David Wylie says the pandemic is going to result in major changes to borrower profiles and that only the nimblest lenders will be able to thrive.
The pandemic has changed how we all do things. Quite how dramatically will only become fully apparent as the weeks and months after the lifting of the lockdown tick by.
We’ve already had more than an inkling of what the changes to the status quo will likely be. We can all say without much fear of contradiction that digital payment will increasingly be used rather than cash, digital platforms are replacing bricks and mortar, and consumers will look for instant gratification rather than expectation management.
Spending the best part of a year in lockdown has convinced many more of us of the benefits of using technology to obtain what we want, when we want it. Even late arrivals to the digital scene are now benefiting from the shift in behaviour.
These are the obvious big-headline changes that we all know about, but there are many more that don’t show up quite so prominently on the radar. Changes that may be every bit as significant.
I can already see a major one in lending.
The pandemic is amplifying a particular type of finance applicant; one that is going to account for a large and growing tranche of applications going forward. What could be termed the ‘newly non-prime’.
Covid-19 unleashed a wrecking ball onto the pre-pandemic underwriting scene. Unlike previous downturns, individuals from all walks of life have been impacted. Even those with unblemished credit scores will have had alerts placed on their credit files in recent months through furlough, mortgage holidays or temporary unemployment.
A large number with up-to-now ‘prime’ credit profiles will no longer present as well to lenders.
In terms of the typical underwriting scorecard, the ratio of prime to non-prime will tilt towards what in earlier times would have been regarded as the sub-prime end of the spectrum.
While this shift has been happening to borrowers, lenders have been busy adjusting their lending exposures in the light of the damage done to the economy. Credit card companies, for example, have unilaterally reduced credit limits with little or no customer consultation. Most notably, Barclaycard has told 100,000 of its customers that their limits are to be cut by as much as 90%.
Lenders have imposed these restrictions following a period of record consumer paying down of debt. According to Bank of England figures, some £15.6bn was settled between last March and October alone.
This double whammy - of the newly non-prime and reduced finance availability - is going to lead to unpleasant surprises when consumers apply again for finance in the weeks and months ahead. They might have spent the past year reducing debt, but now that they need credit again, their plastic spending limit has been slashed and for some their credit profile has deteriorated.
Their need for finance is still there though. With the lockdown over and them being back at the workplace, they will want to spend on their deferred home improvements, holidays, cars, etc.
This mismatch is a challenge that presents a huge opportunity for those lenders who are able and willing to respond creatively.
Those in a position to make more sophisticated underwriting decisions, to take account of a multitude of variables, and come up with a more bespoke decision for each applicant are going to find a large market to tap. Not only will they be lending more to existing customers, but there will also be a sizeable number of people who will be looking for a new credit card provider, new unsecured lender, or remortgage bank.
Thankfully, using technology and automated underwriting platforms, there are lenders who can rise to this challenge.
These lenders use platforms like LendingMetrics’ Auto Decision Platform (ADP) to give themselves a previously unheard of level of granularity. In addition, by utilising Open Banking and multiple third-party bureaus they can drill down in real-time into each application to come up with an optimal lending solution for that particular person.
Never has it been more important to have such tools. Not only do they enable lenders to quickly and comprehensively adapt to the immediate post-pandemic world, they also allow them to flex as the economy moves forward and changes as it undoubtedly will. Structural changes will be picked up and dialed into lending algorithms, so that the bigger picture can always be seen and used to guide each decision.
If I were a lender at this pivotal time, I would ask myself one key question: is my credit decisioning capable of adapting to this changed environment? If I wasn’t sure of the answer, I wouldn’t be counting on a straightforward bounce back to pre-pandemic business levels any time soon.