Acquired, in partnership with Infinian, support businesses throughout the lending ecosystem to optimise and streamline their processes. We invited Ben Allott, Commercial Director, Infinian to share his thoughts on responsible lending and the challenges of assessing affordability and vulnerability.
When assessing affordability risk both the lender and the customer are aiming to reduce friction in the customer journey so prefer to minimise data capture and the level of intrusion into an individual’s financial circumstances. Traditionally, lenders have turned to affordability assessment methods such as manual bank statement review, Open Banking, CRA models, ONS Data and trigger figures. However, each of these methods come with their own challenges and issues and can lead to unrealistic modelling. Infinian provide unique data insights that enhance businesses decisioning process, they have shared their insights on the limitations of traditional affordability assessments and how the process can be reimagined to provide a more targeted view of income and expenditure.
Manual bank statement review
Manual bank statement review is fraught with issues around human error, the aggregation of meaningful information and is also highly labour intensive. Open banking is equally fraught with issues around identification of key transactions such as salary and rent as well as general aggregation issues, for example how would a £300 supermarket spend be allocated. This can reduce the resource requirement in assessments but does not always remove it altogether and may lead to false positive and false negative results where automation is employed.
CRA models are often based on fixed amount values or broad averages that have limited value where a customer is on low income or on niche subsets of the population. The credit data is useful but the wider affordability products less so. Even income verification is not wholly reliable where either a positive or negative result is found. The CRA trigger products can be employed as part of an account management strategy around repayment risk but are based on bureau data that is only refreshed monthly.
The issue with ONS data that is that it is a year or so out of date when it is published and is built on a small sample (statistically speaking) could be labelled too ‘one size fits all’. As with other affordability assessments, the modelling does not look realistic for people in the lower income deciles.
Trigger figures use flat £ amount values based on household structure and therefore are not targeted at different income or demographic groups. Using multiple data sets is the most accurate way of assessing affordability risk around financial difficulty and establishing disposable income.
Buy Now Pay Later
TransUnion became the UK’s first credit reference agency to announce that it’ll be including Buy Now Pay Later data on credit reports. There has undoubtedly been an issue in creating accurate assessments when BNPL plays a role in an individual’s financial vulnerability. A few lenders are now specifically asking about BNPL and adding this debt to the information derived from the credit bureau, but they are few and far between and there are still multiple providers who do not contribute data to a Credit Reference Agency (CRA).
Affordability Cost Matrix
Infinian’s approach to assessing affordability uses a cost matrix which utilises multiple data sets and looks at reliable customer specific Income & Expenditure (I&E) data as well as the Financial Vulnerability Index’s (FVI). Where there is no match to a specific customer the Infinian AR cost matrix creates a more targeted view of disposable income. Other data providers rarely have access to behavioural data such as loan purpose. In all cases the values are expressed as a percentage of income rather than a flat fee and it can be configurable to a much greater extent than other products in the market.
Implications of inaccurate assessments
Lenders who rely on outdated affordability assessments which fail to look at multiple data sets risk higher rates of debt and write-offs at a later stage in the customer journey. From a payments perspective, failing to recognise vulnerability and pre-delinquency can result in higher decline rates for payment collections. By using real-time data and working with a payment processor who can offer a panoramic view of the business’ payments landscape, lenders can better understand the affordability and circumstances of individuals and accurately assess whether a product is affordable not only at on-boarding stage but also throughout the lending cycle.
Insights from Ben Allott, Commercial Director, Infinian. Infinian & Acquired are part of Quint, a leading highly innovative group of fintech businesses. Infinian provides highly insightful data to the financial services sector and fintech companies. They help businesses identify high risk individuals and set up early warning alerts to mitigate risk and comply with regulation.