RESTORING STABILITY
USING DATA AND INSIGHTS TO SUPPORT VULNERABLE CUSTOMERS NAVIGATE THE COST OF LIVING CRISIS

TRANSUNION

Consumers in the UK are facing increasing financial pressure amidst the rising cost of living. Inflation hit 10.1% in the twelve months to January 2022, whilst the Bank of England raising base rates to 4.0% has significantly increased the cost of borrowing money. Unsurprisingly, people are feeling the impact, with our latest Consumer Pulse study showing three quarters of UK consumers are reducing spending to help them cope, whilst nearly four in ten (39%) are building up savings to safeguard themselves.

In the face of economic uncertainty, it’s crucial for credit providers to be able to better identify and serve financially vulnerable customers. And with new regulation from the FCA coming into effect this year in the form of the Consumer Duty, which aims to set higher standards of consumer protection across financial services, affordability assessments based on a robust and holistic picture of an individual’s financial situation can play a major role in helping to deliver the right outcomes.

IDENTIFYING VULNERABLE CUSTOMERS

Our analysis here at TransUnion suggests that 12 million consumers now spend everything they earn (with £0 disposable income at the end of the month) up from 8 million in December 2021. So, to help protect consumers and manage their customer base better, credit providers need to be taking a proactive approach to identifying financially vulnerable customers and implementing appropriate affordability checks.

The view on cost of living is crucial when undertaking an affordability assessment. It’s important that affordability screening reveals not a general trend but an individual-level susceptibility to stress and economic changes, such as steeply increasing energy prices or a fixed rate mortgage ending – which will likely have a significant impact on consumers in the current financial climate.

It’s also paramount that the cost of living view includes different expenditure categories, such as council tax, energy, water, media services, home insurance, car insurance, commuting and food. This can help lenders get detailed insights into a consumer’s financial position and make more informed and sustainable decisions.

EMPOWERING CONSUMERS

In addition, by accessing an individual’s bank account directly via Open Banking – subject to the consumer’s consent – credit providers can obtain a granular picture of income and expenditure, complementing the traditional credit reference data. This helps finance providers to make lending decisions that are tailored to the needs of each individual, whilst also simplifying the process for the consumer and reducing the need for manually providing bank statements and other documentation.

Open Banking can also help with stress testing and identifying where consumers may experience an unexpected drop in income that could have a significant impact on their financial stability and ability to make repayments on their loans or credit agreements.

Credit education tools, underpinned by Open Banking technology, that help consumers to understand their credit information and how it’s being used by lenders, are also a valuable support. These tools empower people to monitor and manage their financial standing and we’ve seen, with TransUnion’s solution which is used by many leading banks, that this can lead to a significant increase in credit scores for customers in the lowest score bands – an indication it’s helping those that need it the most.

With the new Consumer Duty, the FCA has highlighted that it has never been more important for customers to get the outcomes that they need from consumer credit markets, to help them cope with turbulence and restore stability.

TAILORED OFFERINGS

Some consumers will be turning to credit to help them weather the storm that the rising cost of living has brought. Our Consumer Pulse study shows, for example, that nearly half (49%) are planning on taking out a new credit card in the coming year. Given the wider turbulence, having the right data will be crucial so that lenders have an accurate and up-to-date picture of the applicant’s financial standing.

Using nuanced, trended credit data and analytics – via advanced solutions like TransUnion’s TrueVision – lenders can take advantage of a continued sight into where a consumer has been and is going in their financial journey. Hence, they can be better equipped to make informed decisions about appropriate credit, as well as providing tailored support where needed. That could include flexible repayment options or reducing interest rates, for example, by incorporating mortgage-specific scores for assessing creditworthiness of new applicants.

With the new Consumer Duty, the FCA has highlighted that it has never been more important for customers to get the outcomes that they need from consumer credit markets, to help them cope with turbulence and restore stability. By utilising data and analytics to make informed decisions and assess affordability, lenders can support their customers through the cost-of-living crisis and build loyalty and trust as a result.