RISK IN AN OPEN-DATA WORLD - How and where lenders can enhance affordability through open data and analytics - AWS
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RISK IN AN OPEN-DATA WORLD How and where lenders can enhance affordability through open data and analytics May 2020
EXECUTIVE SUMMARY
In our last Paper: Rethinking affordability,
we explored the increasing role of affordability in lending.
At Experian assessing and exploring the increase role of affordability in
lending, has been a firm focus of ours. We welcome the FCA’s distinction
between credit risk and affordability1. While a customer may have the
means to make repayments, doing so may place a strain on their finances
and negatively impact on other commitments further down the line. As
an industry, there is an opportunity to get a better understanding of that
while also remaining competitive, meeting regulation and enabling the best
customer outcomes.
In this paper we will look at credit risk in today’s open data world.
Read our whitepaper:
Rethinking affordability
1. FCA Consultation Paper CP17/27 Assessing Creditworthiness in Consumer Credit
2
CONTENTS INTRODUCTION CONSIDER ATTITUDES AND IMPACT EMPOWER YOUR CUSTOMER MANAGEMENT WITH CONTROL AND INSIGHT CONSIDERING MORE VARIABLES IN YOUR ASSESSMENT CAN ONLY BE A GOOD THING NON-TRADITIONAL DATA UNDERSTANDING THE SUPPLY CHAIN OF A DECISION HOW DO YOU CREATE THE OPPORTUNITY FOR BETTER RISK ASSESSMENT IN AN OPEN-DATA WORLD? WHAT DOES RISK IN AN OPEN DATA WORLD LOOK LIKE? CONCLUSION 3
INTRODUCTION
The FCA is striving for balance. Their aim is to minimise the
risk of predictable financial distress, while at the same time
avoiding restricting access or increasing costs of borrowing.
In an ideal world, customers would The need to consider the impact of
be granted credit only if they can each decision
afford to repay in a sustainable
In theory, a decision means deciding
manner and without harming their
on far more than whether a person
overall financial situation.
can go on a holiday or buy a house.
In practice this can never be It is contributing towards designing
guaranteed and during an economic that path for them; designing the
downturn like no other, it is even path for their future and helping
harder to achieve this. Assessing people to achieve their life goals.
affordability isn’t an exact science.
Today, a decision means the
Credit may be affordable for one,
difference between someone being
but unaffordable for another in a
able to pay their bills or not.
similar situation, purely because of
how different people manage their It is undoubtedly unprecedented
finances. In addition, circumstances times - and lenders have an even
can change due to unpredictable more complex sum to do in regards
life events, such as the sudden loss to assessing risk and affordability.
of a job, serious illness or loss of a There is a need now to assess if a
partner. customer is high-risk because of
the pandemic, or would have been
Today, both businesses and
anyway. If they are a risk - is it a
regulators are striving for a
short or long term risk.
sustainable future. There is also
a unique opportunity to make this
happen for everyone. Advances in
analytics can equip you to become
experts on your customers.
4
Tradition should not be forgotten data (such as bureau data), historic
behavioural data (through bank
We should continue to capitalise on
account transaction data) and
the advances in analytics that have
through forward-looking data (such
powered risk based scoring models
as economic data and affordability
and other techniques for the last
risk variables). This can be powerful,
30 years. However, today there is
and equip businesses with a single
also an opportunity to maximise the
process to inform the right decision.
greater potential of big data.
The challenge for many is
New data brings new opportunity
where to start
2018 saw bank account transaction
In this paper we explore the most
data come to market through the
effective roadmap, alongside the
PSD2 and open banking.
biggest opportunities. Affordability,
We continue to see many new this far, is treated as a second stage
data sources enter too, offering of decisioning. First, an assessment
equally huge potential. If we are on whether the applicant is
to maximise the transformative creditworthy, then a view of if the
potential these new assets contain, applicant can afford the lending or
we’ll need to be able to qualify, not. By resequencing this journey
manage and connect these you can help empower customers
data sources. Today, current account turnover When this data is categorised, it
with control by giving them
data (CATO) is used to check can further validate a person’s
knowledge of what’s realistic, or not;
The requisite power of analytics income during an application, financial circumstance by
or affordable, or not, upfront.
and technology and this is still an effective giving an understanding of their
We will also explore the areas for method for most straightforward actual behaviours, including
Today’s analytics can consume
consideration as you re-tune your cases. Open banking brings in income and expenditure. This
various data feeds, including
risk policies and manage the pace bank account data through the is particularly helpful in cases
those that are complementary to
and scale of change across your PSD2, which offers another, where a person’s credit history
traditional data, then understand
customers and portfolios. more granular view of credit is limited or non-existent, or in
it in a simple way and deploy it to
automate fast and accurate lending risk. Here, with consent, lenders cases where a score refers the
decisions. This is done by bringing can access a person’s entire application for further review.
together various trended points of bank account transaction history.
data, including historic recorded
5
CONSIDER ATTITUDES
AND IMPACT
There are many considerations required when conducting an
assessment on whether lending is affordable.
The FCA state that: “Most firms have a strong commercial incentive to
assess credit risk, including the probability of default, but may have less
incentive to assess the risk that the credit will impact negatively on the
customer’s wider financial situation where these customers will still be
31%
profitable for the firm”. As such they want to protect consumers from
the harm that can arise when they are granted credit that is predictably
unaffordable at the point it is taken out. To do this there is a need to of people will ask a family
understand not just financial performance, but financial health and member to borrow money if
stability with a keen eye on the future horizon too. an item is unaffordable
People themselves are unclear of Willingness versus capacity to pay Understand, and consider
41%
what’s affordable future impact
When making a decision, regulation
Our recent research shows that now requires businesses to look at It is important to understand both
customers themselves often credit risk (or willingness to pay) actual and future trends, behaviours are over their mobile phone
overestimate how much they can as well as affordability (or capacity and attitudes, in the entire lending contract at the end of the
afford to pay. Our calculations to pay). Willingness is about track criteria. By understanding this – month, and a further 19%
revealed that the amount people record – what’s known about an something that’s now possible exceed their agreed utility bill
believe they can afford to repay individual’s past behaviour. Previous through data analytics – you can
on a mortgage each month is good performance shows there is a then produce appropriate models
around 40% less than their actual
mortgage payments are likely to be.
In addition, we can see how most
good chance that an individual will
honour credit commitments going
forward, for example.
that are reflective of the audience
you want to engage with. 52%
of people are unable to
people have little if any accessible accurately provide a view of
savings, or long-term savings in the their income and outgoings,
form of a pension. half under estimating and half
over estimating
For more detailed analysis into peoples financial
behavours, view our insight report here
EMPOWER YOUR CUSTOMER
MANAGEMENT WITH
CONTROL AND INSIGHT
Reducing friction can engender loyalty
In today’s fiercely competitive market having the slickest journey is
imperative to compete and grow. However, to this point research shows
how this is more often at the expense of certain checks; with fraud and
affordability checks being forgone in a bid to relieve and reduce friction.
Customers want, and at large need, financial
stability, personalisation and command value.
By giving your customers an ability to self review if the lending is affordable
pre-application you can help people only apply for what’s affordable. You can
guide them through the journey through the provision of value-add tools like
a personal finance management (PFM), or help them manage their credit
score by offering them knowledge on how to boost it.
Innovation at Experian is a critical part of our business. Recent
developments in the design of Personal Finance Management
(PFM) tools and other apps are helping solve problems and bring
new-found value. Experian boost, our latest initiative offers a self-
management tool that can help consumers understand and see
where there is value through the introduction of new data, to boosting
their credit score.
7
CONSIDERING MORE
VARIABLES IN YOUR
ASSESSMENT CAN ONLY
BE A GOOD THING
Different lenders will have different appetites for risk, It’s estimated that 40% of Customer segmentation and
offering different prices and a different cut- off points in UK consumers are currently scorecards are a vital part of that
experiencing income shock. For picture, providing for and protecting
the decision process. the credit providers that serve your customers, as well as your
them, moving forward means portfolio. However, as the world
These factors are commonly based on the risk profile of the customers
understanding how that impacts navigates these unprecedented
you want to attract through your marketing and product strategies. The
the tools they use to make critical circumstances, the tools you trusted
challenge for many businesses is to align departments so that marketing
business decisions. even just a few weeks ago may
is talking to the ‘right’ people. To do that, you need to know the risk appetite
no longer offer the relevancy or
of your business, understand your ideal customers and find the best ways Todays economic circumstances
accuracy you need.
to reach them, ensuring your data and capabilities are relevant to those are not like anything we have seen
identified groups. before - and therefore modeling This is where integrating economic
against previous crisis’ would give forecasts and foresight – the credit
The economy must be taken into consideration an inaccurate assessment. economy – into your decision
making will have a huge impact.
Levels of personal debt are It’s vital that the credit-risk Across the credit industry,
Used alongside bank account data,
currently higher than they were a implications of this are understood, applications are tumbling, applicant
it will help you understand the full
decade ago and have continually both from your own and your quality is deteriorating and even
impact on that person. You can
risen over a period due to more customers’ perspective, and that once-reliable customers are
also foresee the likely impact to a
consumer personal debt. People are you can improve your decision facing tough financial futures. To
customer future by looking at how
borrowing more, for longer periods making accordingly. confidently rise to these challenges,
they’ve prioritised before.
of time. Just before the pandemic providers will need to be able to
As the economic crisis unfolds we
hit we were seeing a risk in demand accurately assess affordability,
are seeing a change in traditional
for loan values between £20-£40k. credit score and risk, not just at the
behaviours. Both on a demand
But also, worryingly, we were seeing onboarding stage, but throughout
perspective, but also performance.
early arrears in these loans. the entire lending lifecycle.
Ensuring your baseline is fit for purpose Consumption is also changing criteria
Scoring and using scorecards can be hugely beneficial for a large proportion How people consume credit has also changed – no longer do people
of people where a credit decision is straightforward. But only if the scoring prioritise a visit to a branch, but expect instant access via the internet or on
model is reflective of the right data and relevant economic climate. a device. Consumption of credit has also changed. Therefore, the weightings
of different pieces of information used in historic scoring models
Scorecards are based on information obtained at a set period, which
may no longer be as good as they could be.
can become problematic as time passes. Here at Experian, we’ve been
rigorously scrutinising our own industry-leading scorecard system, Delphi.
Developed to meet logical as well as statistical validity checks, it’s designed
to continue performing, however extreme the economic conditions. As a
result, it continues to discriminate strongly between good and bad risk
applicants, even in our much-changed world.
Robust, recalibrated scorecard systems have the power to reveal a great
deal about the consumer landscape, and are an incredibly powerful tool in
putting together strategies for reducing risk while fostering much-needed
new growth.
600
500
400
300
200
100
JAN FEB MAR APR MAY JUN
Levels of bad debt Credit application approvals
*Source: Office for National Statistics **Source: UK Debt Statistics from Credit Action based on Q1 2013
Data and insight has been provided by Experian and is subject to change. Correct at the time of creation
– December 2013
9
Open banking as a stepping stone to open data
Available
Now Open Banking
NON-TRADITIONAL DATA Management
Account
More data can help you to perform a detailed assessment
of a person’s creditworthiness. As well as bank account
Health APIs
data, potential new complementary data sources include
government data and rental data.
Social
Rent is a serious financial obligation In addition, new forms of analysis,
and a large proportion of a tenant’s ranging from psychometric
outgoings. According to ONS, rent questioning to advanced machine
is around 27% of an average salary. learning and artificial intelligence Device
Our analysis shows that factoring techniques, are also improving
rental payment history data into assessments by uncovering person- Planned
affordability assessments can help specific insights that have been
give a more accurate representation traditionally overlooked. Today
Payment card
Near term
of a person in terms of payment machine learning is identifying transaction data
performance. This is important as problems in data that were not
“the cost of servicing a mortgage obvious before, as opposed to TISA (savings data)
has fallen since the financial crisis, solving problems it is asked to.
the cost of renting in some parts of How? By being able to ingest and
the country has risen sharply”, as understand large and disparate data Smart Meter Data
Under
reported by ONS. sets that can bring a better base for
consideration
understanding such problems.
Mid term £ Investments
Utilities
£ Taxes
DVLA
10The evolving credit bureau
Credit bureaux have changed over There are many types of new data
the last decade. We know more available across both commercial
about people than we did 10 years and consumer lending which is a
ago and some new pieces of data significant asset in such turbulent
have entered the equation. The times. Thanks to such advances in
recent addition of bank account data - but also the requisite power
transaction data, for example, gives of analytics to understand it and
the opportunity to improve your technology to act on it, there is the
ability to assess willingness and opportunity to reduce economic
capacity to repay. impact.
In addition, new alternative data With our deep understanding of
now contained within the bureau, data, we are in a unique consulting
such as rental data, utility data position. The road ahead may be
and more, offers extra insight rocky, and there will undoubtedly
that can be valuable too when be new developments to navigate.
making a decision and increase the However, by working together, and
performance of your scoring. bringing you powerful data (and the
tools to process it), we believe we
can help you and your customers
come back from this crisis strong,
secure and ready for a brighter
future.
New data,
Open Council Tax, Utilities, Current Account, Mail Order & new opportunities
Banking Private Rental Social Rental Credit Card, Telcos Negative Only CAIS
2.3% 2.7% 7.3% 8.4% 78% Thin file
11Integrating affordability from start to end Having confidence in More frequent data updates will
your calculations prove beneficial
With the right software, data and analytics, you can perform checks across
the credit lifecycle to see what a person can afford at different points in In addition to traditional scoring The data infrastructure powering
time. These checks could include re-verifying their income using CATO and/ models, there is an opportunity credit bureaux uses periodic batch
or bank account data. Income estimations based on trended data can help today to be able to connect new updates of data about a customer.
determine a person’s ongoing ability to repay. Debt-to-income ratios can data and tailor metrics during an So, while credit decisions are made
allow you to understand a person’s debt profile in relation to their income, assessment. As we’ve covered, in real time, the information used
while knowing their monthly disposable income can help you to assess and where you’re confident a customer to make that decision can be a
automate a decision on whether they can repay. is giving accurate information, snapshot of how each active credit
credit scoring and affordability account looked several weeks ago.
software are still helpful.
In today’s digital-orientated
Introducing prequalification into
economy, we believe more
the mix will also help enhance
frequently updated data would
the customer journey.
bring better-informed decisions
Growth Where a decision is more complex, and greater efficiency. Particularly
Targeting for example where an application in high- cost, short-term lending,
needs further assessment or with a when loans can be applied for,
limited credit history, new data and received and paid back all within the
analytics can be extremely powerful. monthly-statement cycle.
Continually
Customer understand We’ve already developed a real-time CAIS capability to facilitate
management Originations
what’s affordable increased speed in data sharing and identify where a person may be
overextending themselves by making multiple applications in quick
succession. Now we are consulting with lenders to fully understand
the benefits of this.
Collections
Listen to our podcast:
How data has changed over time
12UNDERSTANDING THE Risk becomes an opportunity
We must realise the risks in
Helping people make the
right life choices
SUPPLY CHAIN OF A DECISION this and see the opportunity to
be more helpful. As we pass
People are becoming savvy to
this changing climate. More than
through generations the ability for half (60%) of young people are
To be truly responsible, lenders should look beyond inheritance is limited as people’s considering buying a home with
affordability to consider the impact or knock-on effect of any financial freedom becomes tighter. friends or family to be able to get
The bank of mum and dad, who on the property ladder. The main
lending decision. For example, if someone can’t afford to pay still helped a quarter (27%) of problem many face is the deposit
for insurance and loses their car, it will mean they can’t get to millennials buy a house last year – 59% of those 18-35 have savings
work. If income is lost, they may struggle to pay their bills. (worth £81.7bn in gifts) will soon of less than £1000 and 20% have
not be an option. settled to the fact they will never
They need to connect people The generation gap is closing: be able to afford to buy their own
We will likely see the impact of
better to finance the need to intervene is now property, causing shifts in other
this in the future, and therefore
There is an opportunity across For a long time now, we have seen a financial traits and behaviours.
need to understand how we can
financial services to help people in growing gap between generations. create positive opportunities and
many ways. While today’s economy Young adults face high property choices now.
is nervous, people’s economic prices and low wage growth, versus
attitudes are somewhat indifferent. their elderly counterparts who
We are seeing:
As we touched on earlier, people are benefiting from periods of
express concern about their future economic growth, final salary
A decline in demand
well-being yet their spending pensions and inheritance.
traits suggest no contingency is
People becoming exposed through
being developed.
greater indebtedness
Greater levels of persistent debt
“If we can help introduce positive change to financial
behaviours now, we can safeguard the future which is Mortgage applications declining
currently poised to suffer due to an increasing pensions
and savings gap. It is important to act now.” An increase in fraud
13HOW DO YOU CREATE THE
OPPORTUNITY FOR BETTER
RISK ASSESSMENT IN AN
OPEN-DATA WORLD?
With the current hype around analytics, as well as a surge in
regulation, you need to not become overwhelmed by change.
Many perceive change to be a long There are many ways you can
and expensive process and often take advantage of these new
struggle to know where to start, opportunities, without necessarily
or which areas will have the most investing in an entirely new IT
impact and therefore are unable to system. An affordability assessment
secure investment due to a lack of of the future is beyond a single
visibility on the ROI. check, it spans your entire business
processes and redesigns your entire
Change can happen in many ways;
processes from prospecting through
it’s just as impactful to solve many
to customer management.
small problems as it is to tackle
bigger challenges.
With the right affordability check upfront, and within the customer
lifetime, you can negate the need for collections to even be an issue.
Your cam optimises each action in real-time and better manage your,
and your customers risk.
14Ensure you’re accessing the
1 Advanced analytics
2 Innovation through test
3 Digitisation
4
most accurate information and learn
Many businesses (78% according At present, we see many
Ensuring your scorecards are to our research) plan on investing Innovation is critical and needs augmenting customer
equipped with all the data that’s in advanced analytics, but few constant investment. Test experiences. This is important,
available and taking the economic have a clear roadmap of where and learn is important for all especially as people today
climate into consideration, will and how and year on year organisations if we are to solve expect to give the minimum of
help ensure the cases that are analysis shows only 12% have problems and innovate. The effort, but receive convenient,
straightforward receive the best managed to adopt in-year as they most effective way to do this is instant access. Digital means
decision, based on accurate data. aspired to do. Advanced analytics to access a data rich analytics fast, accessible and easy. By
In addition, accessing specific can be complicated and require sandbox which enables you to using an appropriate decision
variables, such as disposable specialised teams to implement connect various data sources, for management software, you can
income, economic change, debt- and manage. It needs continued example your own and Experian not only fully transform into a
to-income ratios and so on, will development and investment and data, and perform advanced digital company, but can create
help ensure that you can measure while we have seen some great analytics in a safe and secure an environment that underpins
affordability risk easily and results across the market, they testing environment. This type your entire business offering
accurately based on current and are most often in specific isolated of access can allow you to test significant uplift in strategic
future scenarios. cases. The most effective way on a segment in parallel to your outcomes and an ability to
of accessing advanced analytics everyday business, letting you digitally transform.
is by choosing solutions that prove, and identify, the case
integrate this capability, allowing before full implementation.
the intelligence to be accessed
in specific tasks.
Advanced and enriched scoring, Forward-looking credit risk Real-time scenario planning and Next generation decisioning,
through access to trended data. modelling through machine modelling through an analytical allowing connection of all
learning based aggregation sandbox enriched with data. processes that can act, from
and categorisation. start to end.
15WHAT DOES RISK IN AN OPEN How will this change the way you
engage with customers?
DATA WORLD LOOK LIKE?
Lender approves
By being able to automate data, add complimentary data and or rejects
understand it, you can power new opportunities for fairer, application
more accurate and more inclusive lending, at scale and at
speed. You can innovate and you can be better equipped.
Apply affordability
LEGITIMATE INTEREST
CONSUMER CONSENT
metrics
Deciphering which assessment criteria is valuable
Categorise
transactions
Offline
Good file coverage
Less
Bureau Based Consumer tells you Good Credit Score Source bank
something
Solutions
(Legitimate interest)
Low indebtedness transactions
Good CATO data coverage
Consented accounts
ONS expenditure Consumer
Interaction POOR CREDIT GOOD CREDIT
Online SCORE SCORE
Thin file
Open Banking Consumer actions Non-Consented accounts
Solutions something Lower Credit Score More
(Consent) Higher Indebtedness
Low data coverage
Bank transaction data
can improve credit risk
decisions Credit score and
income check
16CONCLUSION
The theme running throughout this paper From understanding credit risk, to understanding Creating a fair, inclusive financial economy
has been the need to focus on the customer your customer
In a big-data, high-churn environment, being able to
by having the most appropriate tools to Get this right, and we move from understanding credit automate insight from data to inform decision- making
serve them. That same theme came out risk to understanding the risk to the actual customer. will be critical. Categorisation and machine learning
The process becomes more human and you can have can be used to promote fair and responsible lending
very strongly in our research where we saw a better dialogue. The industry has the chance to in the gambling industry, provide personalised credit
businesses prioritising customer insight reconnect with customers, win their trust and help limits for home shopping, and automate income and
and customers frustrated by the lack of it them manage their finances better. payment history checks for the rental market or the
evidenced in their interactions. Data can improve scores, assessments and
self- employed for example. This is all achievable by
analysing open-banking data and serving it up in real
much more
Keep pace with changing business models time at the point of decision making.
As the open-data climate becomes an everyday reality,
Regulation aside, we believe the main reason for this Experian are the prime partner who can help you
we have a phenomenal opportunity to improve the
is the speed at which business models are changing continue to innovate and adapt
quality of data, scorecards, affordability assessments,
– or expected to change. In today’s ultra-competitive and understanding. Data and insight have become a valuable currency;
climate, focusing on the customer is the only way businesses with the best insight on their customers
businesses can succeed. The benefits are far bigger will be the ones that thrive. By working with the right
than simply market share. With the right tools, “In our trials we have seen significant uplift in partner and accessing the tools that can help you better
you can engage more people who were previously GINI performance brought through new data understand a person’s credit risk, you can access
misunderstood and reap the benefits of better and are able to identify where opportunities exist, information that gives you a clear advantage. Data
relationships through having a better knowledge. in what scenario.” analytics and technology all have a role to play and
AI can automate at speed, and scale with present a huge opportunity for all.
more accuracy
Consent requires value, value comes from trust
What we find particularly exciting is the potential “Today, risk can be assessed quickly, accurately
of artificial intelligence and to make automated Obviously, this use of open-banking or personal data
is only possible with consent. Our research, which and fairly. It can also be more integrated into the
personalised recommendations at scale – something customer journey creating better opportunity
that could improve the financial futures of millions of explores the attitudes of people to share their data, has
clear evidence that people will share their data if there for growth which expands the opportunity far
people quickly. beyond a single decision.”
is immediate value to them. And value in this sense is
depicted in the role of easier access to finance. There is
appetite but inevitably you will need to work on building,
and in some instances rebuilding, their trust. To do this,
17 you need to better understand them.Visit our website for more information on how we can help:
www.experian.co.uk/business Content methodology
Or contact us: The insight contained within this report is correct at the time
Business.Enquiries@uk.experian.com of publishing – 4th May 2020. Insight is derived from Experian
data sources, incuding analysis produced by our award-winning
Stay up to date with our latest thinking, Economics team. Note that Experian owns the copyright in this
by bookmarking our thought leadership portal: document and the information that it contains is the confidential
www.experian.co.uk/latest-thinking information of Experian. We are providing this to you because
we believe it is in the public interest to do so at a time of national
crisis. However, the confidentiality provisions of our contractual
The insight contained within this report is prepared using research arrangements apply and you may not share this further.
performed on both Experian data and external data sources, in addition to
We also wanted to let you know that Experian will shortly be adding
market research. All sources, unless referenced, are from Experian insight.
a transparency information page to its website to let data subjects
The information contained within this report is designed to help know how we are using data to help at this extraordinary time.
businesses manage the complexity brought by a national crisis - and is
a summary of key areas and capabilities. To understand more about the
breadth of market-leading capability Experian has, or to access further
detail on the impact of Covid-19 on consumers, business and lending
portfolios - please contact us.
Registered office address: © Experian 2020.
The Sir John Peace Building, Experian Way, Experian Ltd is authorised and regulated by the Financial Conduct Authority. Experian Ltd is
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