Affordability assessments have quickly made their way up the priority ladder for lending organisations over the past few years. Increased regulation from the FCA has been an important reason behind this shift. But, our research of UK risk and customer experience managers revealed that organisations are also increasingly seeing it as their duty to understand a customers’ ability to pay for their services. A large majority (72%) believe that they have a social responsibility to prevent customers from overstretching themselves financially.
Modernising affordability checks must be a priority
Despite the fact that understanding consumers’ financial health is becoming increasingly important to lending organisations, affordability assessments’ have yet to become standard practice. Current levels of checks vary between organisations, and just under one in five (19%) risk leaders rate themselves as extremely effective at identifying the warning signs that a customer is heading for financial difficulty.
Clearly there are some challenges to overcome. Our research identified lack of buy-in from senior managers (64%), Brexit and its consequences (56%), and cost (52%) as some of the biggest obstacles. The General Data Protection Regulation (GDPR) coming into force next year, is no doubt another factor organisations might struggle with when reviewing what data they collect and how they use it.
Yet, without a complete view of a customer, a lending organisation can’t have full confidence in an applicant’s ability to repay the loan. Verifying whether an applicant can afford new credit needs to be done via a thorough evaluation of their income, outstanding debts, cost of living and general expenditure, and then working out how this new debt relates to their disposable income.
Not only will this help to reduce indebtedness, it will also help to drive business growth, as the more the lending organisation can understand about their customers, the more they can offer and upsell tailored solutions for them. Finally, and perhaps most importantly, it will also help to protect consumers from financially overstretching themselves.
What steps could your organisation take now to improve affordability best practice?
- Identify your weaknesses
Perhaps it’s the time it takes to conduct an assessment or maybe it’s a lack of insight into your customers’ financial health beyond the initial interaction. The areas of weakness will be different for every lender, but once they’ve been established, you can devise a solid plan of action.
- Use regulation as an opportunity to enhance the customer experience
There are a range of solutions that can help to verify your customer’s income and expenditure more rigorously, often without having to ask them to provide supporting paperwork and documents. This can help lenders make responsible and informed decisions quickly and with ease.
- Don’t just conduct affordability checks at point of application
Organisations should adopt a continuous approach to assessing affordability and creditworthiness to ensure that lending decisions are optimised throughout the entire customer lifecycle.