As FCA affordability regulation continues to evolve, the industry is carefully considering the impact on end consumers. Affordability must be properly assessed to ensure that consumers only access products that are right for them. Checks vary in complexity depending on the product being applied for, but they largely focus on an individual’s credit history and their historical ability to meet repayments. Some people have asked whether these checks can actually have a negative effect on consumers, limiting lending activity.

Lending is certainly not appropriate in all circumstances. In the worst case scenarios, it can be detrimental in the long-term, causing difficulties in meeting financial commitments. These situations should absolutely be avoided, but in other situations, affordability checks may actually improve the likelihood of a consumer getting access to credit.

Greater focus on improved affordability checks means that lenders now have access to a wider range of data sources, for example, Current Account Turnover (CATO) data, property valuations and more to come. This makes it possible to gain a more comprehensive picture of consumers and their circumstances.

It can also help build up the profile of those who may have a ‘thin file’. Consumers with a thin file may be younger people, people who simply have limited need for credit, or those new to the country. They will often struggle to gain credit, as their ability to repay, which firms often base on past performance, is unknown.

How do enhanced affordability checks work?

New to the country, Cross-border data sharing is rare, especially credit repayment data. This means that a customer who has previously had a clean credit history, and an excellent credit score in one country, may emigrate to a new country and find themselves struggling to be accepted for credit. How do we lend to these people?

Someone who has moved from another country to the UK in the last few years will most likely struggle to get credit as they don’t yet have enough UK credit history. Using current account data, which has been made available in the last few years, makes it possible to see current account turnover, balances and limits, enabling lenders to properly assess their customers and show whether they can afford the loan despite a lack of credit history.

Limited need for credit

People who rarely use credit will also benefit from this additional data. A possible case here could be someone who applies for a credit card but faces difficulty getting accepted as they don’t currently have any other credit. They’d only ever had, for example, a mortgage, which has been paid off for years. Some lenders who only use traditional credit information would draw a blank when assessing these types of consumers. However, a data source such as property valuation could help.

New to credit

Young people, not previously old enough to apply for credit, or maybe living at home with no need for credit, can also struggle to borrow due to a lack of credit history. They might be great payers but with no history to prove it yet. So how can we assess them?

The data sources already discussed could help, but let’s also look to the future. Open Banking and Payment Services Directive 2 (PSD2) are hot topics in the financial space right now and will make access to personal data easier. These initiatives will enable consumers to use their own current account transactional data as their ‘passport’ to credit online, avoiding the need to print off and post statements.

he Payment Services Directive 2 (PSD2), European-wide regulation that comes into force in January 2018, will bring huge changes to the financial world and is encouraging new players to enter the payments market. This increased competition will lead to more choice and better outcomes for consumers. One of the outcomes from PSD2 in the UK will be Open Banking, also starting in January 2018. It should be a real game changer, particularly for people in situations like those outlined above.

Open banking will mean that consumers and business will be able to make their bank transaction data available digitally to share securely, and only with their agreed consent, via open application program interfaces (APIs). They will be able to plug into new services and providers. This means people can access products that are better tailored to their needs, or offer better value, and also gives them a new way to prove their financial worth so they can access credit without all the hassle.

A win-win situation

The increased regulation around affordability assessments and the power to incorporate additional data sources will bring long term benefits to both lenders and consumers. Robust and transparent data can provide lenders with the additional informational needed to make responsible lending decisions; more consumers can be accepted for credit and at the same time lenders can avoid offering products that are unsuitable for a customer’s needs. Knowledge is power and new affordability measurements are changing the future of borrowing and lending for the better.

 

Laura Hales, Product Management Consultant, Equifax