By James Jones, Head of Consumer Affairs, Experian
Consumer credit is a major part of our economy. Most borrowers repay without difficulty, but it’s right for lenders to focus on affordability as well as credit risk when making those all-important decisions on creditworthiness.
Lenders must always consider consumers’ best interests and take every necessary step to avoid potential financial distress. The credit industry needs to not only consider whether a customer can or will be able to repay, but whether they can repay affordably.
When sufficient data is available, the best decisions are made. A typical credit card debt of approaching £2,500 in one household is affordable when it’s attributed to a high earner with a significant amount of disposable income, perhaps even on a 0% deal for a further two years. However, that figure doesn’t present the same scenario for an individual with less than £200 left over at the end of each month, after paying for accommodation and essential monthly services. The key is having a 360-degree view of each person’s financial circumstances.
It’s a positive sign that the FCA recognises the importance of not being over-prescriptive with the measures that companies should be looking to use when assessing consumer affordability. Over-indebtedness is a key challenge for both individuals and the economy. It’s something that needs to be taken seriously.
The answer is in the data. Sourcing new relevant information and taking a new approach to existing information sources is key to driving better, more responsible lending decisions.
We can all recognise that consumer credit plays an integral role in our society and is mainly beneficial, allowing borrowers to buy goods and services and pay them off over time. It helps people smooth out the peaks and troughs in income and spending, and to invest in the future.
Putting the consumer first is essential, but it needs to be carefully thought through. Proportionality is crucial. Each individual needs to be treated as exactly that. There’s no one-size-fits-all approach.
Lenders are increasingly recognising that they need to apply greater scrutiny when making lending decisions. Digital technology, such as mobile apps, allows lenders to create new pathways to process credit applications and source data.
There is also acknowledgement that income and expenditure data needs to be considered in relation to a credit score if an accurate picture of a customer’s creditworthiness is to be achieved.
Open Banking promises benefits for both sides. Loans are processed faster, costs are reduced, and decisions are made with greater accuracy. Right now, lenders are now actively looking at incorporating these factors into their decision-making process.
Given the volume of data that should be taken into account, intermediaries can play an important role in helping lenders and consumers gain the best results, and safely. Lenders will not be able to manage this alone. They will need solutions that can accommodate consumers who agree to share data, as well as those that choose not to.
All parties need to understand and agree on automated methods of data sharing to present timely and accurate holistic views of relevant customers. Technical issues such as categorisation, managing the data exchange, including caching and throttling of data, and having legitimate processing grounds, will need to be thought through and addressed.
Yet the promised rewards to businesses are considerable, certainly in terms of creating new services to help deliver new value propositions to customers. Potentially benefits include the use of data to fuel better automated decisioning, leading to more accurate and speedy credit decisions, reduced fraud risk, and in reporting and monitoring to help with customer support.
When it comes to those customers who opt to not share their banking data, traditional credit risk and affordability approaches can still prevail, such as the credit score, CATO (current account turnover) data and Office for National Statistics expenditure estimates.
Consumers sit at the centre of this new world of data-driven insight and all credit industry services need to focus on their well-being to minimise the risks and drive maximum benefits for all.