Closing the Credit Feedback Loop
New FCA credit guidelines boost fintech innovation
Traditional measures of creditworthiness have been the same for decades, despite significant changes in the way individuals behave in the digital era. New data sources are available, but the customer must be involved in the process of collecting and processing this data. Lenders can find a win-win situation by involving individuals in the credit evaluation process, offering borrowers additional benefits from sharing their data, and maintaining contact with borrowers regardless of their credit decision. Luckily for lenders, new technologies developed by fintechs make this process cheaper and easier than ever before.
The FCA has identified the difficulty in gaining a clear picture of individuals’ creditworthiness as one of the key factors driving millions into high-cost credit products in their recent reviews of High-cost Credit (CP18/12) and Overdrafts (CP18/13). The reports highlight as lack of ‘mid-cost’ credit available to many people, which pushes them into credit products with high interest rates. These rates are in part fueled by the significant costs alternative lenders face in assessing creditworthiness and affordability.
“Credit Reference Agency (CRA) data may not give lenders a clear picture of the circumstances of high‑risk applicants, particularly those with little credit history or where there are gaps in CRA reporting such as rental data and non‑bank income.” — FCA High-Cost Credit Review
Adjusting for widespread trends such as the rise of zero-hours contracts and and increasing proportion of renters has presented a significant challenge to traditional credit reference checks. Closing the credit feedback loop, by involving the customer in the credit decision process, can go a long way to modernising the UK’s credit scoring system.
Smooth, well-designed customer interfaces are key to engaging borrowers. Credit Kudos’ interactive Open Banking journey clearly lays out what data an individual is sharing and how it will be used, which we’ve found increases trust when working with personal data. The lenders we partner with offer borrowers faster application times, better rates, and increased visibility into creditworthiness and spending patterns in exchange for sharing their data. Our algorithms use financial history to more accurately analyse individuals’ affordability and creditworthiness, while reducing the costs to lenders for accessing and evaluating detailed information.
Interactive platforms that simplify financial data empower consumers to better understand the link between their behaviour and the availability and cost of credit.
Alerts, eligibility tools and prompts are among the remedies put forward in the FCA’s credit review papers. Credit Kudos’ borrower portal allows customers to interact with their own financial data, enabling them to better understand their specific financial situation. Lenders and brokers can improve customer engagement by offering individuals a platform for understanding their financial situation. Adding an additional touchpoint to interact with the customer increases willingness to share data and opens an ongoing dialogue.
Recent legislative directives have been centered around customer involvement: GDPR was built on the idea that customer consent is key, while Open Banking requires an individual’s explicit consent before bank transaction data can be shared. Creative solutions can help firms thrive in a shifting regulatory environment. Technology built by a new cohort of fintechs like Credit Kudos have the power to help solve many of the problems the FCA has identified, easing the cost of complying for partner businesses. Regulation need not be a burden when it spurs businesses to adapt to the modern age.
