Over the past decade we have witnessed significant commercial and regulatory changes in the financial services sector generally, but in the last 5 years especially, we have seen the particular focus placed on Consumer Credit. The mortgage sector has seen major changes through the MMR and more recently the EMCD. Other forms of consumer credit, not secured on residential property, (including car finance, personal loans, HCSTC and credit cards) have been extremely busy preparing for and implementing an entirely new regulatory regime under the FCA since April 2014.
These measures have forced businesses to look closely at how they operate, how they interact with the customer, how they approach risk and how they compete.
Background to the market challenges
The solution to “ever decreasing margins” in consumer credit?
There can be no doubt that margins in the alternative lending sector, high-cost credit in particular, have suffered in recent years as a result of multiple regulatory offensives and market disruption.
Margins have been eroded by prolonged “all-time low” interest rates. Lenders have been required to invest heavily to obtain regulatory permission, maintain high regulatory standards and improve lending decisions. Many observers and stakeholders would say “quite right too”. Regulation of consumer credit had been woefully under-enforced and consumers put at risk. The challenge of eroding margins has been magnified by a constant and rapid succession of hurdles placed in front of lenders, primarily by regulators but additionally by changing market forces.
There can be few businesses which have avoided the need to introduce further costs to their operation, in the form of compliance staff, compliance procedures and external professional advice.
Those in specialist niche sectors have seen stringent caps placed upon the interest rate and charges that can be applied to the (consumer) loan.
Strict affordability and suitability standards have been introduced, requiring more detailed checks to be made before lending to a consumer, thus resulting in many more loan applications being refused and therefore an increase in abandonment costs.
Market forces, in the form of a plethora of new and innovative lending products, have offered consumers a solution to every conceivable niche of lending idea, thus adding to an already crowded market and offering consumers “Instant Gratification” when applying for a loan online.
Waste and unnecessary costs
So, as if the challenges of this rapidly evolving market are not enough for lenders to deal with, there is also the ever-present need to control the many and varied costs within the business, the most significant of which are usually;
- Marketing (SEO, Google Ads, repeat customers, lead buying campaigns)
- Bad debt ( caused by ineffective underwriting, fraud, poor collections processes)
- Staff payroll (looking at wasteful applications, making inconsistent decisions)
- Credit reference searches (wasteful searches on applications that will never proceed
In order to improve productivity and therefore reduce costs to combat price compression, it is our view that automated credit decisioning is a huge contributor to driving down costs and improving efficiencies. This is a powerful way of restoring or even increasing margin. There are several reputable providers of such technology on the market and we would urge you to look at all of them.
Introducing automated decisioning to a lending business (or upgrading an existing system) is an important strategic decision for any business to make and can in the short term cause some distraction and apprehension, but if handled correctly and with the right help, it will be a decision that quickly rewards the business.From the perspective of the IT department, the short-term effort required to integrate an automated decisioning platform will very soon be outweighed by the day to savings.
The decisioning platform’s integration with the major credit reference agencies means no more adding and updating each and every third party integrations by the firm’s IT department;
When business rules need to be changed, the credit risk team can make the changes autonomously without disturbing the firm’s IT team. The credit risk team can instantly turn the flow of business on or off, you guessed it, without disturbing the IT team.
But aside from the short-term distraction caused by its introduction, automated decisioning has always suffered from one other barrier, and it has indeed been a major barrier. The typical cost of deploying such a system has easily run into the hundreds of thousands of pounds and the annual support fees have been broadly similar. For this reason, an off the shelf solution so to speak has been an option for only the largest firms. The alternative for smaller firms has been to build a more rudimentary solution with basic functionality and which often retains a heavy involvement from the firm’s IT department to make rule changes and maintain party integrations.
- So we now live in a world where the consumer wants everything NOW, but we also live in a world where fraud has reached high levels of sophistication;
- We have more and more regulation telling us that we must do to protect the consumer and lend responsibly;
- There is greater competition both in terms of price and availability of credit;
- More and more credit providers offer quick online loan portals;
- Technology can greatly expand the virtual trading hours of a business without increasing its costs, therefore diluting the effects of fixed overheads;
So businesses must now ask themselves, do they want to embrace these opportunities and exploit the subsequent market opportunities, or do they want to continue to operate in the way they have always operated and fall further behind whilst becoming more and more uncompetitive.
“If your lending business isn’t already planning to add automation to its credit decisioning, then you’ll miss out on the solution to help you to increase and restore your company margins.”
If your business intends to follow the progressive route, then you need to be talking to LendingMetrics. With one of the best award-winning solutions out there and the most competitive pricing model you will see anywhere, we truly believe you cannot go wrong.
With our dedicated ISO 27001 certified team of UK based IT professionals and our credit risk consultants all on hand to help you through the migration step-by-step, there really is nothing left to chance.
Watch our explainer videos at http://lendingmetrics.com/#page-top