by Mark Dunleavy, senior vice president financial services, Software AG
Although it does not formally take over from the Office of Fair Trading until April 2014, the Financial Conduct Authority (FCA) has been quick out of the blocks to redefine the rules it wants to see in place regarding consumer credit.
Recently, it has announced that payday lenders will not be allowed to roll over loans more than twice, and will face tough restrictions on how many times they can to try to take cash from borrowers’ accounts. The new regulations, which will also come into force in April 2014, are designed to address problem areas in what the FCA describes as ‘high-risk short-term loans’.
For example, in response to the fact that some firms do not properly assess whether or not an individual will be able to pay back a loan, it will become mandatory for all lenders to do an affordability check on borrowers. This could make a big difference, especially when considering a recent government survey which found that one in five customers were not asked about their financial situation when they applied for a payday loan.
Some firms have encouraged multiple rollovers without taking into account a customer’s individual circumstances and under the new rules the number of rollovers will be limited to two. Similarly, some companies use continuous payment authorities (CPAs) to take money from customers when they can’t afford it and in future it will not be possible to use a CPA on more than two occasions.
Clearly, much of the FCA’s focus is on stamping out high profile examples of poor lending practices with regard to vulnerable consumers. However, while the headlines have concentrated on the impact this will have on short-term, unsecured ‘payday loan’ industry, the regulatory changes will apply to any credit transaction, involving credit cards, goods and services sold on credit, as well as providers of personal loans.
Empowering the business
The concepts of due diligence and risk management in financial services are well-established, with banks and other lenders adopting traditional tools and processes to analyse and understand each individual’s credit-worthiness.
Payday lenders meet the needs of a specific market and can legitimately charge a reasonable premium in offering loans linked to a higher level of risk. The FCA view is that this can be achieved – to the benefit of both lender and borrower – by adopting a similar approach to risk analysis. In doing so, the tougher regulations do not simply set a higher bar for compliance but also reflect best practice in providing a valuable service while protecting the interests of the consumer.
There are a number of key elements in developing a solution which delivers against the twin goals of regulatory compliance and providing a good customer experience.
First, it is essential to get visibility of existing processes – in this case, those linked to signing off a payday loan request – in order to make the changes required to meet new regulatory demands. This is important in improving the way in which existing products and services are delivered but also in creating dynamic ways to bring new products to market faster and more effectively.
There are two critical elements here. This is a business rather than an IT issue. Adopting the right tools will empower business managers to define the appropriate processes and then pass these on to IT for implementation.
At the same time, this creates the opportunity to embrace best practice from the outset in identifying and developing new processes.
Having defined the process, the next step is to create the business rules – a set of basic ABCs – covering customer details and whether or not they meet the firm’s loan criteria. Once again, latest software tools enable the business to own the process and then work with IT on effective deployment.
Combining big data, process and analytic solutions
The new processes and rules need to be run against data. In the case of a payday loan, for example, in which customer contact is typically via the website or telephone, a high volume of transactions demands rapid decision-making.
In a big data environment, this requires data to be rapidly aggregated and analysed from multiple sources, including existing customer information, credit ratings, evidence of outstanding court orders and even social media information such as the applicant’s Twitter or Facebook activity.
Data is also important in supporting effective sentiment metrics. Like other companies providing credit, payday lenders are concerned about the public image of their business and the broader sector. They want to know what customers think about the service they receive and, in the era of social media, encourage customers to share positive experiences as well as complaints about service.
To enable seamless change, all these elements must form part of a flexible open architecture that allows the business to adapt to evolving market conditions. For example, business rules will never be static and so will require continuous oversight and adaptation by the business.
Adopting stand-alone solutions to immediate pain points are likely to fall short of the ideal, whereas an underlying open architecture will allow the business to adapt quickly and easily to new regulations or market conditions.
For all companies involved in consumer credit transactions, the winners will be those who can effectively differentiate their offering through tailored, personalised customer interactions. And as customers, we will stay loyal to those businesses who know who we are and understand the challenges we face.