“People are 33% more likely to develop a mental health issue if they find themselves struggling with debt, 70% of debt advice clients were prescribed medication from their GP to help them cope with debt-related mental health difficulty, and 33% have attempted or contemplated suicide as a result of their debt.”
- from Maxed Out: Serious Personal Debt in Britain; A policy Report from the Centre for Social Justice Working Group, 2013
Over the last month we have examined in some detail the new regulations that are being brought to bear by the FCA. These changes, from November 1st 2018, and depending on the time you read these words, are either imminent on the horizon, or have already been introduced.
Beginning with the FCAs decisioning and reasoning behind the new policies, we inspected how not considering affordability was the final nail in the coffin for Wonga, whether affordability could be calculated through the use of credit reference agencies, before finally picking up on the FCA’s open letter to the CEOs of all high cost, short term creditors (HCSTCs) from October 15th.
We recognise that the impact the new rules will have will be considerable for many lenders. Clearly none will want to go the same way as Wonga.
So what can be done?
Through the context of this article we recommend a solution. A solution that offers instant decisioning based on a verified source of data, promulgates responsible lending and offers a seamless customer experience.
The impending issue for lenders, particularly those in the HCSTC market, is the new rules being enforced from November 1st. From this date, lenders need to complete a thorough affordability assessment of each applicant prior to issuance of credit.
As we have detailed in past articles, the intricacies surrounding affordability make even a simple loan application exponentially more complex. Part science, part backward-looking, and part future-gazing, the assent of a loan will require a panoply of data and the ability to interpret the results.
Where loan providers could historically restrict themselves to the examination of credit risk (“what is the risk the loanee will not repay the loan”), they must now consider the applicant and the financial impact that acceptance of the loan will have on their finances (“if I approve this loan, is there a chance it could cause them financial distress”). Taken together, credit risk and affordability make up an applicant’s creditworthiness.
The effects of this consideration are sure to be considerable. At this time, a lender will check an applicant through credit reference agencies. This gives an understanding of the type of loans, credit cards and bank accounts the applicant has, and has had historically. They may also request bank statements to be sent in to gain an understanding of salary or income, and regular outgoings. Based on this information they can make a judgement on whether the applicant has the necessary resource to repay the loan.
Affordability adds another dimension to this equation by demanding that as well as the above, the lender also consider what the impact will be on the applicant should the loan be offered. To complicate matters further, they must also consider what an unexpected incident (serious illness, divorce, job loss etc) will have on the applicant’s ability to repay the loan and whether this could leave them financially distressed.
This new step will require more detailed information being requested and consumed from the applicant. Requests for documentation, as any financial institution can attest, slows down internal processes, lessens the chance of the applicant completing the application, and lengthens the time from initial contact to being able to bill for services.
From January of 2018 the nine largest banks in the UK (CMA9) were mandated by the FCA to surrender customer data to other companies at the behest of the consumer.
Open Banking has arrived in the UK.
Through the use of APIs, customers when buying a product or service can be directed to the login page of their internet banking. After logging in, APIs are given access to (read only) information.
Completely secure, and offering read-only access to any information, Open Banking is a game changer in financial services. In the context of affordability, it completely removes the need for customers to send in bank statements and pay slips. With the ability to see what outgoings the applicant has compared to salary or income, calculating discretionary spend becomes far simpler. With sight of discretionary spend and available resource, financial institutions are therefore much better placed to make judgements on whether a loan is affordable for the applicant.
Open Banking is even wider than affordability. As technology has progressed, data and the use of data has become ever more important. As illustrated by the Facebook-Cambridge Analytica scandal, and the introduction of GDPR in the EU, strict limits are being imposed on how customer’s data is utilised. The introduction of Open Banking facilitates individuals taking control of their own financial data. This in turn will allow for personalisation of services and consumer choice for the individual.
With 61% of retail banks saying removing friction in the customer onboarding process was the most important trend for 2018 in a recent report from MIT Techonolgy Review, it is clear to see just how much of an impression Open Banking can make both in the UK and globally.
An Open Banking Solution
The ID Co. has been working with bank data since 2011. DirectID, our B2B offering was launched in 2015 to offer financial institutions’ customers a seamless onboarding experience.
Today, DirectID integrates with over 5,500 banks across the globe (including the CMA9 and Monzo and Starling Bank in the UK) with 30+ customers globally.
An Affordability Solution
Through Open Banking, DirectID has the power to solve affordability issues.
As we’ve discussed, calculating affordability comes down to understanding an applicant’s discretionary spend, and calculating whether they are sufficiently financially insulated to afford a new loan.
Through Open Banking, customers can login to their internet banking following a loan application and the information required to make a decision encompassing both credit-risk and affordability is accessible.
In today’s complex world, fewer and fewer individuals are working stable 9-5pm jobs, and there is an increase in self-employment, zero hours contracts, and the gig economy. Do credit reference agencies offer all the information required to make a decision on the future ability of an individual to repay a loan? Similarly, young people and those that have never applied for, or have required, credit, will have thin credit files. Will credit reference agencies provide all the requisite information to make a complex decision?
With DirectID, financial institutions can sleep easy in the knowledge that they will have access to the full picture. Even more importantly, customers will be assured that decisions are based on the full facts, and the service offered is bespoke to their needs.
DirectID also removes unnecessary documentation such as bank statements and pay slips being sent through the post. We know that loan providers want to make decisions in the fastest possible time. DirectID provides this ability and reduces unfulfilled applications, thus improving customer experience.
And the best part of DirectID? With no complex integrations, customers can be up and running in less than a week.
The new requirements from the FCA are the most impactful for lenders since their 2014 regulations capping interest rates and default charges. Financial institutions must be able to justify the basis on which a loan decision is made, and particularly if it was affordable for the customer.
As with many FCA regulations, they have left it vague as to how lenders are to reach their decision, allowing them considerable scope in how it is to be accomplished.
As we have shown in previous articles, and related again above, technologies provided through the implementation of Open Banking are a fast and secure route to the information required, offering superior customer service, and importantly, satisfying affordability criteria.
DirectID from The ID Co. is the most comprehensive solution on the market today. We have been regulated by the FCA as an Open Banking Account Information Service Provider (AISP) in the UK.
Talk to our team today about getting started with DirectID.