Lending Technology Think Tank 3.1 Review

5th April 2023

Credit Connect’s hosted its fifth Online Lending Technology Think Tank last week which saw lending strategies and the future of the sector discussed by fourteen leading professionals from a variety of lending sectors.

The event was attended by over a hundred lending professionals from banks, credit card providers building societies, loan providers, credit unions and fintechs were among the viewers across four sessions.

The themes of credit risk, affordability digital lending and regulation were discussed by panellists and Chair Chris Warburton from ROStrategy The insights from the event were recorded and now can be viewed by clicking on this link.

Commenting on the event host Colin White Founding Director at Credit Connect said “It was great to see such a great mix of lending professionals take part in the industry panel discussions supported by the viewer interactions.”

“I look forward to continuing the conversation at the next virtual lending event later this year and at the next face to face version of the event taking place on 23rd November in Manchester.”

Chris Warburton  Director and RO Strategy and Event Chair said  “Like spring, there was a burst of energy in the Lending Technology Think Tank this week. Lots of new ideas and concepts coming through. Clearly, Q1 has been super busy for most folks, and as we know plenty has been happening economically, with regulation and in society, both in the UK and around the world… so there was plenty to discuss and think about for the future.”

“As always there were a couple of big ideas that really caught my attention and made me sit back and think. There are very different responses in demand and arrears levels by market segment. Mortgages are very flat, whereas unsecured lending is seeing increasing loan demand volume with affordability issues spiking

“A discussion around affordability. Can affordability prediction be used to measure whether products are helping customers tend toward better outcomes? (ie evidencing consumer duty). Consumer duty is coming soon, but implementation readiness is mixed. This could be an issue with deadlines in April and July, and resulting in a very busy 6 months for some. ”

“Affordability is as much an issue about income rather than expense. Higher earners just have more wiggle room to not have to think about budgeting as much. They may be poorer budgeters as a result. This may cause issues as financial stress creeps up to higher income cohorts than before. We now need to think about not just the consumer-company relationship, but the consumer-company-regulator relationship. Regulators are taking a more active role. Will pricing be next (as the case in Ireland and in some other markets in the Eurozone).”

“It was a privilege to be able to Chair again. Thanks to everyone for their expert insights, it is always interesting.”

Event speaker, Chanuka Perera, Head of Credit Strategy & Underwriting at Zilch “The lending industry has been quickly evolving over the last few years with the impacts of historic low ongoing interest rates, Covid, changing governments, regulatory reform, and the cost-of-living crisis so it’s always so refreshing to hear how my peers in the industry are also reacting to the times. I found the panels very insightful, and the speakers really understood the challenges we all share in lending.”

Fellow speaker, Paul Martins, Director of Residential Lending & Compliance at Mortgage Evolution said “It was a pleasure to be a part of the panel and to hear the insights of how the other sectors are dealing with the current cost of living crisis and the challenges at present. Although clients have been hesitant in the mortgage market over the past five–six months, there are definitely green shoots coming through as we are seeing some first time buyers entering the market again as we move into spring.”

Louise Allemagne, Compliance Manager at the Lending Standards Board said “In the current economic environment, placing customers at the heart of what firms do is more important than ever. Being cognisant of the challenges customers are facing, offering flexible solutions and being proactive are all vital steps in achieving fair outcomes.”

Andrea Cox, Affordability Director from Experian, the event sponsor, said “I thought it was a really great conversation and I  thoroughly enjoyed taking part.  Affordability is a key focus area across all industries and it was insightful to hear and discuss the views from such a diverse panel.”


Event Questions round-up

Responses to selected questions:

  • How well does the panel find the categorisation quality of open banking data? 

Chanuka Perera from Zilch: It has been almost 5 years since PSD2 and open banking was ratified and we have seen the industry flourish since then. I have seen the global understanding of the transactional data grow exponentially and categorisation especially has definitely improved. From what I’ve seen, experienced Open Banking categorisation services, would have cover over 90% of transactions.

Sho Sugihara from Pave/Fuse: Accurate transaction categorisation is key to successful downstream analytics using Open Banking data. From our own research, we’ve seen that superior categorisation can lead to over 10pp uplifts in Gini scores. We’re seeing specialist transaction enrichment firms (including Fuse by Pave) emerge and believe this will push enrichment quality towards a more satisfactory, value-add level.

  • Are you able to address consumer duty specifically and what kinds of things firms are doing to implement the duty into both operational processes?

Chanuka Perera from Zilch: The consumer duty will help firms continue to have a business wide focus and effective ownership of the outcome rules especial customer facing departments such as Operations, Marketing and Product. For example – there is a requirement to not only believe your customer messaging is clear and transparent, but to also test it with customer surveys. For any responsible firm, there is no real changes need to how the departments operate generally but tweaks to existing processes.

Sho Sugihara from Pave/Fuse: We believe transaction analytics is key to enabling the detailed customer segmentation that the FCA requires, together with real-time insight into customer vulnerability. At Fuse we are building technology that helps firms detect both financial and non-financial vulnerability of customers looking at transaction data, and we are working with Pave (our own app) and clients to implement these models to support with compliance and ensuring good outcomes for consumers.

Paul Martins from Mortgage Evolution: Whilst lenders are still finalising what they need for the introduction of Consumer Duty, it seems most likely that there will be some additional paperwork for the clients to read, sign and return as part of the mortgage application, however, the content and how much this will be remains to be seen.”

  • What are the views on the adoption of open banking payments for collections and/or arrears?

Chanuka Perera from Zilch: Open Banking could be a powerful tool in the collections space, if it already used as part of a lenders’ payment process as it would allow ensuring the consumer has funding before attempting to collect money. The difficulty is, when the consumer is already in arrears, there is currently very little incentive for a consumer to sign up for Open Banking.

Sho Sugihara from Pave/Fuse: We believe the combination of AIS analytics combined with Open Banking PIS has exciting potential to offer customer cashflow centric payment plans, that could even automatically update based on changing customer affordability patterns. We are yet to see wide adoption of such systems in the industry, but it’s clear the technology exists to support it.

  • OBIE said they have seen an increase in consumer uptake of open banking payments because lenders are presenting it as a preferred method and consumers prefer it to make overpayments. Will it reduce fraud, chargebacks, and costs?

Chanuka Perera from Zilch: As we go on, consumers are starting to become more accepting and understanding of Open Banking. There are definite benefits for lenders such as less chargeback risk and the potential for cost optimisation. Additionally knowing that the payment will be successful prior to attempting the payment can be used for better credit risk decisioning as well.

Sho Sugihara from Pave/Fuse: From the research, we’ve done, transaction costs and chargeback costs are likely to decline for lenders as a result of switching from collection methods such as CPA to Open Banking PIS. We do not believe there is enough data to show whether Open Banking PIS will reduce fraud, but this could be an additional benefit.


Session Summaries

Session 1: Credit Risk and the Cost of Living Challenge

  • Customers struggling more than ever before; financially stable customers also facing hardship for the first time; rise in illegal money lending indicates customers are finding finance in different ways; challenge is how to reach those customers and have the right conversations
  • Responsible lenders are reevaluating policies during the current financial squeeze
  • Tips for budget planning: be blunt with people who say they can’t afford it, reconsider expenses like cars, keep an eye on interest rates for loans and mortgages
  • The future looks unpredictable and interest rates are going to be quite unstable for some time. Lending and credit risk models should be proactive in factoring that in
  • The increasing interest rates make it hard for consumers to predict their future outcomes and may restrict borrowing, causing concern
  • Providing more visibility around credit scores to consumers and finding value for the members
  • Firms are making use of customer data to better understand their needs and challenges, and adapting their products and services accordingly
  • Open banking is valuable because it provides real-time data, but it’s not the only source of valuable information. Traditional Bureau data can be just as predictive, and overlaying the two can lead to better decisions. Recalibrating models and updating data is crucial in a changing environment
  • Recency of data is important for loan decisions as borrowers’ financial situations can change between the time their data is received and when the loan is approved
  • Being transparent with customers and helping them be autonomous is vital for putting the customer in a position where they can take forward their financial needs right, and using technology that’s very data-driven, help the customer understand what went into that decision-making and how it’s been evaluated to put them in a position of empowerment
  • Achieving inclusivity in design stage using large language models to summarize customer feedback and core data
  • Companies are focused on putting customers first and ensuring they can afford it without getting into trouble, and see this as an opportunity to examine every part of the business
  • Lenders were more open to helping people during the pandemic.
  • Mortgage lending is at its lowest in seven years, and first-time buyers are starting to look and buy

Session 2: Measuring affordability

  • Affordability differs depending on the type of lending being done. Mortgages require a more granular assessment compared to buy-now-pay-later retail loans
  • New forms of data, combined with analytics methods, are helping assess individuals with unconventional credit backgrounds
  • Real-time data and very quick decisions with open banking data. It helps assess customer expenses better and enables different types of lending
  • Getting the right data sets is crucial for assessing affordability and improving financial inclusion, to generate accurate financial offers for the right people and delivering good customer outcomes
  • Using data to support customer needs and ensuring responsible loan decisions is crucial
  • Establishing future affordability is a difficult equation, but an ongoing dialogue with data and customers is key to creating a picture of affordability that evolves over time
  • Using data to identify sharp changes in costs or affordability, while also having a longer term picture, gives consumers support throughout the lifetime of their product and can lead to better outcomes for the consumer
  • Using data, you can analyze changes in customer behavior such as increased number of loans, credit card usage, and overdrafts, to determine financial resilience and potential financial difficulties
  • Simplifying the affordability process through ongoing checks, by incorporating transaction data and other sources can allow lenders to become more outcomes-focused for their customers
  • Investing in technology to enrich transaction or credit file data and paint a more accurate picture of the consumer only may not be the best way to win customers over. Resources should be invested in ensuring good outcomes to the consumer through excellent customer support or ongoing care journeys
  • There is a lack of standardized view across the industry regarding good or bad customer outcome in affordability assessment
  • Investing in data and understanding will help provide better outcomes to customers, and is the future of the market

Session 3: Regulations and changes in lending

  • The industry is polarized around the readiness for the implementation of Consumer Duty, with some seeing it as a radical shift requiring fundamental questions and others seeing it as simply treating customers fairly with a different badge
  • The impact of consumer duty on customers should be positive, with better transparency and outcomes for them
  • Innovation in finance will come from this in new firms, while some established firms may not see the need to innovate and will suffer consequences from lack of innovation
  • Challenge will be with evidencing adherence to principles-based regulation and the subjectivity of compliance
  • Changing your mind as evidence changes is however entirely rational even if others view it differently. This however will still be a challenge with Principles based regulation
  • Consumer Credit Act: The consultation process is underway involving different organizations including the treasury and FCA to determine the rules and regulations for customer engagement, communication and more in the consumer credit sector
  • Increasing regulation adds friction to the Buy Now Pay Later journey, creating tension withing the business model. Interesting to watch
  • Complaints coming from people who have never had a loan with a particular company are a significant concern seen with CMCs
  • Regulation around AI is inevitable due to the increasing complexity of algorithmic instruments which no human mind can grapple with. Over complexity and not understanding how things work fully is one of the biggest contributing reason to financial volatility in the last 15 years
  • The potential negative impact of AI and machine learning in areas like HR recruitment and lending to certain communities should be carefully considered. It needs to be regulated to ensure fair and unbiased practices

Session 4: Digital Lending

  • There is increased interest in digital lending from both consumers and new lenders coming to the market, as well as existing lenders adopting more digital processes to improve efficiency and margins.
  • The remaining retail banks still have a branch network, but there is a lot of emphasis on digital focus and distribution channels
  • The lending decision process outside of the application process easier with good affordability. Someone who has a decent credit score and not looking to borrow too much or for an obscure or a purpose, will be easy to automate. Digital adoption however still has some inefficiencies that can make affordability assessment difficult
  • In Ireland, the Irish government changed legislation to cap interest rates at a 23% APR for consumer and personal lending. This will reduce net interest margins and therefore the level of risk that banks can take on, making credit markers less available for some people
  • It is going to be a challenging for near prime lenders and clients. The regulator is getting involved in pricing
  • Open finance is a huge opportunity, but consumer adoption is a challenge due to non-uniform approach and the need for value exchange, which in many cases is still not clear
  • Clients are hesitant to share too much information with banks and have concerns around over-sharing personal information via bank statements. This poses a challenge to get clients to be more open to the benefits of open banking and open finance
  • Digital lenders will have to adopt manual processes to ensure financial inclusion is achieved. This is a challenge that has not been looked at strongly enough by many digital lenders when they were setting up
  • Machine learning algorithms can make lending decisions based on customer’s background, career field, and propensity to repay the loan rather than just credit history
  • The urgency for completion of mortgage cases is causing lenders and brokers to adapt and find ways to give quicker answers
  • Data-driven lending decision is being used up-front instead of underwriting, making the two-step process more streamlined

* ALL EVENT DATA AND SUMMARIES ARE COPYRIGHTED TO CREDIT CONNECT MEDIA AND SHOULD NOT BE USED OR SHARED WITHOUT OUR PERMISSION

Lending Technology - Think-tank

Recordings will also be added soon to Credit Connect’s Youtube channel. An archive of all past digital events can be viewed on Credit Connect’s Youtube channel which can be found here.