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Three key trends facing lenders in the consumer lending market

11 October 2016

Credit, Collections & Risk Magazine, Sept 2016: pages 19 & 20

Eamonn Tierney, managing director, Credit Solutions, Callcredit Information Group

Ahead of this month’s CCR Lending Roundtable in partnership with Callcredit Information Group, Eamonn Tierney looks at some of the key consumer trends lenders are facing in the market.

Today’s lenders are operating in one of the most challenging environments of recent years. Lenders have been facing increased pressure to ensure that credit is only provided or extended to consumers who can genuinely afford it, something which can only be achieved by truly knowing your customers. Technology is transforming the way businesses can use data, enabling them to get a greater understanding of their customers. This is a development that has the potential to improve lending outcomes for both consumers and businesses.  

Three trends in the lending market that we are seeing at Callcredit include:

• Market insight: How market insight is being used to develop a clear strategy that works both for the lender and the consumer.
• Redefining affordability: The changing face of affordability assessments and how well lenders know their customers.
• A decline in short term lending: This is shifting from one month payments to three months or instalment loans to fit with a consumer’s affordability. 

Market insight: unlocking the power of data to benefit the needs of the consumer

Market insight can be an invaluable tool for benchmarking lenders against their peer group, helping them gain a wider understanding of the products that are successful, but it can also paint a detailed picture of consumers’ borrowing behaviour, including what isn’t working for them and what may need to be adapted to better suit the consumer.  What’s more, the consumer understanding generated can also further help mitigate risk and determine strategy. For example, considering the alternative finance industry, an analysis of a representative sample of short term loans issued in 2015 would include the performance of those loans and how often consumers went into arrears and at what point.  As lenders become more aware of those products that have a higher default or late payment rate, they can incorporate this information to better understand and manage this risk not just for the company but also for the consumer.

An individual’s credit characteristics can also be analysed, such as short term versus long term average default rates, creating a benchmark for the average consumer.  This detailed picture of an individual’s borrowing behaviour allows lenders to better interact with their customers and understand which products are best suited to their needs.

The benefit of market insight for the lender is obvious, by optimising their offering they will be able to generate increased revenue and enhance their business’ productivity. The consumer also stands to gain as much, if not more, with lenders putting their needs first, helping them to not over extend their finances by providing tailored offerings better suited to their needs.

Redefining affordability

To find out how lenders are making use of customer data and assess their changing attitudes to affordability, Callcredit recently interviewed 100 risk professionals and 100 customer experience managers from across the UK. A first look at the results highlight that lenders increasingly see themselves as having a wider responsibility when it comes to lending and understanding a consumer’s ability to repay, with 72 per cent reporting they believe it is their duty to prevent customers from overstretching themselves financially.

To meet these expectations, affordability assessments are required to give lenders an understanding of a customer’s current level of risk and how this is likely to change over time. Utilising technology, advanced affordability solutions such as Affordability Report 3 (AR3), now give a more accurate, real time view of a customer income, living costs and spending habits, providing organisations with greater confidence in their lending decisions. With AR3, lenders are able to verify income and debt commitments without asking the consumer to provide supporting documents at the point of application. Lenders are able to assess more potential borrowers to borrow money with no paperwork or manual intervention with automated application processes as detail on the applicant’s financial history is available digitally through data held by us.

These innovative technologies enable affordability to be assessed both at point of application and future sustainability and give lenders a comprehensive view of their customer as a whole, rather than considering customer’s data in isolation at a certain point in time.

These solutions add greater depth to a lender’s understanding of a consumer, whilst simultaneously enabling them to meet regulatory requirements and make better informed lending decisions.

But it doesn’t end there, using technology, affordability assessments can now quickly and easily verify whether a credit applicant can afford further borrowing. So, customers are not only helped from over-extending themselves, but this is all done with greater speed, efficiency and security, bringing lenders ever closer to truly putting the customer at the heart of every lending decision.

Decline in short term lending

Following changes in regulation a change in the alternative lending space has also been noted, the sector’s emphasis has shifted from mainly providing short-term loans to a focus on longer term lending options that fit with a consumer’s affordability. Whilst this shift can be attributed partly to regulation, it has also come about as lenders increasingly feel a greater sense of responsibility when it comes to truly understanding a consumer’s ability to afford credit.

Clearly, the lending landscape has been and is continuing to evolve at a rapid pace. Lenders shouldn’t try to resist these developments, and instead keep up by capitalising on technology and those available solutions that can help keep their business agile. Market insight and affordability assessments that use the latest technology can not only help lenders promote responsible lending but also develop the kind of tailored solutions that will deliver the best outcomes for their business and customers.