this crisis, and your organisation’s future success.

We are aware many of you are already getting huge numbers of requests for payment holidays. Finding a way to meet that need and, at the same time, look after your own, will be pivotal.

So, use the data you unlock to shape your customer-support strategy, asking yourself whether you can suspend late fees, change terms or reprice products to keep people from falling behind. Explore whether you can offer cheaper rates, faster support or a different approach to forbearance. With solid, current data at your fingertips, the answers will be much easier to find.

Find out more about Experian’s analysis of the COVID-19 crisis, its impacts on consumers and lenders, and how we can help your business through it, in our white paper ‘How to effectively manage consumer credit risk in a turbulent economy‘.