Inequality has been a key thread throughout the COVID-19 pandemic. Arguably, polarisation at a household level extends to the digital capabilities of lenders with which consumers engage — with some lenders being better equipped to cope with unpredictable consumer behaviour related to the crisis. This article considers how a deeper understanding of this issue can help lenders deliver better outcomes.
Traditionally, inequality discussions revolve around socioeconomic issues, and amid the pandemic, divergent stories have emerged: Some households have been hit hard, while others have been insulated and are actually paying down debts. Concerns have been brought to the forefront through national conversations about job security; those working from home versus those who can’t work from home; and free school meals or access to devices to help with home schooling.
Research into the financial impact on households identifies consumer groups largely unaffected by the pandemic and able to repay more debt. This is thanks to lack of spending and consistent income, thus strengthening their financial position. In fact, according to YouGov nearly a quarter (24%) of UK consumers have saved more money over the course of the pandemic. Our ongoing TransUnion consumer study found that 61% of households finished 2020 either where they expected to be financially or better off. In the latest Money and Credit statistics, the Bank of England revealed consumers repaid £2.4 billion of credit in Jan. — the largest net repayment since May 2020 — and a substantial increase on previous months. Mortgage borrowing has remained strong at £5.2 billion in Jan., with 99,000 mortgage approvals for house purchases.
At the same time, those affected by loss of income are worse off — in many cases utilising government support schemes and payment holidays just to get by. Despite these support mechanisms, financial challenges remain for some consumers, as observed in behaviours such as early arrears or shifting to higher-interest lenders to access credit. We found half of households were still reporting a negative financial impact at the end of 2020, and 4 in 10 (41%) UK consumers overall were concerned about their ability to pay their bills.
Looking at employment as an indicator, the Office of National Statistics reported in 23/03/2021, 693,000 fewer people were in payrolled employment in Feb. 2021 compared to Feb. 2020. Digging into the figures, however, presents some contrasting news. There were 68,000 more people in payrolled employment in Feb. 2021 compared with Jan. 2021, which is the third consecutive monthly increase suggesting a more positive outlook. However, of those who have lost their job since lockdown, nearly 60% of newly unemployed are under age 25, reflecting a potential loss of skills and experience at a key moment in the lives of younger people.
The extension of the furlough scheme to Sept. 2021 (this time to include freelancers) further clouds the picture of what’s happening to household finances and adds to the uncertainty. It potentially masks the true economic reality of what may occur when extensions to support packages — such as furloughs or the Universal Credit uplift — end. Behaviour observed by lenders/others may not necessarily reflect the underlying challenges consumers faced. Finance providers must continue to take a dynamic approach to cut through the data noise and best serve the unique needs of consumers.
The pandemic has skewed consumer behaviour as they operate under the pressure of unpredictable and immediate macroeconomic forces. For lenders this has amplified the nuances of effective customer segmentation. Further impetus for a richer understanding of customers comes from the FCA and what affordability checks should entail.
Shail Deep, Chief Product Officer, TransUnion in the UK, outlines challenges facing lenders as the traditional approach to understanding a consumer’s financial situation no longer guarantees it can deliver all that’s needed: “COVID-19 has tested the resilience of data insights and digital operations. Understandably, this fast-moving situation has created blind spots or exposed gaps. We’ve seen lenders evolve data attributes to counter this and continue to strengthen their creditworthiness approach.
“To gain additional lenses, new insights like income shocks can be applied. These can help identify consumers who have experienced reductions or improvements in income and its extent compared to pre-COVID-19 levels and their last income view. Income segmentation summarises income variables, and an income confidence variable shows the stability and coverage associated with the income.”
Another data conundrum when predicting risk concerns consumers who have taken a payment freeze, which at the time of writing comes to an end in March 2021. Payment freezes have helped and perhaps protected some consumers from an imminent arrears event — one of the strongest indicators of risk and future behaviour. By essentially ‘hiding’ this, a payment freeze could inadvertently cover the true representation of a consumer’s risk by giving them a score higher than the actual risk they represent.
Conversely, there are subsets of consumers who may taken a payment freeze on a mortgage or substantially reduced their daily costs perhaps due to a lack of a daily commute to pay down another form of outstanding debt. These consumers could be present acquisition opportunities in what will be a competitive market when it comes to new business as the Office for Business Responsibility (OBR) projections indicate.March 3, 2021
If a lender offers a new credit product with stricter policies increasing score cut-offs and raised thresholds on affordability checks, an alternative way to assess the risk presented — as part of a wider reassessment of scorecard performance and credit policy effectiveness — is required. Lenders will need to assess whether an applicant who has opted for a payment freeze is displaying any other credit behaviour changes — such as increasing overdraft utilisation, reducing card payment ratio or maximising a credit card — which could indicate a deteriorating financial state.
Solutions like Open Banking can give the granular detail needed to strengthen affordability checks. These datasets can indicate the risk of the individual and provide rich insights that help applicants access only appropriate, affordable financial products.
The pandemic has sharpened focus on enriching datasets whilst simultaneously improving the customer experience (CX). There are a number of new solutions lenders can harness to gain a richer view of affordability and, in turn, use this information to drive better decisions and trust.
“For better and for worse, the pandemic is shifting the way the economy works and consumers behave. As such, FS institutions should consider the role played by next-generation solutions to strengthen their understanding of consumers’ credit behaviours,” explains Deep when discussing what goes into building a robust affordability solution. “For example, TrueVision®, our pioneering trended credit data product, offers a bird’s-eye view of 72 months of payment history and balances. It represents a significant change in the way credit is assessed — revealing trends and behaviour previously undetected. Likewise, Open Banking is an evolving solution and potentially a cornerstone of the future of banking - Open Banking can help enable better customer outcomes through more granular data, automated processes and its ability to streamline the customer journey.
“Enhancing your capability to understand a customer’s income position can give you greater confidence in your ability to manage your customer books, and identify those who may need support during the pandemic and those in good position to take out new financial products.”
For customers, a more visible, tangible solution that marries data and CX is CreditView. Designed to improve customer engagement on their terms, it can be embedded as a white label product within branded digital properties. It uses familiar digital cues to make financial information easy to digest, encouraging more informed spending behaviours and cultivating loyalty. High street lenders and disruptive consumer credit providers are some of the businesses that have invested in empowering their customers with tools to help bring their financial data to life during the pandemic.
With a consistent roadmap of innovative module releases, such as Score Simulator and dark web monitoring services, CreditView strengthens engagement within a customer management strategy.
The unprecedented nature of the crisis means businesses must be agile and work in new ways. Evolving your creditworthiness approach and deploying new solutions — especially in a remote environment — places pressure on resources and expertise.
To adapt digital ecosystems so they meet the demands of fractured consumer groups, we’ve reworked roadmaps and supported teams to optimise approaches and deliver the benefits our solutions aim to offer. We’re helping lenders with hands-on expertise through analysis, consultancy work, and interactive sessions where we share ideas, discuss trends and walk through market challenges. Talk to us to about how we can help your business in the new digital economy.