On the face of it, the UK economic recovery is underway. According to the Treasury, the green shoots of are all around us, with Britain expected to be back at 2019 GDP levels by this time next year.
The government-backed Furlough Scheme has now been extended until the end of September. Elsewhere, consumer confidence hit an 11-month high as the end of lockdown loomed alongside clear progress following the roll-out of the nation’s mass vaccination programme.
But is the optimism masking the true picture?
Despite state-sponsored bounce back loans, huge volumes of hidden debt are still prompting critical questions around the true sustainability of micro-businesses and small to medium-sized enterprises (SMEs). Failures are currently being forecast at around 900,000 businesses, with a wave of bankruptcies now predicted by the end of April, warns the Centre for Economic Performance (CEP) and the Alliance for Full Employment (AFFE). Of this, more than one in seven are predicted to be businesses with 10 or fewer employees.
As a result, the true level of financial stress on industry, commerce and consumers is still unclear.
In a bid to shore up its position, HSBC has unveiled a £15bn fund to help UK SMEs through the economic recovery. It includes more than £10bn specifically allocated to support regional employers. Other high-street lenders are looking at similar initiatives.
Alongside this, the Financial Conduct Authority’s recent Woolard Review made 25 recommendations for stronger oversight of unsecured credit channels, increased regulation of buy now, pay later (BNPL) schemes, credit masking, improved credit decision-making, prescriptive forbearance and a review of repeat lending practices. The report has a strong focus on vulnerability assessment and accurate validation, tackling persistent indebtedness, while driving right outcomes.
But getting a clear picture of customers’ true financial position, while treating at-risk borrowers appropriately, continues to pose a headache for lenders. On the one hand, reducing mortgage default enforcement and the promotion of payment holidays are distorting unsecured credit risk analysis. While on the other, salary protection schemes make assessing the true creditworthiness of new and existing customers challenging.
Across the UK, differing demographics are wrestling with the economic impact of the lockdown. This trend is predicted to continue as we come out of lockdown as income protection schemes are eased between now and September.
Lenders are keen to retain existing customers – especially their most resilient. But given the uncertainty and clouded picture of personal finances, the only way to do it is with laser accuracy of risk.
The pandemic’s impact has already reshaped the typical spending habits of millions of UK households with significant reductions in travel and transport overheads, paired with dramatic increases in energy and insurance expenditure.
Despite the evident consumer optimism, multiple demographics and income groups are clearly in differing financial positions given high levels of financial inequality. Many are still at-risk, high-risk, or perilously close to delinquency.
To get a true picture, lenders are now obliged to combine Open Banking transactional data and alternative data sets alongside sharper analytics and real-time data streaming, given adjustments of shadow and actual credit limits can be triggered by a spend, within a matter of nanoseconds. Examples of sharper analytics would be the calculation of a score that indicates the risk of upcoming delinquency based on patterns in transactional data. The analytics would adjust the score based on given employers, job types, government support, increases in certain spending’s and reduction in others (e.g. grocery) to find early indicators of financial stress.
It’s worth noting that collaboration is now far easier than it has ever been, enabling the adoption of analytical and process optimisation, driving a host of capabilities including revised credit lines, alternative offers and pricing. Plugging in to the FICO Platform can help address the many challenges driven by changes in consumer behaviour, economic, market and regulatory drivers.