David Wylie, Commercial Director of LendingMetrics, predicts bumpy times ahead for lenders unable to adapt rapidly to what is becoming constant macroeconomic change.

It’s quite sobering to consider how much economic conditions have changed over the past couple of years. It has been a bit like a child’s kaleidoscope - one minute the picture looks one way, the next it is totally different.

At the beginning of 2021, inflation was slightly ahead of its 1.4% level of the previous year, interest rates were just 0.25%, and there was no reason to believe anything was going to change dramatically for the worse.

Sure, the economy had been hit hard by Covid lockdowns and pundits predicted a gradual uptick in inflation as consumers, released from house arrest, spent their money again, but it would be a blip rather than anything more serious. And a ‘good’ blip at that, given that the uptick would be down to increased economic activity.

Then, in early Spring 2021, came another wave of Covid and national lockdown. The brakes were slammed on again and economic activity stalled, at the same time government spending (borrowing) was supercharged.

The UK plateaued through the rest of that year, only for Russia’s invasion of Ukraine to unleash monster inflation at the beginning of 2022.

So, from 1.4% inflation, we now have 11.1%, and from a 0.25% Bank Base Rate, we now have one of 3% and rising.

You could be forgiven for thinking that we have been, and still are, on an economic rollercoaster.

Already we have sight of the next cycle, with the Bank of England expecting inflation to fall sharply from the middle of 2023, as demand for goods and services falls away and the impact of the energy price cap is felt.

This sort of thing is not a pleasant experience for lenders. Such big swings lead to borrower risk profiles markedly changing almost overnight, along with affordability calculations, given the variety of variables at play.

What has made matters worse is that at a time when lenders have had to put up interest rates, the cost of everything else has been increasing too. Ordinarily, during times of recession, inflation falls along with interest rates, but this has not been the case in recent months. Regular finance payments have risen sharply along with everything else, while disposable income has been shrinking.

Additionally, industries that used to provide vanilla-grade job security suddenly do not. Who would have expected job tenure at the likes of Meta and Twitter to be so precarious?

Such an unsettled backdrop is making lending calculations far more tricky, and this places an emphasis on the need for assessments to be dynamic and reflective of real-time market conditions.

In these circumstances, finance providers need to ask themself a key question, the answer to which will determine their viability in the years ahead: “Do I have the ability to analyse market changes week-by-week and adapt my lending swiftly to the new reality?”

Having had the conversations I have with lenders over the past few years, I know that most, if they are honest with themselves, will answer ‘no’ to this question.

Unbelievably, there are plenty who still use manual underwriting, and there are others hobbled by ‘hard-coded’ decision engines. Many have both.

The obstacles when trying to implement rapidly-changing decision protocols via a manual underwriting team are self-evident and need not be stated here.

Regarding hard-coding, it is hopelessly time consuming. Scorecard changes have to join the tedious list of jobs lined up for the IT department or contractor, which can take days or more often weeks. Even then, they are rarely error free, so a testing phase is needed using ad hoc scripts.

What chance have you got to introduce timely changes when you’re operating in this environment?

Any lender looking to be around for the longer term and make a decent profit needs to be in a position where they can introduce swift changes to their lending regime almost overnight.

It looks like we are in the midst of a sustained period of volatility, so this is going to be of massive importance. The mini-Budget debacle was a foretaste of what can happen when you are slow to adapt. The Chancellor’s ill-fated announcement left a number of high-profile lenders caught like rabbits in the headlights. They were unable to respond to changed market conditions, so had to effectively withdraw temporarily from the market and re-price.

Lenders should be able to reflect changes within hours of budgets, US Presidential elections, reversals of war, industry travails, etc. And it is not as if this is a difficult ‘ask’, given that they can already do this with plug-and-play automated decisioning platforms such as our own ADP.

The bottom line is that if they don’t employ such technology and fail to flex with macro change, they will be pricing for a ‘no’ when they should be pricing for a ‘yes’, and vice versa.