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Comprehensive credit reporting will soon leave unprepared finance providers with unprofitable business models while it spurs those ahead of the curve to further success, says credit and risk consultant Andrew Tierney
The news that most consumers can now benefit from comprehensive credit reporting should come as a wake-up call to finance providers who have yet to embrace the digital era.
All four major banks are now providing credit bureaux with detailed customer transaction data relating to credit card usage, personal loans, mortgages and other financial commitments.
CCR is poised to reshape our industry. ‘Game changer’ may be an overused phrase – but in this case it’s accurate. For this reason, it surprises me that there are a large number of credit providers still stuck in the analogue era, who show no signs of wanting to change. They aren’t benefiting from CCR and don’t seem to want to.
For example, while talking to a subprime lender just last week about what he was doing to meet this new challenge, he said his company already treated all applicants as subprime, with an interest rate that reflected the level of risk. He didn’t need transaction data direct from the applicant’s current account to help him make a decision, so why fix something that had been generating profits for as long as he could remember?
I can’t imagine how those with this mindset, determined to carry on as they have done, will still be in business in 10, maybe even five years’ time.
While many don’t see it at first, there’s eventually a light-bulb moment that arrives once you spell out how CCR is going to impact their business.
For the lender I mentioned, all it took was me pointing out that legislation requires lenders to use all the tools available to understand the risk a loan presents to the client. Without tapping into CCR, is he really doing this?
What defence will he have for not utilising CCR when the regulator comes knocking on his door? Cost isn’t a factor. There is no need for any major investment in back-office infrastructure or IT when you can tap into CCR and open data at little cost via platforms provided by tech companies.
Was he prepared for legal action that he could face, as a result of not fully checking affordability?
Further, there is the risk exposure that comes from not knowing the size that your liability could be in the future. As we all know, the regulator has been moving the due diligence goalposts for us.
By the end of our talk, the time investment he was willing to devote to this had grown exponentially. Now, he is days away from taking full advantage of CCR.
However, CCR should not be viewed simply as a big stick when it poses many more business benefits.
As recently calculated by Kevin James at Equifax, $20bn in extra loans could be granted to consumers over just one year by giving lenders granular detail on customers’ debt and repayment habits. The real-time transaction history at the point of application gives lenders the data needed to allow loans that previously would have been turned down.
Suddenly, a slice of business that used consultantto be a ‘no’ could become a ‘maybe’, then a ‘yes’. Because this decision will be largely automated, it will be possible to use true risk-based pricing for the first time, with loan terms designed specifically for a borrower.
Those that lag in this business are undoubtedly going to be left behind.
It won’t be long before they see a change in demographic in their pipeline. The profile of hopeful borrowers they are used to dealing with will change, as previous ‘nos’ find they can go to more mainstream sources and become ‘yeses’. Why would borrowers be willing to pay a higher rate of interest when they can get a lower one that is specifically tailored to their situation?
Finance providers who stubbornly remain behind the times may also find the likely ‘nos’ will begin to target firms that do not use CCR or open data, because they know their transaction data will not stand up to the same level of scrutiny and they are more likely to sneak by to approval.
Those who do not embrace these changes are going to have the rug pulled out from underneath them in the not-too-distant future. Their business model that has always been profitable could lose its edge overnight.
If doubt remains, remember that none of us need to think very hard to come up with examples of analogue businesses that have long been left behind.
Andrew Tierney
Credit and risk consultant
