By Mike Coley, Equifax Product Director

 

It's a really interesting time to be a Chief Credit Risk Officer right now. 

On top of new regulations, we’ve been living through a pretty turbulent economic environment over the past couple of years with inflation and interest rate rises eroding purchasing power, leading to spiralling cost of living. And this shows no sign of abating.

And then there’s curveballs like the rise of buy now pay later (BNPL) as a new form of credit. This all adds up to create a more challenging environment in which to make decisions on long term affordability.

The new consumer duty regulations, which launched this week, emphasise the significance of assessing product affordability and suitability for consumers as well as ensuring fair outcomes. 

Existing lending criteria in sourcebooks like CONC haven't changed, but consumer duty amplifies those expectations of how you apply those principles in practice, and lenders need to  have clear evidence of how their lending decisions are appropriate to customer segments. 

Whilst the FCA is not dictating which data sets should be used, lenders need to think more holistically about how they assess affordability. This is where open banking could play a central role, in particular by filling gaps for customers with a thin credit file.

In fact 68% of people attending our webinar on this topic last year told us they believed “open banking could provide the higher standard of care the FCA are looking for in the consumer duty regulations”.

Open Banking’s Role in Enhanced Affordability Assessments

The implementation of new consumer duty regulations underscores the importance of evaluating consumer affordability. Open banking steps into this arena by offering a comprehensive and real-time overview of a consumer’s financial circumstances, providing richer context in combination with traditional credit checks.

Lenders, by incorporating open banking within their application and in-life monitoring processes, can blend the detailed financial data of customers with credit bureau data to enable them to make informed and regulatory-compliant credit decisions.

Open banking data can be used as a counterweight to where the bureau data is missing or thin, or where the applicant’s financial problems were further back in history and we can see from the open banking data that an applicant’s situation has changed.

Open Banking: An Avenue to In-depth Customer Insights

Open banking extends beyond surface-level data, delving into the granular details of a customer's spending habits. This comprehensive understanding helps lenders distinguish between discretionary and non-discretionary spending, a crucial component in their decision-making process.

The up-to-date nature of open banking is part of what makes it so powerful. It’s accurate to the day you receive a credit application. In the current economic climate, our situations are changing very quickly - someone who may have had a good credit score a couple of months ago, may have experienced a significant change in circumstances impacting their ability to afford their existing financial commitments.

Open banking offers insights into vulnerabilities like problem gambling, financial stress, and also shedding light on BNPL purchases too. Here it’s important to understand whether BNPL payments are simply a healthy part of a consumer’s normal economic activity or where someone is stacking unregulated credit across multiple providers as part of delaying tactics, to temporarily mitigate more immediate financial problems.

Insights like these, unseen in traditional credit reference agency data, enrich the financial portrait of consumers, aiding lenders in making more prudent lending decisions and satisfying the expectations of consumer duty regulations.

Identifying financial difficulty in existing customers

One of the key elements of consumer duty is monitoring whether the product given to the consumer actually provides a good outcome. There is also, rightly, a focus on forbearance and identifying early signs of financial difficulty. 

We have a great example of this working in practice: Equifax helped a major high street bank improve their affordability assessments for customers at the end of a period of forbearance by automating the capture of income and expenditure. This helped the bank to reduce call times by 50% and, more importantly, put in the right support for customers without lengthy and potentially stressful phone calls.

There's also the potential for continuous ongoing use of open banking, throughout the product life cycle. At the point of consent it is possible to capture ongoing access to someone's bank account data for up to 90 days. Recent changes have made it even easier to refresh that consent too.

Imagine a scenario where a customer approaches a lender for a consolidation loan, recurring consent to their bank transaction data offers a clear and quick view that the original debt has been paid off and that the loan provided for consolidation is being used to create good outcomes for the customer (and that it's not being used to just spend on discretionary items potentially resulting in a worse situation).

Risk Mitigation Through Open Banking

Open banking serves as a valuable tool for lenders in mitigating risks linked to lending. 

Even when a consumer's credit history is sparse or non-existent, open banking data provides a comprehensive view of their financial health. This vital information allows lenders to make well-informed decisions and assess risk accurately, ensuring they remain compliant with the new consumer duty regulations.

Open Banking as a Support for Customers in Arrears

Open Banking can also be utilised to support customers who are in arrears. By using open banking data, lenders can improve affordability assessments for customers, eliminating the need for lengthy phone calls and manual data collection, helping to smooth the customer journey.

We’ve already done this for a number of companies including a major motor finance company, who we helped improve their customer collections journey by automating their income and expenditure assessments. Find out more in our PSA Finance case study.

Summary

Open banking capabilities can provide lenders with the tools to help them comply with the new consumer duty regulations, by fostering transparency, providing a comprehensive understanding of a consumer's financial status, and minimising risks. Open banking promises a more accountable, efficient, and customer-centric future for the lending industry.

Visit our Open Banking page to discover how Equifax can help you implement an open banking journey and help your business get consumer duty ready.

Or book free consultation with one of our open banking experts to discuss this in more detail.