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Credit Risk Summit Edition | Experian UK Business

  1. 10+10+10+10+10+10+10+30+A CREDIT RISK SUMMIT EDITION FutureProof THE POWER TO CHOOSE Introduction Economic outlook Consumer credit trends Consumer expectations Responsible credit choices A seamless experience The pursuit for growth Issue 9 – Autumn/Winter 2015/16
  2. INTRODUCTION This edition of Experian’s FutureProof expands on some of the key presentations from this year’s Credit Risk Summit, where we explored the customer’s power to choose. Empowered by access to more information, consumers now have more control over choosing which product or service is right for their specific needs, and also when, where and how they want to be served. Add to this a host of other factors, from risk and regulation to the demands of a global economy, and organisations are obliged to re-think, invest in and overhaul how they choose to serve customers. In this rapidly evolving environment, deciding how to proceed is complex. For many organisations, being truly customer-centric and understanding what this entails remains top of the agenda. But given the range of possibilities available and the speed at which technology is advancing, this can simply remain an aspiration rather than a reality. There is no doubt that the increasing power of today’s consumer intensifies competition and drives innovation, however one thing is certain – tomorrow’s winning players will be those who give their customers the power to choose. I hope you enjoy this edition of FutureProof. Andy Andy Marshall Go To Market Sales Director Experian
  3. ECONOMIC OUTLOOK William Thomson Director of International Economics Experian Exactly where the economy goes in the next few years depends on our choices both as citizens and consumers. We’ve just chosen the Conservatives and they are busy implementing changes – such as tax credits and other benefits – to balance the deficit. The Labour Party has chosen a new leader, and he is proposing alternative ways of managing and improving the economy too. Then there are other factors that have to be counted, such as the effects of interest rate rises, continuing low inflation and the potential exit of the UK from the EU, which could impact the economy and financial markets in a variety of ways. Government policy decisions, such as funding for Trident, may also lead to a new referendum on Scottish Independence, which could potentially have a considerable impact. Increased prosperity and consumer spending On average, each of us in the UK is now doing as well financially as we were before the recession. As the economic outlook brightens, consumer prosperity and spending is also on the rise, which is great for the credit industry. In fact, we predict that individual consumer spending will be up to pre-crash levels within the next five or six quarters. Interestingly, the fact that there are more of us in the UK today than in 2008 means that total consumer spending is actually above pre-crash levels already. With increased consumer demand driving the economy forward, we need to make sure that consumers continue to have access to appropriate credit. Understanding consumers and helping them to access the most suitable financial products and services will help to maximise spending within the right affordability parameters. A strong labour market and higher wages A strong, stable labour market is a major indicator of a strengthening economy, and that’s what we have at the moment. Unemployment has continued on its downward march in recent months, which is improving the financial outlook for thousands of families and giving the economy a much needed cash injection. The latest set of GDP results shows that productivity is also on the increase, which means that the new jobs being created are delivering more output than before. If this productivity growth continues, and the labour market keeps improving, the economy will grow too. As well as seeing more people in employment, wages are also increasing by 3% a year on average1 . Because interest rates remain very low, many consumers are finding themselves with more disposable income than they’ve had for a while, which will lead to sustained economic growth over the coming months and years. What it all means for the credit market Overall, the outlook for lenders is overwhelmingly positive. Unsecured lending is on the up, and that’s set to continue. What’s more, consumer confidence is high, income growth is strong and labour market conditions are sound. All this means that the economy should continue to grow strongly over the coming months and years, providing excellent opportunities both for lenders and the customers we serve. Where there are unknowns in the economy, successful credit providers will see these as opportunities rather than threats. While some of your customers might have been affected by the recent Budget changes, for example, there may be ways that you can reach out to help them with new products and services that meet their short-term financial needs. Coupled with improving economic conditions, the industry is developing new technologies and data to minimise credit risk and support more personalised services for customers. By ensuring that products and services meet customers’ individual affordability requirements, these kinds of technologies can help lenders to build long, trust-based customer relationships, while achieving compliance with FCA requirements and minimising financial exposure. Despite these unknowns, it’s mostly good news for lenders at the moment, with many of the economic indicators looking very positive indeed. 1 Source:
  4. CONSUMER CREDIT TRENDS Jonathan Westley Managing Director Consumer Information Experian Working closely with you, our consultants and analytics experts, we’ve identified some key trends in the consumer credit market – particularly regarding mortgages and motor finance. THE MIX OF LENDING IS VERY DIFFERENT FROM 2008 Credit cards and personal loans are a smaller proportion of consumer lending – a trend in the UK that has echoed the US There has been a huge growth in motor finance recently, which now accounts for a larger market share of new lending in the UK Mortgage lending levels have increased – there are fewer mortgages being issued, but at higher values The quality of lending is very high across most products, particularly mortgages and motor loans issued by captive finance companies Unsecured new lending is now very close to where it was, pre-crisis, in 2008
  5. CONSUMER EXPECTATIONS Jon Roughley Head of Strategy Credit Services Experian Stephen Daniels Head of Credit Services Operations Experian We are living through a data revolution. More than 2.5 million1 pieces of information are shared on Facebook every minute, two thirds of the UK’s working population are happy to share their personal details online2 and it’s estimated that 100 billion devices will be online3 by 2020. All of this data gives us amazing opportunities to improve the way we work and to deliver better, more personalised services for customers. We can also reduce financial exposure and risk, protect our corporate reputations and help customers to make the best-informed credit decisions. Bringing credit reporting into the 21st century The challenge for the industry is that many of the mechanisms we currently use to share and report on data have been around since the 1980s. Back then, the internet was in its infancy and customers received a paper statement from their bank once a month. Now that the pace of life is dramatically faster, we all expect real-time access to our financial data. There is a risk, however, that underlying data technologies are not keeping up with that expectation, leading to issues of data accuracy and timeliness. In one example, we found an organisation that had recurring customer dates of birth, such as 5/5/1955, in their database. On closer investigation, we found that the business had filled in gaps in its database with this ‘default date’ during a technology migration. While it may have seemed like a good short-term fix, this inaccurate data could affect credit decisions as well as other key functions such as customer marketing. Data quality issues can also negatively impact the customer experience. With more people than ever checking their credit reports, we are now getting around 300,000 data queries a year. To resolve data queries faster and give customers the fastest possible credit decisions, the industry needs to re-evaluate current data quality measures and checks – including the existing 28-day SLA for reviewing and addressing data queries. A bright future for data A new generation of data management and sharing technologies can improve data quality for both you and your customers. For example, it is now possible to look through practically any data set to identify errors and anomalies, and to provide rich management information on data being submitted to the bureau – helping you to address issues at the source. We can only do all this if we can connect to the data in a timely way, identify patterns and insights, and use those to make better business decisions.
  6. CONSUMER EXPECTATIONS Industry partnerships could also help to improve data quality and speed up any required changes. We are currently in talks with industry stakeholders about the concept of a data-sharing network. This would allow consumers and businesses to inform just one data holder to have their data corrected – improving the end customer experience and saving everyone time. Finally, we are challenging the traditional 28-day SLA to improve the experience for customers with data queries. We need to think about the speed that data moves through the network, in a world where a fraction of a second is now considered timely, processes that operate over a timeframe of weeks and months will increasingly be considered archaic. Improving this is about instilling confidence and trust in the system. Winning customers’ trust As customers take more control over who can see and use their data, they will increasingly choose to deal only with organisations they trust. As a result, data quality is no longer a ‘nice to have’, it’s a major source of competitive advantage. 1 Source: million-pieces-of-content-every-minute-19428 2 Source: 10years/2015_Adults_media_use_and_attitudes_report.pdf H8 3 Source: internet_of_things_sizing_up_the_opportunity So here’s something to think about: are you paying enough attention to your data quality, or could you be doing more?
  7. RESPONSIBLE CREDIT CHOICES Paul Russell Director of Analytics Experian Duncan Shores Director of Banking Experian Helping consumers make good credit choices is a win-win. Increasingly, we’re finding that our website and social media channels are powerful tools for educating consumers on credit and giving them good financial knowledge. We currently have 25,000 people following us on Twitter, 100,000 people liking us on Facebook and more than 10,000 people reading our blogs each month. Putting affordability first While education is the first step, the ability to match the right products to the right customers is also critical – and affordability plays a big part in that. In the past, a quick review of a customer’s finances was good enough – but not any longer. The FCA requires more in-depth affordability processes to protect both lenders and customers. Fortunately, we now have a range of data and analytics technologies that make affordability a science, rather than an informed guess. We can combine a customer’s bank account information with details of their rent payment, other monthly payments, outstanding debts and more, to give a much clearer view of their ability to pay back. It is also possible to identify customers who may be exaggerating their income, helping us protect both you and them from unsustainable debt. Click to view the full infographic solutions Consumers’ needs are met by giving them access to suitable products and services that help them live the lives that they want. At the same time, you can comply with FCA regulations for ensuring good consumer outcomes, while minimising your credit risk. While the benefits for consumers and lenders are clear, helping consumers make the best credit choices requires a certain amount of thought, not to mention investment. It starts with education and it ends with insight, systems and processes that match the right products and services with the right customers at the right time. Education, education, education When it comes to helping people make good credit decisions, education is key. We have to work together to debunk common credit myths and empower customers to make better choices. One way we are contributing to this is by starting early, delivering financial education to thousands of school-aged children across the country, as well as to their teachers and parents. We are also following up with educational programmes for adolescents and students, as well as for adults.
  8. RESPONSIBLE CREDIT CHOICES Click to view the full infographic We added consumers’ rent payment data to their credit scores to investigate the effect this added insight would have on their credit bandings. 62% of consumers who had a ‘good’ credit score moved to the ‘excellent’ band when their rental payments were taken into account. 38% of consumers with a ‘poor’ credit score moved to the ‘fair’ band with the addition of this data. 62% 38% THE EFFECT OF RENT PAYMENT INFORMATION ON CONSUMER CREDIT SCORES Combined with next-generation analytics technologies, customer and credit data can help you put customers on the right credit track like never before. The pre-qualification advantage Pre-qualification is another great way to help consumers make good credit choices, showing them which products they are likely to be eligible for before they apply. This kind of solution makes it much easier for customers to weigh up their financial options and to find products that suit them, both in terms of available credit limits and affordability. There’s also less chance of customers being turned down for products, which usually leaves a negative mark on their credit scores. Technology for life For most customers, their affordability does not stand still. For this reason, any technology or data that supports credit decisions must be continually updated and fully supported throughout the entire lifecycle of the relationship. In this way, organisations can help customers make better long-term credit choices, as well as delivering appropriate, affordable products at every stage of the customer journey – from someone’s first loan to supporting major life events like getting married or having children. By constantly updating customer data, it’s also possible to identify and mitigate any shocks that are impacting a customer’s financial situation; from the loss of a job, to a downturn in the local economy. By accessing the right customer data at the right time, it’s possible to dramatically reduce financial and regulatory risk. The biggest benefit, though, is the ability to help customers make better credit choices: the surest recipe for repeat business and longer, stronger customer relationships. The Rental Exchange - additional insight into affordability To find out more about any of our education programmes, follow the links below: Values, Money and Me primary school resource - Experian Experts Twitter - Experian Facebook - CreditExpert YouTube channel - Experian Experts blog -
  9. A SEAMLESS EXPERIENCE Ian Cunningham General Manager of UKI Identity Fraud Experian Chris Cresswell Strategic Client Director Experian Customers are now using digital and mobile technologies to engage with organisations around the clock, and to get immediate responses to their requests. They expect banking services to work the same way. 1 Source: BBA - 2 Source: 3 Source: Experian client insight from leading banks, 2015 4 Source: McKinsey - In response to these consumer demands, organisations are investing heavily in digital solutions, from SMS banking services to on-the-move banking apps. In the near future, we may also have video banking, where consumers can talk to their financial advisors on smartphones, PCs or tablets from the comfort of their own homes. While online banking is now almost ubiquitous, mobile is gaining ground rapidly. Mobile transactions overtook PC-based transactions for the first time in 20151 . In addition, the number of UK consumers using mobile banking services increased by a staggering 941% between 2010 and 20151 , according to recent industry research. The numbers from individual organisations back up the trend. RBS and NatWest have 91% of their customer base registered for internet banking, while Lloyds has 2.7 million customers registered for mobile banking services. Meanwhile, Barclays has 1,980 log-ins a minute to its mobile banking app 2 . Good, but good enough? While it’s clear that organisations are investing heavily in their online and mobile channels, satisfaction levels are still not high enough. This is largely due to friction that still exists in the digital customer journey. Some existing customers, for example, are not recognised by their financial services providers when they apply for a new product or service, requiring them to provide their information again. Customers also complain about the complexity of the information- gathering process, with 150 to 200 pieces of personal information typically required3 . One of the biggest issues for customers are so called ‘breaks’ in the digital process. This happens when customers begin an application online, and are then asked to send in physical documents or receive paperwork at home to sign and return. Friction can mount when online ID checks aren’t passed, and unexpected manual checks are required, possibly taking up to 48 hours. This can all lead to unhappy and frustrated customers and as many as 85% drop out of digital banking processes before completing them (compared to just 15% in the branch), according to McKinsey research4 . Some of these customers may end up at the contact centre or branch, but others will go to competitors who offer the seamless digital experience that they expect. Looking back... 18th Century Branches 70s Cash points 80s Telephone banking 90s/00s Internet banking 2007 Mobile banking 2015 Near Field Communication (NFC) payments
  10. A SEAMLESS EXPERIENCE Maximising the digital opportunity Increasing digital conversion could be much easier, simpler and less expensive than you think. For example, instead of sending paper documents, customers might be given the option to submit their information electronically, making the process much faster and easier for them and for you. Over time, you may move to introduce completely digital journeys, with no manual touch points at all. One way to align customer expectation with reality is the introduction of innovative pre-qualification solutions. Potential customers are able to provide minimal details and get a strong indication if they are likely to be approved for a credit card - and what their limit would be. In this way, customers can reduce the risk of being turned down after a lengthy application, and they can protect their credit scores too. Above all, the journey to an effective, successful digital environment starts with an in-depth analysis of customer pain points at every stage of the journey. Once you understand where your customers are running into brick walls, you can begin to streamline the process, maximising online conversion and increasing competitive advantage. It’s all about listening to your customers, and making the journey as smooth as possible. Roy Vella is a digital expert, independent adviser and consultant to a host of companies in the financial services, digital and mobile space. Much as many of the topics he addresses seem futuristic and unreachable, everything he describes is happening all around us. The idea of the Internet of Things is already in full swing, where hyper-connectivity and information transparency are opening up our global community. He echoes Darwin’s belief that it’s not the strongest or the most intelligent, but the most responsive in this ever changing world who will survive. Roy highlights five elements that are critical to success: How can you ensure you’re ready for what’s to come? Success in a digital age – Roy Vella, Vella Ventures 1. 2. 3. 4. 5. Speed – it’s about moving fast and moving now Transparency – it’s essential and leads to trust Resilience – key in the changing dynamics of today Simplicity – keeping it simple is essential, simplicity is the ultimate sophistication Trust – is the new currency and it commutes across the brand and across networks Creating a digital bank – Paul Rippon, Mondo Bank
  11. THE PURSUIT FOR GROWTH Nicola Wildman Manager, Banking Authorisations Financial Conduct Authority Growth and diversity are front of mind for the FCA, which wants to use its powers to prise open banking and financial services to allow in more entrants, encourage new ways of doing business and pave the way for more competition and consumer choice. Since 2013, changes have been made to reduce the regulatory barriers to entering the banking market. For start-ups this means: The climate of innovation and change is meeting the FCA’s remit to drive more consumer choice and provide challenge to the existing banking sector Minimum capital reduced from €5mn to €1mn for small specialist banks Certainty of early authorisation offers credibility to enable the recruitment of staff and negotiation with suppliers and agencies A far more efficient, faster and cost-effective process Regulatory expectations are made clear from the outset with pre-application support and named case officers available throughout Timeframes in pre-application and mobilisation are driven by the applicant, not the regulator more pre- application meetings being held every year Around 50 AROUND 20 OTHERS IN ACTIVE PRE-APPLICATION TALKS WITH THE FCA AND PRA new banks authorised since April 201312 As a result: 1. 2. 3. 4. 5.
  12. To discuss any of these topics further, please contact us: or speak to your Experian account manager Stay informed on credit risk, collections and fraud hot topics, trends and insights via our Latest Thinking Blog: © Experian 2015. The word “EXPERIAN” and the graphical device are trade marks of Experian and/or its associated companies and may be registered in the EU, USA and other countries. The graphical device is a registered Community design in the EU. All rights reserved. Experian Ltd is authorised and regulated by the Financial Conduct Authority. Experian Ltd is registered in England and Wales under company registration number 653331. Registered office address: The Sir John Peace Building Experian Way NG2 Business Park Nottingham NG80 1ZZ United Kingdom