Evolving Scoring Strategies in the New Normal

It comes as no surprise that the COVID-19 pandemic has had a seismic impact on the UK economy. After all, we first went into lockdown in March and have been living under constraints of varying restrictions for seven months, culminating in new national lockdowns in October and November. And although it may feel by now that COVID-19 is something of a known factor, the economic narrative timeline is more complicated than an epicenter in March and April, followed by several months of damage assessment and rebound strengthening through 2021. The fact is, this crisis isn’t just unique in terms of the size of its economic impact, it’s also unique in the nature of its economic impact.

Data noise is clouding our understanding of what’s happening in the economy

In a typical recession, falling GDP affects the real economy pretty quickly via rising unemployment. In this case though, because the impact was so sudden and broad — and hopefully temporary — the government rolled out its Coronavirus Job Retention Scheme that ultimately saw almost 10 million jobs being furloughed during lockdown (with an estimated 2 million still furloughed at the end of October).

In terms of jobs saved, this is great news of course, but it means the communication between the macroeconomy and labour economy has been paused. In our Financial Hardship Survey, 48% of households were still reporting a negative financial impact in October, so this ‘pause’ is in no way an immunity — and more so for younger households where that number is 55% — but it does indicate some information is missing from the system.

Adding to this data noise is the fact that deteriorations in the labour economy usually affect the credit economy via missed payments, and here again, we have payment freezes to interrupt that communication. According to UK Finance, 1.9 million mortgages (or about 1 in 6 mortgages) were granted extra leeway — which is not a trivial factor. This suggests the dust won’t clear — and lenders won’t have an obvious picture of the true impacts of COVID-19 — for some time to come.

Consumers are spending

But while we wait, consumers have started to spend again.

Numbers published by the ONS show after a sharp drop in early lockdown, five consecutive months of growth resulted in September seeing a 3.4% year-over-year increase in the value of retail sales (6.0% increase if you exclude fuel sales which are down with road traffic).

This spend includes the sort of major outlays that often drive retail credit demand. Referring again to our latest financial hardship survey, we see 23% of households planning to make home improvements in the next quarter, and 28% still planning a holiday either locally or abroad. And yet, credit card and personal loan balances, which had fallen sharply in the second quarter alongside retail spend, have yet to recover in the third — suggesting lenders are still cautious.

Solutions to help lenders better understand consumer economics amid COVID-19

So there is demand. And with credit cards losing four years of balance growth and personal loans losing one, there should be lenders willing to meet that demand. But how can you do this safely and responsibly?

First of all, don’t panic, the fundamentals of lending still hold true. Despite payment holidays being almost universally available on all debts, some consumers still missed payments and rolled into deeper levels of delinquency, so there’s still fresh risk data coming through and traditional scores should continue to work.

That said, there’s no escaping two important facts: (i) different customer demographics and employment sectors have been impacted to varying degrees and at different rates; and (ii) the ‘fresh’ risk data is not as clean as we’re used to dealing with.

So, no one solution can work for all situations, and similarly, no one solution can work alone. For that reason, we’ve developed new scores that are entirely non-delinquency-based and which nevertheless aim to deliver high levels of predictively. It turns out, by taking note of early warning indicators in consumers’ spend and borrowing behaviours, we can help rank order risk in a world still noisy from COVID-19’s impact.

When traditional and new scores are combined, we see the best results. And in most cases, we’re finding a matrix proves to be a better solution for scoring in the near term than a full new score build which may suffer from a lack of stable data. However, that might not always be the case, so if you have questions about evolving your scoring strategies for the current environment, please reach out.

Talk to us about how our creditworthiness expertise can help your business and customers

TransUnion has helped shaping the market conversation regarding the impact of COVID-19 on consumer finances; publishing guides about different consumer groups, conducting and sharing analysis of ongoing consumer research, and hosting webinars offering valuable insights about the effects of the pandemic on household finances. Visit our dedicated site to find out more.