EXPERIAN: IN THE LIGHT – REASSESSING AFFORDABILITY

Features | 23/07/20

How to reassess affordability in the light of COVID-19.

The coronavirus pandemic has hit lending at an uncomfortable time. With growth already slowing and affordability stretched, new income uncertainty is straining customers’ resilience, yet their need for credit of different varieties, is greater than ever. Against this backdrop, providing responsible lending without unreasonable risk means taking a new view of affordability, right across the lifecycle. So where should firms begin?

Right now, the sands are shifting beneath people. Those who were financially vulnerable before the crisis started, are seeing their situations worsen. Others with strong financial track records are looking unemployment and hardship in the eye for the very first time.

As a result, banks are likely to see even usually reliable customers fall behind in their payments or seek extra borrowing to stay afloat. At the same time, we predict they’ll see high levels of new applications. People are exploring their options, with prequalification being used more frequently as a means to understand what is accessible. Some in preparation, and others with an immediate, pressing need to borrow.

With access to the right data, you can monitor and support customers immediately

Understanding what individual consumers can afford, both now and as the crisis unfolds, will be essential if firms are to provide the support existing customers need, and the fast, affordable lending new customers are looking for.

Real-time access to bank transaction data via Open Banking is seen as the panacea to help solve many of the problems resulting from Covid-19 and the economic downturn. Undoubtably, Open Banking can help, but credit bureaux and lenders are rising to the challenge by sharing insight on changes in consumer credit behaviours and current account turnover, more frequently, to provide more comprehensive insight.

This is where were seeing the power of the bureaux and UK’s comprehensive credit data sharing scheme, come to the fore, allied to the detailed insight provided consumer consented bank transaction data.

Combining insight from the consumption and use of credit, with the income and spending behaviours revealed in Open Banking is key to protecting consumers and your business.

Recognise the shortfalls in trusted tools

Unfortunately, unprecedented situations like these turn convention on its head, and the historic expenditure metrics so many lenders rely on are likely to prove problematic. Statistical data such as the ONS Family Spending Survey which measures a customer’s affordability based on a set of modelled averages is no longer a suitable metric on which to measure affordability in these rapidly change times. It limits your ability to access accurate or timely insight on what a customer can afford.

To compensate, we’re already seeing some lenders asking for far more in-depth income and expenditure checks than in pre-COVID-19 times. In our view, understanding how the pandemic impacts consumers’ incomes will be pivotal here, and a number of key metrics are emerging which lenders should be tracking in their existing customers over the coming months.

Monitor a new set of income metrics

Firstly, look out for signs of income shock. These are sudden, significant drops in an individual’s income, most likely caused by loss of employment, and certain to have an impact on their ability to afford existing and new credit. Secondly, make sure you’re tracking customers’ income stability to understand emerging increases or decreases, and their probable causes and durations.

Regular updates of current account turnover data, and real-time snapshots of income using Open Banking, can be beneficial in providing immediate insight into a customer’s financial health.

Take note of indebtedness measures, such as income ratios versus debt and expected payments, and watch for signs of growing debt stress. These can include a number of new loans, balance increases, revolving credit use, cash advances and minimum payment activity.

Protect and provide for your customers

This continuous monitoring of affordability will be critical not only in identifying stress, and therefore pre-delinquency, but also for protecting increasingly vulnerable customers. Bureau-based triggers and tools such as Open Banking are invaluable aids to protecting you and your customers.

Being able to perform affordability checks ‘in-life’, will bring the value of foresight. Applying this same level of care and attention to onboarding new lending will enable you to better understand customers’ affordability status, and offer them the right products, at the right time.

These insights will also give you a firm foundation from which to review your eligibility rules, tightening restrictions where you need to, and seeing new targets in a more informed light.

Tap into powerful new resources

However much it’s needed, monitoring new and increasingly complex data isn’t easy, especially with depleted and scattered teams. Lenders need help to rise to this pressing challenge, with affordability solutions that give them deeper, more relevant insights. Insight made possible by Open Banking and Open Data, enables you to shine a light right into a customer’s bank account, gaining an accurate, real-time, personal view of affordability based on income, expenditure and credit information.

Gain the visibility you need

Offering customers a secure platform for sharing transactional data, provides a clear, picture and the best possible indication of those who are likely to struggle in the current crisis. Reliant on consent, consumers seem willing to share information, especially when it helps them access the products they need. For many, this need is becoming urgent and leaning on innovations that smooth the way will be seen as helpful.

Using bank transaction data, automatic triggers and alerts around income, liquidity and balances can be created, helping you to proactively monitor and help customers.

Boost decisioning without straining resources

Advanced decisioning can help lenders more accurately assess affordability, consider future scenarios and understand the levels of comfort a customer will have with credit.

Intelligent decisioning platform pull together data from a whole range of sources, limiting a your exposure to risk, and leaving you free to divert teams into much-needed customer support.

Rob Haslingden
Head of Digital Propositions
Experian