Alternative lenders must make the most of technology
It was fascinating to watch the publication of the of the recent High Cost Credit review as a supporting character rather than a main player
The gaze of the FCA has been elsewhere in recent months and, in some ways, that has allowed short-term lenders to return to the business of lending. Just as importantly, they continue to be at the forefront of innovation and this is always exciting as alternative lenders have a track-record in technological advances.
Many firms can take pride in the innovation they brought to lending. While there may have been concerns about how easy borrowing had become, some of that came from firms creating a much better user experience. Innovations such as ‘sliders’, or the analytics around application behaviour, are now much more common across lending.
Earlier this year, at the Credit Summit, I was asked to chair sessions where firms shared some of the emerging technology, and the innovations they are bringing to provide solutions or new products. It was great to see that they continue to develop new systems to further enhance their decision-making process and the customer journey.
With large, high profile breaches, recently being reported in other industries, it is not surprising that cyber security is one of the largest areas that companies are investing in from a technology perspective. This includes looking at how new technology can make firms more robust to these types of attack. I think we will see investment across the entire financial services industry continuing in this area. Linked to that, is the constant battle to keep ahead of fraudsters, with technological weapons on both sides.
It is exciting to see that firms are also asking how new technology can help vulnerable customers, particularly those with damaged or thin credit files. On a large scale, innovation could improve access to credit as new products develop to meet the needs of very specific customer groups. While the mainstream lenders have become much better at working with those finding themselves in a difficult position, they tend to avoid them as customers.
Reputable short-term lenders have also used technological developments in their approach assessing affordability and creditworthiness. The checks carried out by short-term lenders are arguably more rigorous than the checks carried out by other consumer credit providers, such as banks and credit card issuers, such is the number of data points firms now call upon.
The development of ‘open banking’ also generates new opportunities when it comes to data, and the potential is still unknown.
It would be impossible not to write an article on new technology without mentioning AI, the use of which is starting to infiltrate the thinking of firms in this sector. It is still early days, but I suspect the challenge will be striking the right balance between efficiency and customer experience.
While firms have been investing, there does remain some uncertainty in the industry, which may impact on whether this is sustainable. Investment in these new areas depends on confidence in the future. The high-cost short-term credit market has changed dramatically in recent years. The size of the market has shrunk, reducing the commercial opportunity, and there continue to be legacy costs – not least the rising number of complaints.
Firms need to make difficult decisions about where to place their resources. It can be difficult to identify the opportunities for innovation and gather the funds required.
We can expect to see more innovation from those that might be described as alternative lenders. New technologies are entering all areas of the lending process and bringing improvements for customers. These are customers that have not been well-served by the mainstream. Every gain counts.
The test will now be how much firms are willing to invest in an industry that is still letting the regulatory dust settle. Our hope is that alternative lenders will continue to be the innovators and disrupters.