Unprecedented Consumer Behaviour: Learnings for Lenders Six Months Into the COVID-19 Pandemic

Circumstances brought about by the COVID-19 crisis have shifted the way we live, creating an unprecedented change in risk profiles. As we head into the traditional golden quarter — normally the apex of consumer activity — furlough schemes are winding down, lockdown rules are evolving and economic uncertainty persists. It’s vital to now assess some of the influential ideas, solutions and ongoing talking points regarding financial issues consumers are facing and how lenders can further support them whilst protecting their portfolios. Ultimately, this will add confidence to strategies and business plans, but also better equip us for 2021.

An unexpected beginning to a new decade

Economic activity has been turned upside down with large numbers of employees furloughed and businesses announcing redundancies or even folding. Consumers working in exposed sectors, such as hospitality, retail or travel, running their own business, or living in a single income household, are experiencing financial stress and worrying about their future. Sudden impacts on household finances, along with anticipated but yet to be realised changes, have altered consumer behaviour and priorities — and by default what we think we know about them — en masse.

^{Source: Financial Hardship Report August 2020 Wave 8}

“At this moment in time, all financial service providers are having to work out what the pandemic means for their estimation of risk. At a macroeconomic level, the market has shifted with consumer risk profiles changing in both a positive and negative way, regardless of a risk score or other related attributes,” explains Will North, Director — Core Credit, TransUnion in the UK. “This movement requires adjustments to portfolios and optimisation of analytics to obtain the most accurate, comprehensive view of a consumer’s evolving financial situation.”

Lenders are under wide ranging pressures, including the need to treat customers fairly and adapt to fast changing regulation; conduct comprehensive and accurate affordability assessment in light of new economics of a COVID-19 world; and manage customer relationships to deliver the best possible outcomes. Central to achieving this is the ability to effectively harness data and analytics to better understand a customer’s situation and support them in taking control of their financial situation.

Getting a deeper understanding of consumer affordability

Financial services companies have traditionally operated on the premise that past consumer behaviour is a key indicator of future financial performance. The pandemic has skewed this as consumers operate under the pressure of macroeconomic forces characterised as unpredictable, immediate and unexpected. As we navigate uncharted economic territory, tracking sudden changes to a consumer’s circumstances requires new insights to understand how income shocks can impact customer affordability and overall portfolio risk.

Our pen portrait series looks at the challenges facing different consumer groups. As the COVID-19 situation evolves, the trajectory of each consumer has changed considerably since the start of the year:

• For Claire, ‘Just About Managing’ and living in a household with UK average income, financial pressures and lockdown have been a source of stress. Post-lockdown has been a relief, improved further by the return of school, but the remaining part of the year will remain financially challenging and uncertain.
• For Oliver, part of Gen Z, his employment options remains challenging. He expects to have to wait further for a graduate job and is considering moving back in with his parents. That way he can save money, have some security and avoid too many changes to the lifestyle he’s accustomed to. If this happens, it’s likely his risk profile won’t worsen as his outgoings and income balance out.
• David is Married to the Mortgage. With substantial financial commitments, he’s returned to work after being furloughed, and managing his finances in the best possible way to reduce any long-term pain and guard against future job uncertainty.

An effective approach requires an optimised customer management plan — with the right technology and data stack — that gives a comprehensive view of a consumer’s situation and alerts you to significant credit behaviour changes.

As a pioneer in affordability assessment, TransUnion bolstered its creditworthiness suite in 2019 with TrueVision®, a comprehensive trended credit data solution, and an award-winning early adopter Open Banking programme. We’re extremely well-positioned to help lenders obtain the deep read on consumer finances they need. In 2020, we’ve rapidly released enhancements to our solutions to help lenders optimise their customer management approaches. Looking ahead, we expect lenders to leverage new sources of information (Affordability ISV) to understand the evolving landscape and use them (Include account management wheel) to strengthen their creditworthiness approach throughout the customer lifecycle. For instance, during an application for a new financial product Open Banking offers valuable granular detail. Once onboarded, CreditView can give a customer a better understanding of their financial situation, encouraging more informed spending behaviour and engagement with the lender. And if a customer has a sudden, negative change in their circumstances, CallMonitor provides alerts within 24 hours, giving lenders the earliest possible opportunity to intervene and support customers accordingly.

Payment freezes and a new type of risk

When individuals experience an income shock and come off a payment freeze, one action might be to apply for a new line of credit to support their lifestyle and mitigate any loss of income. Google Trends provides crude but useful insight into UK consumers’ thinking about financial products during the pandemic. It shows a significant spike in interest in loans during the early parts of summer 2020 compared to the past 12 months. Indeed, this spike is significantly higher than any search term volumes related to ‘loan’ over the past five years. This suggests large numbers of consumers — worried about income stability and an environment of uncertainty —were considering how to shore up their finances and insulate themselves from any sudden downturn.

Payment freezes have helped consumers and perhaps protected some from an imminent and inevitable arrears event — traditionally one of the strongest indicators of risk and future behaviour. By essentially ‘hiding’ this, a payment freeze could inadvertently mask the true representation of a consumer’s risk by giving them a score higher than the risk they actually represent. The issue then is they’re potentially accessing financial products they can’t afford, leaving the lender unable to fulfil obligations to protect vulnerable consumers. Therefore, it’s vital to find an effective way to assess the risk associated with those who have taken a payment freeze.

For Shail Deep, Chief Product Officer at TransUnion in the UK, understanding income shocks and building out creditworthiness solutions to help lenders better understand this issue is key: “The ‘cliff edge’ has become a major narrative of the economics of the pandemic, painting a visual picture of the real risks we’re exposed to. For consumers and lenders, it presents itself when different types of payment freezes expire — payment holidays had by mid-June created an additional estimated £6bn of consumer debt, whilst the winding down of the furlough scheme sees a rise in employment uncertainty.”

TransUnion can help 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 that they’re in a deteriorating financial state. These variables indicate the risk of the individual, and lenders can use these insights to help ensure applicants access only appropriate, affordable financial products. “Protecting consumers from accessing new and unaffordable financial products and falling into a deeper debt trap they’ll struggle to get out of, highlights the clear need to revise the way we assess risk,” adds Deep.

The many faces of vulnerability

According to the FCA, half of UK adults (25.6 million people) display one or more characteristics of being potentially vulnerable. This number will have undoubtedly increased during 2020, and some of those classed as vulnerable are suffering more deeply.

In today’s digital world, little or no face-to-face contact between customer and service provider makes it deceptively easy for organisations to consider their services to be purely technical processes, despite the extremely personal impact they can have on the consumer. We’re seeing more services and interactions going virtual — whether users or companies want them to or not — and understanding the personal impact of these transactions is critical.

For organisations that deal with those in vulnerable situations, especially where there’s a cultural history of a personal approach, it’s crucial to appreciate the ultimate impact of each technical or corporate decision. Identifying and protecting vulnerable customers is of significant importance across all industries and can be addressed by smart thinking, brought to life with the right data intelligence and analytical tools.

A vulnerable person is at risk in a variety of situations, including being a target for fraudsters. Fraud rates and scamming, particularly email, SMS and phishing scams, are markedly rising as greater usage of digital channels increases the amount of personal information being shared. TransUnion’s latest quarterly analysis of global online fraud trends found that fraudsters are decreasing schemes against businesses but increasing COVID-19-themed scams against consumers online. Something like a flash SMS message that powerfully disrupts your mobile experience can easily seem like an authentic warning from a bank and hook consumers into a scam. It’s essential businesses do what they can to protect the vulnerable. For example, older consumers who may be lonely are more likely to be at risk of being scammed, with Cifas reporting over 33,000 individuals over 60 were victims of impersonation in 2019, an increase of 34% on the previous year.

It’s important to recognise that vulnerability is a term used in many contexts. In the case of vital service provision — such as access to financial services, insurance, utilities etc. — its meaning has special importance given by industry regulators. In general, as outlined by oversight bodies, such as the FCA or the Office of Water Services (OFWAT), we must work to understand the drivers of vulnerabilities and characteristics of each type, distinguishing between transient and permanent vulnerability, for example, to provide the best service.

Data and technology come to the fore when considering this identification challenge. To ensure a vulnerability can be identified, organisations must have auditable processes in place that use given indicators to recognise these circumstances. These could be third-party data points, customer behaviours or self-declared information. Interactions with vulnerable customers must be recorded, along with outcomes, so continual improvement can take place.

Dave Webber, Director of Data Strategy at TransUnion in the UK explains: “Harnessing data insights and building on existing foundations of knowledge-sharing across sectors can bring clear benefits. Already, progress has been made, and can be seen in the collaborative work undertaken with our client base, which has identified distinct demographics and risk insights (such as financial stress) for those who become money mules, complicitly or otherwise.

“The importance of collaboration can be seen in our contribution to the Cabinet Office publication, ‘Tackling fraud in Government with data analytics’. This isn’t just about improved fraud detection but greater awareness and understanding of the many forms of vulnerability that exist. As the world moves online, perhaps shifting how consumers and the services they need interact, it’s vital those interactions protect and serve the most vulnerable in our society — collaboration and data intelligence is the way to achieve this.”

Talk to us about how our creditworthiness expertise can help your business and customers
TransUnion has led the market conversation as to 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 hub to find out more.