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In Focus Collections

A changing landscape

The intensified focus on ‘customer outcome’ has led to lenders changing their approach to back-book affordability assessments

Ian Renard Business product manager – affordability, Callcredit Information Group

Recently we have noticed lenders have changed their approach and appetite in relation to back-book affordability assessments. Rather than the traditional approach

underpinned by a set of credit-risk-based policy exclusions, behavioural scores and credit usage or utilisation measures, we have seen an increase in focus on: l Robust and timely data. l Customer outcomes. l Stressed scenarios. l Transparency and evidence. Whilst the traditional approach has been

effective in stimulating spend and generating revenue, one of the main reasons lenders have stepped back and reviewed their strategies is the roll-out of the consumer credit sourcebook (CONC) across consumer credit and the intensified focus on the ‘customer outcome’. This changing landscape, and move to enhanced customer- level decisioning, should ultimately ensure good customer outcomes are achieved whilst maintaining ‘good profits’ and margins. It is clear that the use of data is central

throughout this journey – from the deployment of accurate and timely affordability assessments, to tracking the customer outcome as a result of the increased exposure. Ensuring lending is affordable and sustainable for a customer can only truly be achieved if their full financial position and potential outcomes are understood.

Robust and timely data We must ensure assessments are underpinned by accurate data sources that provide a realistic view of the customer’s financial position and their capability to accommodate the additional credit commitment via a


discretionary income derivation. The main challenge observed in this area is ensuring the customer’s income data used is reliable and up to date – internally held income data is often out-dated and based on what has been captured on old credit applications.

Understanding the customer outcome Success criteria have historically focused heavily on the profit-and-loss impact and the additional revenues that could be achieved. Whilst this internal-looking view is still fundamental to any growth strategy, the customer outcome is now being considered the primary performance indicator – that is, ensuring the product is

Stressed scenarios Whilst understanding the customer’s current affordability position is key, lenders are now expected to consider future changes in the customer’s circumstances and feed these through into their affordability assessments. This could be information known and stated by the customer – for example, planned retirement date or the expected date of completion of a contract – or it could be more economic factors, such as the additional mortgage commitments resulting from a base-rate rise. These scenarios are being applied to

lenders’ back-books at a customer level and feeding through into credit pre-assessments, particularly in relationship to longer-term facilities.

Whilst understanding the customer’s current affordability position is key, lenders are expected to consider future changes in circumstances

appropriate for the customer and that the increased commitment is affordable over the term of the agreement. Understanding the worst-case scenario, from an affordability perspective, is the key here; for example, if the customer utilises the full increased line or borrows up to their pre-assessed loan limit, is their repayment affordable? In addition to the strategy itself, lenders’

controls and sign-off processes have increased in rigour, with customer-centric checklists and MI in place to ensure customer impact is understood up front, mitigating future consumer detriment.

Transparency and evidencing There has been an aspiration to deploy more logical and transparent income-and- expenditure approaches where each component is derived and understood, moving away from the sole reliance on credit scoring. This move is partly driven by the desire

to understand each customer’s full financial position and circumstances before considering their ‘next best action’, but also to improve clarity in both customer communication and when evidencing decisions that have been taken. The lending landscape is one that has,

and will continue to change, but the importance of a robust affordability assessment will not – lenders need to ensure they are on the front-foot and have flexible solutions in place that can adapt to this change whilst maintaining the focus on the customer outcome. CCR

October 2015

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