Credit and Covid-19: making sense of the financial wall ahead
Aire Fellow, Christian Miccio, shares with us his experiences of accessing credit — and why the consumer experience is so desperately in need of an upgrade.
When I first moved to the UK, I couldn’t get a mobile phone contract due to my lack of credit history. The fact that I had started my own company and was an active Director made no difference.
But what was true ten years ago is unfortunately still true today: take a recent test drive of a Tesla Model 3 that led me to fill out their credit application process. While the car itself was a lesson in UX simplicity (seriously, give it a go), the financing process served as another stark reminder of the improvements needed to benefit all of us when it comes to accessing credit.
To illustrate, here were some of the highlights:
- A freelancer with no regular payslip? Oh, just put an estimate of each month’s income.
- Three house moves in the last five years? Please enter all the addresses, with dates broken up by month.
- You know what I make, and still need my last five years of employment history? Yes please, with dates, company names, addresses, office phone numbers and salary levels — every single time.
This set of questions was clearly created to highlight significant trends in my life. But between ‘adapting’ data to entering confusing data points, one could wonder about the validity of this information when checked against my existing credit score with the bureau: a hassle for the consumer and of questionable use for the credit provider.
Fundamentally, we all need credit
Access to financing has always been a cornerstone of our lives. Whether it’s a home, mobility, education, or smaller important items such as a mobile phone contract, everyone needs this kind of liquidity in order to function in society. Your credit score is therefore not just useful, but fundamental.
However it was developed decades ago, when, for example, job stability was measured differently. The signals used to calculate those scores mean the number of people this is valid for constantly decreases as our world, and the way we work, change. Credit scores would ideally be adapted continuously in order to give a good representation of the person they judge. But therein lies the rub: the incumbents find themselves trapped in the innovator’s dilemma, continuing to rely on their profitable legacy systems instead of enacting real, fundamental change.
“More up to date data would unlock credit in many, many cases for those that normally fall through the cracks…”
This idea of providing a more current snapshot of a consumer’s financial situation today is fundamental to the reason behind Aire. More up to date data would unlock credit in many, many cases for those that normally fall through the cracks, and very importantly get ahead of problematic situations, such as early detection of those in financial distress.
The financial wall ahead
Compounding this, Covid-19 has and will dramatically alter our societies. This will make the gap between conventional models and reality even wider. We don’t know the full picture yet — but we are already seeing some of the early signs.
There are two trends appearing in the UK. From reading what businesses and employees say about the financial support currently provided by the government, it is clear that problems will start as soon as this support expires. Restaurants don’t have several months’ worth of cash buffer to survive half empty tables, retail can’t pay leases with fewer sales, furloughed workers are at risk of seeing all financial income stop.
Changes will also happen on a more local level. For example, outside of London, some businesses are doing OK in comparison to those located in the commuter hubs of the city. The current assumption is that people are avoiding the commute into town and are in no rush to start again, so are shifting their spending to more local purchasing. Depending on which direction this swings in the next six to twelve months, it could mean that many businesses will close, but also that new businesses will open to follow the demand. There will be changes, and continuity is not a given.
“Traditional credit scoring models will fail to help people as new activities and income streams will not yield positive results in the traditional credit scoring mechanisms.”
Personally, I think we are facing a very tough period, and many people will find themselves in precarious situations. Articles like this from the Wall Street Journal do well at flagging the dangers. The need for financing will be acute. Part of this will have to come from the government, but part of this will need to come from private lending. Traditional credit scoring models will not help people as new activities and income streams will fail to yield positive results in the traditional credit scoring mechanisms.
The times, they are a-changin’ — and better data, direct from the consumer, can provide the holistic approach so desperately needed.
This is the moment for those working on new ways of helping consumers to access credit to step forward and help and, if you’re someone in need of credit, be assured that you have new companies like Aire to help you.
Christian Miccio is a freelance Product Executive and Entrepreneur. As an Aire Fellow, Christian is part of a collection of experienced industry leaders who provide practical and strategic advice to Aire.
