The importance of telling the right credit story
Aneesh Varma, Founder and CEO, shares with Credit Management the absolute relevance of our individual set of circumstances when it comes to accessing the right credit.
I find myself reflecting more and more at the moment on the need for stories. In direct distraction to the statistic-filled headlines we are greeted with daily, stories can help us relax and switch off — some light relief from the heavy world that surrounds us.
Stories also help us to understand. They are how we remember disparate facts and figures, providing context to our lives and to our beliefs. They are what we consciously or unconsciously seek out. It’s the likely reason you selected this article — that intrinsically human quest for a good story.
And every one of us has a different story to tell.
Jobs, relationships, education — our choices throughout our lives correlate with our future — and this, in turn, shapes the financial story we must serve to lenders when it comes to accessing credit.
Although we don’t do we? Not really. Because the traditional bureau data relied upon in today’s credit ecosystem only serves some of us, not all of us, effectively.
With the right technology, and — crucially — the right data in place, this system can be upgraded for everyone’s benefit.
Changing consumer credit behaviour
This lack of clarity has been exasperated by the recent seismic changes we’ve seen across the credit ecosystem over the last six months.
Measures introduced to combat Covid-19 in March had an understandably dramatic impact on consumer credit behaviour. We stopped buying cars (levels of new motor finance lending extended to UK consumers plummeted by 94 per cent in the first month of lockdown) and we were prevented from buying houses (mortgage approvals halved in April and fell again to just a third of ‘normal’ levels during May).
Meanwhile, consumers who could, took significant steps to reduce their existing borrowing, reducing their exposure to credit products such as credit cards and personal loans by £18 billion between February and June. We also know that leading providers of personal loans, credit cards and retail finance have also written substantially less new business due to the pandemic.
While the motor finance market had recovered relatively quickly since the start of lockdown: bouncing back to pre-covid new business levels as soon as June — providers of other forms of consumer credit will have to be more patient.
And with shock and unpredictability comes caution from the consumer. The OECD’s measure of consumer confidence (a key indicator of borrowing appetite) plummeted between February and May, reaching levels not seen since 2008. While confidence since then shows green shoots of recovery, the figures suggest that, as UK consumers, we’ll be saving more when we can and making fewer big-ticket purchases for the foreseeable future.
The onset of financial difficulty
But those of us that can afford to be more cautious are the lucky ones. Unfortunately the impact of Covid-19 on livelihoods is placing many more of us into sudden and unexpected financial difficulty.
At a then unrealised but now pivotal moment to have done so, in February of this year Aire conducted some consumer research to take the pulse of the consumer credit market at that time.
Figures showed us that eight in every ten UK adults would have been unable to cover essential monthly spending should they experience a 20 per cent reduction in income. Even at that point, 2.4 million UK consumers were slipping further into debt each month, while another 4.1 million spent everything they earned on ‘essentials’.
We don’t need new research to know that the situation is far worse today. 730,000 fewer people were on UK payrolls in July compared to March, while 9.6 million had been furloughed as part of the Coronavirus job retention scheme.
The challenges of job losses and falling incomes have already caused millions to seek support from lenders. UK Finance figures show that one in six mortgages were subject to payment holidays in June. Lenders had also granted 992,400 credit card payment deferrals, provided 686,500 payment holidays on personal loans and offered 27 million interest-free overdrafts.
The number of unemployed will inevitably rise as the job retention scheme is phased out by the end of the month, causing further difficulties for millions already struggling while on furlough. The predictions are grim, with the Bank of England expecting unemployment to hit 7.5% this year in line with other G7 economies.
But lenders have a clear responsibility in this climate to serve their customers proactively. They must look for new ways to detect emerging risks on the consumer’s behalf and must now focus on early intervention and assistance rather than waiting for the fog to clear to pick up the pieces.
Shifting the balance towards the consumer
To do this, lenders must look to the validity of alternative data sources to help. Gathered not from the bureaus, or from social media, but from the individual. The best data rests with the consumer themselves.
We call this first-party data and it is both unique and powerful in offering lenders the most up-to-date view of their customer imaginable. From furlough or redundancy to an increase in hours due to a flourishing business, first-party data provides us with the individual set of circumstances that contribute to the consumer’s overall picture of financial health — or difficulty.
Most importantly, it also starts to shift the power balance, allowing the individual to contribute to their own story and to have a say in how lenders perceive their current circumstances — delivering the system upgrade the credit ecosystem so clearly requires.
Because now is the opportunity to focus on building that picture of the consumer, based on their own individual story: how are they doing right now, not three months or three years ago? How does he or she view their career; the stability of that job; their savings? What is his or her attitude towards their finances? How does their partner’s income impact their own financial wellbeing?
Today, due to technology, it is possible to gather and interpret a wealth of first-party information directly from the consumer — quickly, efficiently and at scale. This vital context augments the view of the consumer gained through historical sources and provides the validated, holistic view lenders need to treat customers fairly, understand those experiencing difficulties, and keep lending profitably.
In the current climate, we’ve seen demand from lenders looking for solutions in customer management grow. While this need to identify a consumer’s current affordability and risk of financial difficulty with new data has always been significant, it becomes critical in the current circumstances.
Let’s return now to the importance of a good story. When it comes to credit, ultimately this is about translating the individual story of each consumer better, quicker and more easily for lenders, based on their current financial circumstances.
The full story, the holistic picture, the truth. Now, and in the months ahead, we owe consumers that fairness of representation — let’s not keep them waiting too long.
This article was first published in the October edition of Credit Management, the magazine of the Chartered Institute of Credit Management (CICM).