'Lender success depends on ability to handle a mass of data'

Lenders were required to adopt more of a caretaking role to ensure the right fit of product to client. 

Since then, every few years has seen an incremental escalation of rules that have pushed responsibility even further back into the hands of the providers of financial products and services. 

Consumer duty turns up the heat

Now we have the consumer duty, which takes caretaking to a much more demanding level. With it, onboarding clients has entered a whole new world of complication. Knowing your client is beginning to require granular insight. 

The sort of granularity that we are in for can be seen by considering the focus on vulnerability. The regime demands providers identify vulnerable customers from the outset and focus on their needs at every touchpoint from written comms, text and telephone channels to websites and online portals to ensure a ‘good outcome’.

This may mean that a host of existing touchpoints fail. How can an elderly customer with few digital skills be said to be supported by a chatbot? How can someone who has lost their job be supported by a tone-deaf arrears-chasing protocol? 

Access to evermore data streams and ability to analyse them rapidly is going to be key.

Given that a recent study by the Vulnerability Registration Service and Outra claimed that 2.4mn UK households were at high risk and 6.3mn were at an elevated risk of vulnerability, ensuring compliance is obviously not going to be easy.

From this one area we get a flavour of what is in store. It might not be immediately apparent, but what we are facing is nothing short of a revolution. The trend towards evermore client scrutiny has only just started, and it is not just going to be limited to the applicant. 

In addition to affordability, vulnerability and the other applicant characteristics, we can expect similar focus on many other areas of the transaction. 

ESG considerations

Already there are signs of this occurring. Mortgage lenders are now demanding applicants’ properties meet set standards of energy efficiency.

Nationwide Building Society and NatWest want to make 50 per cent of their mortgage customers’ homes EPC rated C or more by 2030, even though the government has backtracked on making this a legal requirement of rental properties.

Elsewhere, the FCA is working with the trustees of the International Financial Reporting Standards foundation, exploring sustainability reporting so that the environmental footprint of every transaction can be assessed. 

Apparently, the FCA envisages an onboarding process that is going to take into account a great deal more variables than we have been used to.  

The Nigel Farage de-banking furore revealed just how far the environmental, social and governance agenda is being embraced. How long before providers will be required to show that their loan book ticks a lengthening list of ESG-type requirements? 

Lenders need to realise that they may currently be at the relatively thin end of what will become a very wide wedge.

Once you accept that this is where we are headed, you begin to appreciate that access to evermore data streams and ability to analyse them rapidly is going to be key.

Data systems boost needed

Banks are going to have to quickly access much wider data streams and have the capability to extract, digest and analyse at pace.

It is pretty obvious that most lenders’ data processing capabilities are not currently up to this standard. Many have information effectively spoon fed to them from data sources, including credit rating agencies.  

They have become used to data bureaus responding to their requests in the form of ‘compiled characteristics’ that only summarise raw client data. This could simply comprise the number of CCJs a prospect has, number of defaults, or extent of arrears over a 24-month period. 

Thankfully, advances in data technology are making sophisticated in-house analytics achievable for every lender.

This and other forms of rather standardised data provision needs to be replaced by sophisticated company-specific analysis.

It will no longer be a case of making do with the credit scores that the bureau provides. They may be predictive, but as a minimum you are going to have to understand why they are predictive for your specific customer base. To be able to say ‘the data is predictive when these questions are asked and these elements are there’. 

From such a position a lender can finesse a scorecard over time so that it becomes fine-tuned to required customer demographics.

In this way, they can extract the intelligence that they need for their business, rather than take the pieces of data plus the predetermined questions that a bureau has arbitrarily decided they need.

So, in our example above, rather than a bureau merely telling the lender that an applicant has missed X payments over the past two years, the lender should be able to take 24-months of raw data from the bureau and create their own characteristics to decision against. 

We have to move to a situation where all lenders have the ability to interrogate across all their existing and newly-developing data streams.

Traditionally asking CRAs to undertake such extra analysis has come at a significant cost, and, if you wanted to undertake higher level analysis in-house, you would need the sort of dedicated IT resource that only big banks have.

Thankfully, advances in data technology are making sophisticated in-house analytics achievable for every lender, even those that lack IT and data science knowhow. 

Lenders need to realise that their ability to thrive in the future is going to increasingly depend on them becoming experts in data handling and analysis. 

David Wylie is commercial director of LendingMetrics