Accurate Affordability Decisions for Responsible Lending More Critical Than Ever


James Varga
Written by James Varga

CEO, Founder

Since taking over in April this year the Financial Conduct Authority (FCA) is tightening regulation for responsible lending making the accuracy of affordability decisions more critical than ever.

In recent months we've seen payday lender Wonga write off £220 million worth of debt after the regulator found the company failed to conduct adequate affordability checks. Also, The Royal Bank of Scotland was fined £14.5 million for failing to provide customers with suitable mortgage advice.

With the new responsible lending guidelines in full force, lenders must follow stricter affordability checks including detailed income and outgoings expenditure. However, many lenders we talk to don’t realise how easy accurate credit risk analysis is when live bank transaction data is used.

Below, we look at some key areas where live financial transaction data, direct from the customer's bank account, can improve the accuracy of affordability decisions so lenders not only meet compliance but, increase market share and profitability too.

 

Protect against tightening regulation

Director of supervision for the FCA, Clive Adamson said last week that recent scrutiny on payday lenders "… should put the rest of the industry on notice - they need to lend affordably and responsibly."

Using live bank transaction data for affordability decisions provides a level of insight into a customer's financial profile which previously has not been possible. This up-to-date and accurate record of the financial status of the applicant far exceeds the capabilities of credit data in proving earnings and expenditure, removing the risk of regulatory fines that comes with sole reliance on traditional credit and bureau checks.

 

Stay ahead of increasing competition

Competition is increasing and those looking to enter the UK market typically have a greater understanding of the value alternative data sources such as live bank data bring. UK lenders are still largely unaware of the power these types of data sources yield and are still using bureau and credit reference data in their underwriting process.

The limitations of this data are the historical nature of the reporting, the reliability of self-reported data, and over-reliance on credit and utility data sources. With live bank transaction data from all account types - current/ checking, savings and credit, the precise financial position of the applicant can be clearly understood to improve the accuracy in lending decisions.

 

Drive service value and profits

Not only is live bank data powerful in enabling accurate credit risk assessment but, with solutions such as ours there is the ability to ask customers for ongoing access to their bank transaction data. The benefits of this continual insight into your customer's financial positon include increasing efficiencies and effectiveness in debt recovery collection and proactive customer engagement that adds value to your service and aids customer retention.

Our service DirectID is enabling lenders to embed ID&V and live financial transaction data for accurate and compliant underwriting.

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