Long Read  

The search for the credit rating Holy Grail

The search for the credit rating Holy Grail

Ask any mortgage or credit provider to name their top 10 customer origination challenges and you will find these answers featuring prominently:

  • Conversion rates – Am I sourcing enough suitable applicants who complete the onboarding journey?
  • Cost of acquisition – How much am I paying for leads and how many credit searches am I running?
  • Treating Customers Fairly – Am I making the right decision for each customer?

None of these examples should come as a surprise to anyone familiar with the online onboarding world. After all, lead brokers have been driving growth and innovation in this market for years, expecting lenders to respond quickly and in real time to the leads on offer. With capital to deploy, lenders require a steady and scalable stream of applicants to assess as quickly, cost-effectively and diligently as possible.

With the right technology in place, both parties can deliver a seamless customer experience. As interest rates rise alongside the spiralling cost of living, the logical expectation is that demand for credit will increase, making speed and scalability as important as ever. But as these factors fuel demand, so too will they add to the credit risk and therefore require robust underwriting decisions.

In order to quickly execute vigorous and compliant lending and affordability decisions, Open Banking has – without doubt – begun to play a more important role each year, and this trend is set to continue. However, credit reference agency data is, and will likely remain for the foreseeable future, the most effective and reliable means by which to assess an application for credit. CRAs therefore perform a critical function for lenders.

Credit reference data, though, is not perfect, and none of the major CRAs would claim otherwise.

There is the issue of coverage: no single CRA has a credit file on 100 per cent of the UK adult population.

Moreover, no single CRA has 100 per cent knowledge of every one of the consumers for whom it holds a credit file. Why is this? The fact of the matter is that lenders of all shapes and sizes have the choice as to which of the major agencies they report their loan performance data to; some choose just one CRA while others choose two or even all three.

So, despite the degree of data sharing that exists within the CRA industry, as many people will recognise, the information on your credit file from one CRA can be materially different from that shown on another CRA.

This phenomena, known as 'thin files' drives up the costs for lenders because it leads to an increase in declined applications or referrals (those applicants needing more labour-intensive underwriting attention), which means a drop in conversion rates and, more importantly, disappointed applicants.

CRAs do also have occasional outages, which leads to the risk of yet more declines and referrals because applicants cannot be searched for at all during these times.

No wonder, then, that the prospect of lenders using more than one CRA to assess an applicant – known as the multi-bureau approach – has gained popularity in recent years. What better way to overcome the thin file problem than by calling a second or even third CRA to get a full picture of your customer?