Affordability data in the new digital-first world

The pandemic has forced digital adoption for both UK consumers and businesses. With uncertainty overhanging, how can credit providers adapt to the new market to fairly assess affordability right now?

Through the pandemic, forced adoption of digital-first services has transformed the economy. In financial services:

  • Cash payments dropped significantly by 35% to 6.1 billion payments
  • Debit cards accounted for 44% of all payments in the UK (over a quarter were contactless)
  • 54% of all adults were using mobile banking in 2020.

For lending, this has resulted in greater adoption of digital-first solutions such as Open Banking (largely used for online ID verification) and the rise of markets like Buy-now-pay-later.

With this changing economic outlook, as well as FCA expectations of robust affordability checks and fair treatment of vulnerable individuals, safely acquiring customers has never been more important.

>> Open Banking adoption

We’ve seen some Credit Referencing Agencies lead the way in Open Banking analytics and scoring to support fairer affordability assessments.

Moreover, these bureaux are also offering flexibility within data contracts to help lenders assess affordability, whilst alleviating the need to lock-in lenders to minimum credit search volumes - which can be costly.

>> Buy-now-pay-later

The BNPL market has boomed during the pandemic, with new entrants such as Klarna and (shortly) Apple Pay Later, offering online lending for consumers. Largely targeting the younger demographic, these provide payment solutions to those who may not have been able to access credit elsewhere due to ‘thin files’ - allowing them to tap into a relatively untouched market.

How has this impacted affordability?

In terms of affordability, uncertainty remains until the true impact of payment holidays and furlough is realised later this year. Right now, some lenders have changed affordability policies, refusing mortgage applications from people who took the government's self-employment income support scheme (SEISS) grant.

Others are looking at future-proofed solutions that enable them to support vulnerable customers and treat consumers fairly across the board, a key requirement of the FCA (the FCA is due to conclude on this shortly, which may shed light on the expectations).

By tapping into these new digital markets, like transactional and income data through Open Banking, these credit providers gain a better understanding of which customers are financially vulnerable and in need of additional support. And, it enables them to assess whether an individual can afford additional credit.

As a result of the pandemic, over two thirds (66%) of UK consumers have either experienced a positive financial impact (27%) or no impact (39%).

In fact, a recent review by one bureaux found nearly 50% have a better credit score now, than they did pre COVID-19, with 30% experiencing a lower score.

By lending to those that can afford and have in fact seen their credit ratings improve, credit providers can continue to lend and support the UK with recovery, and revisit business strategies such as increasing profitability. For those experiencing newly reduced credit scores, likely those that are now deemed vulnerable, credit providers can better identify and therefore support these individuals.

What can credit providers do today?

To understand customers on a deeper level and make better-informed decisions that protect your customers and portfolio, it all starts with the data.

  • Review your current data contracts - To ensure they include the new data sources available that enrich affordability assessments (such as Open Banking scores and data)
  • Consider additional data providers that can add value (or work with us to highlight the best sourced for you)
  • Book a free data benchmarking assessment to understand all the available data quality and to ensure you are not being over-charged for the current data and searches from your Bureau
  • Renegotiate existing data contracts or negotiate new data contracts using the insight gained from your data benchmarking exercise
  • Secure the best data sources at the best price. Being confident you have the right data sources at the right price is crucial. If there’s uncertainty around your data quality or the prices you're paying, you could be exposing your business to inadequate checks, or unnecessary fees.

For a free data benchmarking assessment, get in touch: n.green@purplepatchuk.com or send me an InMail.