By Clayton Howes, CEO and cofounder MoneyMe
It is evident that the response to COVID-19 has resulted in extensive economic disruption due to lockdown measures curtailing industries as broad as arts and entertainment, travel and hospitality, and retail. Employment has destabilised, with follow-on threats to the property market for both rental investments and mortgages. While a moratorium on evictions and grace offered by lenders for delayed repayments will go some way to ease financial stress for many Australians, there’s no doubt that this pandemic is a catalyst for change in the loan market, especially now that the federal treasurer John Frydenberg has announced Australia is officially in its first recession since the 1990’s.
The first aspect of this change is the apparent need for a digital solution that works outside of changing human circumstances. With face-to-face appointments no longer possible, and staff in the financial services sector disoriented by the work environment shifting from office to home, lenders with an automated, digital operating solutions and online distribution channels can provide continuity of service.
The financial services industry has spent the last few years aggressively moving away from in-person experiences, such as branches in shopping centres, towards a virtual version that better suits today’s world. The pandemic has simply fast-tracked the relevance of a digital business model and things are unlikely to revert back to how it was before the impact.
Agility in the time of volatility
Rapid changes in financial circumstances from the individual up to industry level have exposed flaws in the traditional system of lending. Credit history as an accurate evaluation of creditworthiness is now not a benchmark that is a lot less reliable, as even people in stable employment have had their financial status re-examined.
Two factors are driving the loan market at the moment. Firstly, a large part of our population in a matter of a week or two became financially uncertain and stressed with the consequence of being without backup finance has risen. Secondly, their reliance on having flexible repayments and a lender who can show compassion and flexibility has also become important as uncertainty with regard to unemployment or underemployment kicks in.
A system built on up to date data and a current understanding of the borrower’s financial circumstances is essential to make a balanced decision between providing required finance and responsible lending practices. Being able to adapt to the new lending paradigm at this pace requires agility, both in the business and in the system used to allow for quick responses to changing borrower behaviours. It is crucial that decision points capture the true nature of the trend; it is also clear that traditional lending evaluations do not manoeuvre fast enough to keep up with changes in the borrowers’ environment as we are seeing now.
Moreover, agility is not just the answer to the special circumstances of a pandemic, it is the new norm going forward. The organisations and lending products that have the speed and flexibility – flexible terms, flexible amounts, flexible repayments – to adjust during a time of volatility will also be ready for a future where economic shifts are faster and less predictable than they have been in the recent past.
Trust and transparency will also be a vital part of the new lending paradigm: trust that lenders will continue to provide strong access to credit, and transparency in how they will provide it. Customers who don’t have a good credit history will find it challenging to access credit in this time of need but will also be cautious about predatory lending, so giving them the opportunity to borrow from a mainstream lender is comforting. Perhaps the only thing worse than a pandemic is people taking advantage of others during a pandemic.
How JobKeeper will align
The Federal Government’s JobKeeper payments (set at $1,500 per fortnight) are providing some income protection for workers and businesses, and security for lenders, should recipients wish to borrow money as a stopgap. We may also see other industry-specific subsidies come into effect over coming months.
This means lenders who use employment as a credit decision point are therefore able to use job tenure and consistency of employment as a baseline for creating a demographic likely to receive this aid, knowing that the borrower’s income is not zero, even if it may be lower than their previous regular paycheque. This gives assurance to lenders, who are then able to keep credit running through the economy while lending responsibly.
The new lending paradigm is a constant balancing act between high demand for funds and responsible lending practices, ensuring borrowers can access the finance they need without being laden with debt they cannot hope to repay effectively in the difficult economic circumstances that have already arrived. The concept of creditworthiness is shifting and only lenders that have the agility to address disruption will be prepared for the times ahead.