GAIN Credit


This winter will be hard. We can say that with certainty. Rising costs will impact everyone. The ‘middle classes’ may have some disposable income, and perhaps some savings. However, those already financially vulnerable will really struggle. Some will turn to credit, but will credit be there?

Data suggests average pay rises in the last year were higher for those on lower incomes, both compared to the previous few years, and other groups. Whilst these will not fully counter rampant inflation, it does perhaps point to some consumers being able to retrench, at least in part, to weather some of the storm.

That said, clearly many will struggle, and credit may not be there to help. The focus on affordability will make this downturn different to those in the past. Historically many firms focused on managing risk. Prime lenders would tighten lending criteria and consumers would flow down to near-prime or sub-prime. who traded higher risk with higher interest rates.

This time, with a heightened focus on proving affordability, those consumers won’t qualify for lending full stop. Whether they would have been able to cut back in order to afford a loan won’t be visible from historical banking data. Higher interest charges mean higher repayments which will be even further out of reach for those ‘falling from prime’. There will be real challenges for this group. Government doesn’t have enough money in the coffers to help, and charities will potentially be overrun.

Knowing costs are going up, firms need to think about their affordability checks. Many rely on consumer declarations of expenses, yet consumers will naturally think about today, not six months time. Firms may ‘floor’ expenses using data, for example from the Office for National Statistics.

Again, this data is based on the past, not where we are heading. Knowing what is coming, truly consumer-focused firms will build inflation into their approach, perhaps looking at particular categories, such as utilities, and factoring in forthcoming price increases to consumers declared expenses. This will, of course, impact lending volumes, but also protect consumers and firms in the long run.

Just like in the pandemic, once again the industry must play its part. With consumer confidence at an all-time low, we should expect customers to be more concerned about their money, want to better understand their situation, and engage more frequently. Firms should be planning now for increases in contact rates.

We know from research done by the Money and Mental Health Policy Institute that the phone is the most stressful channel for consumers, even more so for those who may be vulnerable. Digital services, done well, can facilitate engagement, in particular with those who have never felt the strain of financial difficulties before. It can reduce feelings of shame and empower people to help themselves through self-serve processes.

With increasingly complex requests now being handled through digital, at high volume, it can be a win for both parties. All that said, digital is not the panacea; offering customers choice, which includes a friendly voice for those that want it, will continue to be key.

There is no magic wand, but educating customers, drawing attention to their rising costs, and helping ensure decisions are well considered, will be crucial. This work starts now. There are opportunities for us to work together, intelligently signposting people to sources of support so that every referral counts, delivering,
wherever possible, good outcomes. Some firms will go further, helping people find ways to maximise income or reduce costs.

Others will look to proactively help customers showing signs of stress, for example triggering support communications if they see increasing balances across lenders. One thing is for sure, showing compassion when things get hard should be on all responsible firms’ agendas. FCA expectations are clear. Firms should be able to demonstrate they have put good consumer outcomes at the heart of their business, and at every stage of the customer lifecycle. We should all be reflecting on whether we are setting customers up for success.