We have seen extraordinary levels of Government-backed support made available to the public and businesses alike in responding to the health crisis by our banks through payment holidays, grants and the furlough scheme. While we keep collective fingers crossed that the economy bounces back quickly, the consequences of loan payment freezes, mortgage payment holidays and business interruption loans will no doubt last for years.
As recent Bank of England figures indicate, many customers have opted to take a payment holiday during lockdown. The challenge for lenders will be to predict who will come out of the freeze without difficulty, and who will remain in the cold.
Understanding customer behaviour during the crisis is an unenviable task. From identifying consumers who used a payment holiday due to real financial difficulty to consumers who used them as a tool for clever management of personal finances has been pretty much impossible for lenders. Hands up any homeowners who froze mortgage payments to repay credit card balances?
Add to this the challenge of working out which consumers have been furloughed and likely to return to work or conversely who is facing the possibility of redundancy, and you would think that lenders are attempting little more than a crystal ball gazing exercise. It’s just one of the many factors contributing to the contraction of personal lending volumes over the past few months. However, there is hope. And as usual, in our darkest hours, we can look to technology and data to help save the day.
Open Banking data to the rescue
Open Banking presents itself as a very real remedy to help understand a prospective borrower’s financial position and in a world of uncertainty, it shows better indicators of their current and future affordability. The ability to analyse a customer’s entire transaction history is not just a benefit for responsible lenders, it presents more visibility and accountability to the consumer and helps prevent consumers from taking on more debt than they can afford.
Income and affordability checks can be completed down to a penny based on real-time data, furloughed applicants can be identified, and payment holidays spotted. Open Banking data has the potential to give a here and now view for lenders that is different to credit bureau data at a time when it’s needed most, benefitting both lenders and consumers alike.
With no effective way other than antiquated manual labour to check for payment freezes or furloughed status, it’s not surprising that many lenders are working hard on integrating Open Banking data into their platforms and customer journeys to get this real-time view they so desperately need.
But will consumers consent?
This shift towards Open Banking means being able to analyse more relevant data from consumers prior to making a lending decision, but none of this can happen without the consent of the consumer who hold all the power in this relationship. If consumers don’t feel comfortable sharing their data then lenders won’t get their hands on the data they so desperately want.
Here at Monevo, as a platform that powers the personal loan comparison and marketplaces behind some of the world’s most well-known consumer-facing brands and fintechs, we’re very aware of the potential benefits of Open Banking. In fact, we are soon to release our own Open Banking journey and integration options at various touch points during the loan application process. While we are excited about the opportunity, in many ways the release represents a step into uncharted territory in terms of consent rates. How many consumers will opt in, or opt out, is an unknown at the moment, but undeniably there is a great opportunity to improve outcomes for all involved if they choose to share their data.
Understanding the data
Assuming lenders do get access to the data, it’s not a silver bullet. The depth of Open Banking categorisation data throws up new challenges for those in credit risk in these strange times. For example, grocery shopping is historically a constant spend (as opposed to discretionary), so lenders normally count 100% of groceries in assessing affordability. But under lockdown, consumer discretionary spending has moved around and, in some cases, to merchants that are classified under grocery shopping. Pounds normally spent at pubs and restaurants would previously not class as essential cost but have been spent online at Tesco or Amazon during lockdown.
The hospitality industry’s pain has been the supermarkets gain here, but it changes how affordability assessments need to be looked at. Another challenge is the treatment of those with gambling spend, which, for many, has gone up during lockdown. This is a veritable Pandora’s box in determining what spending levels constitute risk for lenders and consumers that are looking for credit. Normalising these changes in behaviour and interpreting them in the context of credit risk will not be straight forward.
Welcome to the future
Although a rethink of conventional rules will be required, what is certain is that the appetite to lend remains. In addition, as a sector we have never had more tools available to us to try and crack the enigma code of Covid-19. By utilising these tools effectively, we can return to better times with what we hope will be an even more robust personal credit ecosystem that serves and protects consumers well.
Will Hurst, Head of Commercial Development at Monevo