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CREDIT CARD DEBT — ARE WE ALL PULLING TOGETHER?

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CREDIT CARD DEBT — ARE WE ALL PULLING TOGETHER?

Bruce Curry – senior principal consultant for FICO 

Bruce Curry is a senior principal consultant for FICO, working with clients across EMEA on debt management. He blogs at http://www.fico.com/en/blogs/category/collections-recovery/.

As the scrutiny on the UK credit card Industry intensifies, with the FCA’s consultation out on how to manage the 3.3 million ‘persistent credit card debtors,’ a big question remains hanging: When will all parties start to manage borrowers at a customer level, not a product level?

There is a vast difference between customer-level and product-level management, and many organisations have chosen the customer level. However, in the UK a major bank is moving away from customer-level collection strategies because its experience is that they get too complicated for the amount of value they deliver. They do, however,continue to work the analytics at a customer level, which is what many top banks desire to do.

Several leading institutions are very clear about what the customers want, and are using the words “identity”, “control”, “language” and “convenience” to shape the strategy for customer treatment. But to shape the strategy at a customer level, you have to look at the customer in the round. You would not apply the same treatment and tolerance to a customer with a full suite of secured and unsecured products nearing retirement and carrying an EAD of >£350K as you would a customer with only unsecured products starting out on their career with an EAD of, say, £14K.

New Challenges in Customer-Level Management

What is making customer-level treatment difficult? Well, there remain the age-old challenges for many organisations of organising their data and creating a robust ‘Golden Record,’ and then deploying analytics based on that record. Many organisations are not there yet and whilst attempting to close this gap they are being challenged by what appear to be opposing requirements:

  • Customers want to be known and understood – so they expect organisations to have a holistic view of all their liabilities and investments. That’s on any interaction, 24/7 across all digital and non-digital channels.
  • The regulator wants organisations to treat the customers in line with their circumstances – TCF and CONC have been around for some time now and to do this requires accumulation and validation of a wide set of data.
  • General Data Protection Regulations (GDPR) requires that you use minimum data to achieve the decision objective and only where explicit permission has been given to use such data for such a purpose (except where the use of that data is to enforce a contractual obligation).

Add to the above the accommodation of PSD2 and the balance sheet implications on treatment from IFRS9 and it becomes clear that several of the requirements imposed on institutions are in conflict. Some might say healthy conflict, but this stress has not come by design. It is here because differing bodies are progressing their differing objectives in isolation.

  • The FCA is looking to ensure that lenders lend responsibly, borrowers borrow what they can afford and any changes in customer vulnerability are understood and accommodated in the treatment of those customers.
  • GDPR is meant to increase the protection of customer data retention, use and portability.
  • IFRS9 is aimed at ensuring a greater degree of risk assessment and financial prudence to cover changing risk.

There is evidence of Institutions needing more information to determine the right treatment for customers — but only information they have explicit consent to use, or (under GDPR) information that meets stringent use tests. Institutions must demonstrate appropriate levels of forbearance (under FCA CONC) — while holding more provision (under IFRS9) to cover the potential lifetime losses of a status 2 customer, whose deteriorated risk is evidenced by the level of forbearance they require.

How Will This Play Out?

Let’s take an example to see how these conflicts might play out. Let’s say — as has been suggested in the FCA’s consultation for credit card persistent debtors — there is an action such as the suspension of credit card use.

  • Will that in itself be an indicator of deteriorating risk?
  • Will that mean that both the issuer and other creditors of the card holder will need to action and provide for any other of the customer’s borrowings under IFRS9?
  • Will a suspension of use of that card or an aggressive credit limit decrease exacerbate the problems for those customers who are dependent on the card as a seasonal financial ‘pressure valve’? Evidence of the past has been that pre-delinquency treatment on cards has often accelerated entry into arrears for a high proportion of customers are ‘living on the card.’

Credit card issuers could be driving a significant number of customers into status 2 under IFRS 9 — not only for themselves but for other lenders. If those other lenders can’t afford to keep these customers with a lifetime provision,where do the customers go? Will any future borrowing be at a higher cost? Does that not defeat the objective of the credit card initiative to help these borrowers?

You can see the conflicts. Not getting this right is going to be expensive to the customer, the card issuer and other lenders who have the same customer. Managing down over-indebtedness is never wrong, but what matters is how it is done. When so many requirements focus at a customer level (TCF, GDPR, IFRS9) then a product-level initiative may bring as many challenges as it solves.

Different Priorities for Different Market Segments

Many organisations seem focused on adapting what they have to make it fit the new requirements. Very few seem to have stood back and asked, “Is now the time to reshape how we do what we do?”

A small number of organisations do seem to be looking at how they turn these seismic demands on them into seismic changes, to closer meet the needs of their customers,as well as the requirements of the regulatory bodies. And of this group, not many seem focused at a product level.

The fintechs, which have the distinct advantage of no legacy systems, are setting themselves up from the outset to automate data usage and provide credit through low-cost, highly efficient technologies. However, many of them enter the market as mono-lines. They are proving good at what they do; evidence of their success is in the growth of the fintech sector, and the fact that they took the vast majority of this year’s credit awards for the quality of service provision.

But mono-line creditors increase the challenge for all to manage a customer at a customer level.

A number (but not a large number) of traditional lenders are looking at how they can consolidate the multi-dimensional view of the customer through their deep data pools and analytics, and leverage that insight to the benefit of the customer experience and profitability. They are pledging to stay focused on the customer no matter what the new regulatory and accounting landscape looks like.

Then there are the disrupters, those well-established organisations (e.g. retailer banks) that are looking to expand their products and services into the credit arena. Much of this ‘disrupter lending’ is happening outside of the UK (nano-lending in East Africa, mobile credit in the Philippines and WeBank on WeChat in China), but are expected to be quickly adopted here once they prove their worth.

Trying to Do the Right Thing

So, are we all pulling in the same direction on the same fronts?If the aim of the disparate regulation is prudent and appropriate lending, risk assessment and fair treatment of the customer, I’d have to say that many institutions are pulling in the same direction —  and often despite (rather than because of) the regulations intended to enforce that treatment.

It remains to be seen whether the additional costs under IFRS9 for customers whose risk increases or the TCO of data and technology to meet the demands of GDPR will allow the diverse range of credit-issuing organisations to invest competitively in managing customers effectively, when within their organisations or in others, action is being taken at a product level that affects both the risk and the treatment at a customer level.

All of this change is consuming energy, budget and competitive focus at a time of huge competitive disruption (fintechs, digital, cybersecurity, Brexit).And the question remains: Despite their best efforts, will all of lenders’ investment in true customer-level credit management be thwarted by the implications of product-level initiatives?

One thing’s for sure: There will continue to be many an interesting day ahead for those working in credit risk management.

Bruce Curry is a senior principal consultant for FICO, working with clients across EMEA on debt management. He blogs at http://www.fico.com/en/blogs/category/collections-recovery/.

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Will covid-19 end the dominance of the big four?

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Will covid-19 end the dominance of the big four? 1

By Campbell Shaw, Head of Bank Partnerships, Cardlytics

Across the country, we are readjusting to refreshed restrictions on our daily lives, as we continue to navigate the seemingly unnavigable waters of the coronavirus pandemic.

For all of us, the pandemic has made life anything but ‘normal’, and with social distancing here to stay, it will remain so for a long time yet. These paradigm shifts have impacted every aspect of life, including how we bank.

Focus is already turning to the role the big banks are playing through the pandemic, with experts fearing the economic downturn will only cement the position of the ‘big four’ traditional players.

But has the pandemic shaken the dominance of the big banks? Or has it simply confirmed their position?

Turning to tech

There’s no doubt that the pandemic has caused the big players to be challenged like never before on tech.

Classically slower to adapt to developments in the market, increased demand for online services and contactless payment systems have turbocharged the big banks’ need to act like a challenger.

And they have, agilely adapting to this new normal by updating systems and services to ensure customers’ safety and financial security come first.

Scale is staying power

In these new times, the power and influence of the big players has also been proven.

The big four have provided the lion’s share of the government-backed loans designed to help small and medium-sized businesses through the pandemic. It has also been the big four offering the majority of payment holidays for customers on their mortgages, debt and credit cards.

However, it’s important to note that their power to retain customers goes much deeper than their market share.

Our switching study, which looked at the reasons behind customer switching, found that even before the pandemic, despite nearly half (48%) of UK adults admitting they know they aren’t getting the best deal with their current bank, half have never switched their current account.

That’s often because of the value they can provide to their customers, through personalized service, offers and rewards that keeps customers engaged and invested in them. As brands increasingly look to

Focus on finances

As the world becomes a more financially insecure place, due to COVID-19, there’s been a marked shift towards more attention on finances, which has affected not only the business functions of banks but has impacted banking relationships with customers at their core.

From deals to savings, customers now more than ever are re-evaluating how they bank, and how they manage their money.

The impact on the big four is more pressure than ever to keep up with the best interest rates and deals. That can be difficult for a big, and often slower moving, organisation and could be a stumbling block for them in the months to come.

However, on the plus side, the big four can lean into their sophisticated loyalty schemes, using offers and deals from partner brands to demonstrate value to customers and build up their loyalty.

Engaging with purpose

The pandemic has seen many banks acting with a renewed sense of purpose. Banking has had to be more adaptable than ever before – fitting the needs of those who may be feeling financial stress or dealing with unprecedented challenges.

And showing a little heart can go a long way when it comes to increasing customer loyalty and boosting a bank’s reputation.

Over the last months, traditional banks have been quick to adapt their products and services, in response to the demands and challenges their customers have been face.

No doubt, continuing to build more meaningful, supportive and engaging customer relationships, whether it is online or on the newly reopened high-street, will be critical to banks’ dominance as we look to the future.

Bring on the challengers

However, with their meteoric rise ahead of lockdown, we must keep an eye on the challengers, who still have the potential to knock traditional players off their pedestal.

We found that more than three million people in the UK opened a current account with a new bank last year. Our research found that traditional banks made up well over half (69%) of the accounts UK adults switched from, while newer digital challenger banks such as Monzo, Starling Bank and Revolut made up 25% of current accounts switched to. And these fast moving, fast growing challengers may see further growth if traditional banks are stifled by the declining high-street.

What’s more, the high street could yet prove to be the Achilles heel of the bigger players, as shifting budgets and increasing overheads in the context of a more online banking experience could see more big players struggle with their physical presence, making way for the digital challengers to thrive.

So, while the dominant players may have the lead, they should still keep an eye on the challengers as we look ahead to the next, uncertain, six months.

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To take the nation’s financial pulse, we must go digital

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To take the nation’s financial pulse, we must go digital 2

By Pete Bulley, Director of Product, Aire

The last six months have brought the precarious financial situation of many millions across the world into sharper focus than ever before. But while the figures may be unprecedented, the underlying problem is not a new one – and it requires serious attention as well as  action from lenders to solve it.

Research commissioned by Aire in February found that eight out of ten adults in the UK would be unable to cover essential monthly spending should their income drop by 20%. Since then, Covid-19 has increased the number without employment by 730,000 people between July and March, and saw 9.6 million furloughed as part of the job retention scheme.

The figures change daily but here are a few of the most significant: one in six mortgage holders had opted to take a payment holiday by June. Lenders had granted almost a million credit card payment deferrals, provided 686,500 payment holidays on personal loans, and offered 27 million interest-free overdrafts.

The pressure is growing for lenders and with no clear return to normal in sight, we are unfortunately likely to see levels of financial distress increase exponentially as we head into winter. Recent changes to the job retention scheme are signalling the start of the withdrawal of government support.

The challenge for lenders

Lenders have been embracing digital channels for years. However, we see it usually prioritised at acquisition, with customer management neglected in favour of getting new customers through the door. Once inside, even the most established of lenders are likely to fall back on manual processes when it comes to managing existing customers.

It’s different for fintechs. Unburdened by legacy systems, they’ve been able to begin with digital to offer a new generation of consumers better, more intuitive service. Most often this is digitised, mobile and seamless, and it’s spreading across sectors. While established banks and service providers are catching up — offering mobile payments and on-the-go access to accounts — this part of their service is still lagging. Nowhere is this felt harder than in customer management.

Time for a digital solution in customer management

With digital moving higher up the agenda for lenders as a result of the pandemic, many still haven’t got their customer support properly in place to meet demand. Manual outreach is still relied upon which is both heavy on resource and on time.

Lenders are also grappling with regulation. While many recognise the moral responsibility they have for their customers, they are still blind to the new tools available to help them act effectively and at scale.

In 2015, the FCA released its Fair Treatment of Customers regulations requiring that ‘consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale’.

But when the individual financial situation of customers is changing daily, never has this sentiment been more important (or more difficult) for lenders to adhere to. The problem is simple: the traditional credit scoring methods relied upon by lenders are no longer dynamic enough to spot sudden financial change.

The answer lies in better, and more scalable, personalised support. But to do this, lenders need rich, real-time insight so that lenders can act effectively, as the regulator demands. It needs to be done at scale and it needs to be done with the consumer experience in mind, with convenience and trust high on the agenda.

Placing the consumer at the heart of the response

To better understand a customer, inviting them into a branch or arranging a phone call may seem the most obvious solution. However, health concerns mean few people want to see their providers face-to-face, and fewer staff are in branches, not to mention the cost and time outlay by lenders this would require.

Call centres are not the answer either. Lack of trained capacity, cost and the perceived intrusiveness of calls are all barriers. We know from our own consumer research at Aire that customers are less likely to engage directly with their lenders on the phone when they feel payment demands will be made of them.

If lenders want reliable, actionable insight that serves both their needs (and their customers) they need to look to digital.

Asking the person who knows best – the borrower

So if the opportunity lies in gathering information directly from the consumer – the solution rests with first-party data. The reasons we pioneer this approach at Aire are clear: firstly, it provides a truly holistic view of each customer to the lender, a richer picture that covers areas that traditional credit scoring often misses, including employment status and savings levels. Secondly, it offers consumers the opportunity to engage directly in the process, finally shifting the balance in credit scoring into the hands of the individual.

With the right product behind it, this can be achieved seamlessly and at scale by lenders. Pulse from Aire provides a link delivered by SMS or email to customers, encouraging them to engage with Aire’s Interactive Virtual Interview (IVI). The information gathered from the consumer is then validated by Aire to provide the genuinely holistic view of a consumer that lenders require, delivering insights that include risk of financial difficulty, validated disposable income and a measure of engagement.

No lengthy or intrusive phone calls. No manual outreach or large call centre requirements. And best of all, lenders can get started in just days and they save up to £60 a customer.

Too good to be true?

This still leaves questions. How can you trust data provided directly from consumers? What about AI bias – are the results fair? And can lenders and customers alike trust it?

To look at first-party misbehaviour or ‘gaming’, sophisticated machine-learning algorithms are used to validate responses for accuracy. Essentially, they measure responses against existing contextual data and check its plausibility.

Aire also looks at how the IVI process is completed. By looking at how people complete the interview, not just what they say, we can spot with a high degree of accuracy if people are trying to game the system.

AI bias – the system creating unfair outcomes – is tackled through governance and culture. In working towards our vision of a world where finance is truly free from bias or prejudice, we invest heavily in constructing the best model governance systems we can at Aire to ensure our models are analysed systematically before being put into use.

This process has undergone rigorous improvements to ensure our outputs are compliant by regulatory standards and also align with our own company principles on data and ethics.

That leaves the issue of encouraging consumers to be confident when speaking to financial institutions online. Part of the solution is developing a better customer experience. If the purpose of this digital engagement is to gather more information on a particular borrower, the route the borrower takes should be personal and reactive to the information they submit. The outcome and potential gain should be clear.

The right technology at the right time?

What is clear is that in Covid-19, and the resulting financial shockwaves, lenders face an unprecedented challenge in customer management. In innovative new data in the form of first-party data, harnessed ethically, they may just have an unprecedented solution.

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The Future of Software Supply Chain Security: A focus on open source management

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The Future of Software Supply Chain Security: A focus on open source management 3

By Emile Monette, Director of Value Chain Security at Synopsys

Software Supply Chain Security: change is needed

Attacks on the Software Supply Chain (SSC) have increased exponentially, fueled at least in part by the widespread adoption of open source software, as well as organisations’ insufficient knowledge of their software content and resultant limited ability to conduct robust risk management. As a result, the SSC remains an inviting target for would-be attackers. It has become clear that changes in how we collectively secure our supply chains are required to raise the cost, and lower the impact, of attacks on the SSC.

A report by Atlantic Council found that “115 instances, going back a decade, of publicly reported attacks on the SSC or disclosure of high-impact vulnerabilities likely to be exploited” in cyber-attacks were implemented by affecting aspects of the SSC. The report highlights a number of alarming trends in the security of the SSC, including a rise in the hijacking of software updates, attacks by state actors, and open source compromises.

This article explores the use of open source software – a primary foundation of almost all modern software – due to its growing prominence, and more importantly, its associated security risks. Poorly managed open source software exposes the user to a number of security risks as it provides affordable vectors to potential attackers allowing them to launch attacks on a variety of entities—including governments, multinational corporations, and even the small to medium-sized companies that comprise the global technology supply chain, individual consumers, and every other user of technology.

The risks of open source software for supply chain security

The 2020 Open Source Security and Risk Analysis (OSSRA) report states that “If your organisation builds or simply uses software, you can assume that software will contain open source. Whether you are a member of an IT, development, operations, or security team, if you don’t have policies in place for identifying and patching known issues with the open source components you’re using, you’re not doing your job.”

Open source code now creates the basic infrastructure of most commercial software which supports enterprise systems and networks, thus providing the foundation of almost every software application used across all industries worldwide. Therefore, the need to identify, track and manage open source code components and libraries has risen tremendously.

License identification, patching vulnerabilities and introducing policies addressing outdated open source packages are now all crucial for responsible open source use. However, the use of open source software itself is not the issue. Because many software engineers ‘reuse’ code components when they are creating software (this is in fact a widely acknowledged best practice for software engineering), the risk of those components becoming out of date has grown. It is the use of unpatched and otherwise poorly managed open source software that is really what is putting organizations at risk.

Emile Monette

Emile Monette

The 2020 OSSRA report also reveals a variety of worrying statistics regarding SSC security. For example, according to the report, it takes organisations an unacceptably long time to mitigate known vulnerabilities, with 2020 being the first year that the  Heartbleed vulnerability was not found in any commercial software analyzed for the OSSRA report. This is six years after the first public disclosure of Heartbleed – plenty of time for even the least sophisticated attackers to take advantage of the known and publicly reported vulnerability.

The report also found that 91% of the investigated codebases contained components that were over four years out of date or had no developments made in the last two years, putting these components at a higher risk of vulnerabilities. Additionally, vulnerabilities found in the audited codebases had an average age of almost 4 ½ years, with 19% of vulnerabilities being over 10 years old, and the oldest vulnerability being a whopping 22 years old. Therefore, it is clear that open source users are not adequately defending themselves against open source enabled cyberattacks. This is especially concerning as 99% of the codebases analyzed in the OSSRA report contained open source software, with 75% of these containing at least one vulnerability, and 49% containing high-risk vulnerabilities.

Mitigating open source security risks

In order to mitigate security risks when using open source components, one must know what software you’re using, and which exploits impact its vulnerabilities. One way to do this is to obtain a comprehensive bill of materials from your suppliers (also known as a “build list” or a “software bill of materials” or “SBOM”). Ideally, the SBOM should contain all the open source components, as well as the versions used, the download locations for all projects and dependencies, the libraries which the code calls to, and the libraries that those dependencies link to.

Creating and communicating policies

Modern applications contain an abundance of open source components with possible security, code quality and licensing issues. Over time, even the best of these open source components will age (and newly discovered vulnerabilities will be identified in the codebase), which will result in them at best losing intended functionality, and at worst exposing the user to cyber exploitation.

Organizations should ensure their policies address updating, licensing, vulnerability management and other risks that the use of open source can create. Clear policies outlining introduction and documentation of new open source components can improve the control of what enters the codebase and that it complies with the policies.

Prioritizing open source security efforts

Organisations should prioritise open source vulnerability mitigation efforts in relation to CVSS (Common Vulnerability Scoring System) scores and CWE (Common Weakness Enumeration) information, along with information about the availability of exploits, paying careful attention to the full life cycle of the open source component, instead of only focusing on what happens on “day zero.” Patch priorities should also be in-line with the business importance of the asset patched, the risk of exploitation and the criticality of the asset. Similarly, organizations must consider using sources outside of the CVSS and CWE information, many of which provide early notification of vulnerabilities, and in particular, choosing one that delivers technical details, upgrade and patch guidance, as well as security insights. Lastly, it is important for organisations to monitor for new threats for the entire time their applications remain in service.

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