While there are numerous factors that serve to define financial vulnerability, put simply, the term describes borrowers with limited or no means to repay debt, usually triggered by an unexpected loss of income or sudden and uncontrollable increase in expenditure. For lenders, being able to identify exposed borrowers early on in the credit journey and respond accordingly is essential to safeguarding clients.
An inevitable consequence of the rising cost of living and increased interest rates is a surge in missed payments, as well as higher total borrowings ending up in default.
Susan Rann, CEO of Paylink Solutions, in our recent webinar discussion, noted: ‘Our sister company, PayPlan, have seen that 53% of customers that contact them today are registering some form of financial vulnerability’.
As utility costs soar and mortgage rates continue to rise, demand for accurate, up-to-date borrower information for better affordability assessments is at an all-time high. But with recent research from the Open Banking platform, Tink finds that 50% of UK lenders are not using technology to generate credit scores based on bank account data, a landscape of affordability misjudgements and subsequent arrears could be in place for some time.
Average power prices in select European countries
In response to the deepening crisis, UK regulator FCA announced the rollout of a new consumer duty that will safeguard borrowers by enabling increased enforcement powers against lenders offering ill-suiting financial products and failing to provide adequate support– amongst other malpractices.
In recent years, the financial industry has seen a marked uptick in the popularity of neobanks, fintechs, and other market disruptors offering alternative forms of finance. These digital-first operators have surged in popularity due to a ‘growth at all costs’ mindset that emphasises quick expansion and fast customer acquisition. But the weight of widespread recessionary pressures and squeezes on income have created the need for a pullback in spending and an adjustment in lending approaches.
While accurately assessing the customer affordability profile at the first instance is essential to reducing delinquency risks, long-term financial products such as mortgages require proactive approaches to support the payment burden on customers across an extended period. To account for this, many banks offer forbearance measures, allowing borrowers to temporarily reduce or pause payments to allow for increases in financial stability.
The proliferation of Buy Now, Pay Later (BNPL) operators such as Klarna and Sezzle has given rise to an increased reliance on quick credit in recent years, with a growing number of consumers seeking fast, easy access to finance. The call for digital finance products and embedded lending is the product of consumer shifts towards heightened borrower autonomy, barrier-free credit, and enhanced personalisation.
BNPL services may present notable risks to vulnerable lenders though since digital lenders are not typically subject to the same regulatory frameworks as conventional banks. Further, traditional lenders perform stricter credit checks than BNPL providers. Nevertheless, regulators such as the European System of Financial Supervision (ESFS) can enforce disciplinary measures against lenders using misleading language to promote their services.
UK Mortgage Default Index: 2022 Q1
Source: Millian - Mortgage Default Index: 2022 Q1
Open Banking has become an invaluable resource in arming lenders with customer insights and fine-grained information that accurately reflects the user’s financial state. Data harnessed from Open Banking enables firms to make better-informed lending decisions and accurately strategise with reduced risk.
In order to effectively leverage the insights gained from access to customer information, robust tools are necessary—both to handle high data volumes and automate lending and collections processes. And by implementing digital-first approaches to credit, businesses can emphasise customer service and equip customers with a means of support when self-service and automation won’t suffice.
Before indebtedness takes hold, signposting customers with budget distress to sources for improving income and reducing everyday overheads (such as energy and utility costs) can also prevent increases in vulnerability during the repayment process.
At scale, data, systems, and people can serve as essential components in enabling improved customer service and fostering a client-centric approach to lending and collections. The personalised approach facilitated by better data insights and enhanced digitisation—in combination with human points of contact—can significantly reduce budget distress for consumers and better safeguard lenders in a challenging financial market. Early and proactive intervention is the key to effective credit risk management.
Adriana Ellice-Flint has over 20 years of experience in banking and tech, with more than 10 years spent specifically in the banking regulatory space, where she worked for the leading vendors in regulatory solutions, which gave her exposure to all tiers of banks and their ecosystems. Lately, Adriana has been active in the fintech space, where she has been steadily rising through the ranks of product managers, and recently became a product leader in receeve GmbH. Her global experience is helping receeve to design growth strategies and to lead accelerated product growth.
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