New Affordability – the key to tackling persistent debt? (Part 1)
Consumer lending and the surrounding regulation has changed dramatically in the last two decades.
Earlier this year, the Financial Conduct Authority (FCA) announced that credit card companies will have to not just provide more support to customers in persistent debt, but intervene earlier to help them avoid getting into financial difficulty in the first place.
As this example demonstrates, processes around assessing affordability and treating customers fairly continue to evolve at a rapid pace. To better understand the changing attitudes towards affordability over the past decade, we undertook some independent research amongst risk professionals and customer experience managers. The research identified the key concerns facing lenders over affordability checks, as well as their main business priorities and future predictions when it comes to affordability assessments.
Based on these insights, and in light of the FCA’s latest plan for the card industry, this article will consider how organisations can be better prepared to deal with ever-changing requirements and tackle persistent debt.
Protecting customers from financial hardship
Our research found that lenders are now more focused on the customer than ever before, and are truly beginning to put them at the heart of every decision they make. A large majority (72%) believe that they have a social responsibility to prevent customers from overstretching themselves financially – a trend the recent FCA proposal will likely only accelerate.
Affordability assessments play a central role in helping lenders achieve this in practice. Using big data technologies, modern assessments can provide the most accurate, real-time view of a customer’s full financial situation, including their income, living costs and spending habits. This comprehensive understanding of a customer’s financial background gives lenders a better view of a potential borrower’s ability to make repayments, helping them take more informed lending decisions.
But the need for responsible lending does not stop at the initial lending decision, as a customer’s circumstances could change at any time. Rather it should be an ongoing priority in order to avoid individual’s getting into financial difficulty throughout the entire customer lifecycle.
Assessing affordability, both at point of application and future sustainability, is key to helping consumers not just avoid financial difficulty but manage their finances more effectively. In addition to giving lenders a comprehensive view of their customer as a whole, consistently carrying out affordability assessments can help flag when a person’s financial situation changes early on and identify those customers who truly need support. These insights can be used to tailor services and payment plans to better meet customers’ individual needs, and help them avoid getting into arrears or agreeing to unsustainable repayment plans.
What’s more, by being able to easily identify those customers already in financial difficulty, lenders can then also take steps to help them better manage their debt. A number of banks currently using affordability data as an identification trigger for a pre-delinquency contact, are then proactively trying to engage customers to review their financial situation and see if they can support them. For example, by giving debt advice through internal or external referrals and suggesting arrangement plans or full debt restructures.
By enabling them to identify and reach out to the customer at the right time before they meet the persistent debt definition, this approach will help lenders meet regulatory requirements such as the FCA’s recent proposal on credit cards.