How to determine if your customer is struggling to make the next payment

Recent analysis on changes in customer accounts shows that over a three-month period, over 50% of all customers experience some change in their credit profile. Factors such as Brexit have increased uncertainty, and with the cost of living continuing to rise alongside static wage growth, levels of unsecured debt in the UK were at their highest since 2008 in June, at £200.8 billion.

As a result, more borrowers may be pushed into the position of having a negative disposable income, and it is entirely feasible that some of them will begin to miss payments and default. Those with relatively modest incomes are more susceptible to price rises, with those coping with reduced incomes from state benefit reductions also more at risk.

At the same time of course, increasing regulation, including the Office of Fair Trading’s Irresponsible Lending Guidance, requires lenders to ascertain affordability criteria, indebtedness and income verification. With Treating Customers Fairly (TCF) guidelines now well-established across the financial services industry, it’s essential that assessments are made to ensure that a customer’s ability to repay is confirmed.

Amid the uncertainty, it’s vital – and more achievable than ever – for lenders to have an accurate and up-to-date view of customers’ income and expenditure, along with the ability to spot the signs of delinquency, income loss, high cost credit or problem debt.

Affordability

• High debt to income ratios using industry wide income data
• No or limited disposable income

Delinquency

• Missed credit payments – e.g. Mortgage/Loans
• Repayment plans
• Insolvencies/CCJs

High cost credit

• Payday Loan usage
• Home Credit
• High and frequent overdraft usage – over-limit

Income loss

• Recent drop in Current Account turnover – severity and number of months
• Low income earner

Problem debt

• Persistent minimum payers
• Interest versus payments
• Unsecured debt growth
• Highly utilised

Indebtedness and affordability measures are essential for providing the level of insight necessary for effective risk assessment throughout the credit cycle, as well as for evidencing that customers are being treated fairly. Many organisations now share application income data and current account credit turnover to support affordability assessments. Used alongside traditional credit scoring, this approach enables a complete risk assessment package.

Over the last few years some lenders have invested in integrating a range of affordability assessment tools into their credit management processes. These include:

• validating income at the point of application;
• using a range of data to inform about the indebtedness and affordability of applicants and customers;
• monitoring portfolios to identify those who are most over-indebted;
• reviewing the ability to repay as part of collections and recoveries strategies; and
• tracking individuals most susceptible to an increase in mortgage rates.

If something happens to a customer’s profile that is likely to affect their potential to pay, it’s helpful to know immediately rather than find out at the end of the month. Lenders can keep track of certain key metrics and monitor for events, both internal and external, that suggest a problem with affordability. Most people will try to hide financial difficulties from their creditors. A range of internal data, from cancelled Direct Debit mandates, credit card cash withdrawals and short-term lending or pawnbroker credits can provide lenders with additional insight into which customers might be struggling to make ends meet.

Analysis of specific transactions can also provide important insight. Changes in spending patterns such as moving supermarkets or reductions in the value of fuel transactions can indicate a decline in affordability. There is also a wealth of external data obtainable to lenders, with daily triggers available to provide fast and accurate alerts concerning significant new borrowing and missed payments.

By monitoring events such as missed payments, significant total balance changes, new County Court Judgments (CCJs), bankruptcies and CIFAS filings on a daily basis, it’s easier to undertake responsible lending and protect customers from over-indebtedness.

Technologies and tools are available to access these rich insights that help you to make better-informed lending decisions. Having introduced the concept of affordability assessments to the UK market, TransUnion (formerly Callcredit) is better placed than most for extracting value from affordability data.

To learn more, take a look at our Affordability Suite.