Credit reference agencies have many products to assist lenders with their affordability assessments, but they come at a cost.
These expenses have driven many lenders to use their own internal calculators, employing ONS (Office for National Statistics) data on family spending to feed their affordability assessment models. While this data does provide granular information, the next release date is yet to be announced and the latest report was issued over two years ago. A lot has changed in that time, most notably the cost of living. The Bank of England is now expecting inflation to reach around ten per cent this year.
With this in mind, how can lenders be confident that their affordability models are optimal in the cost-of-living crisis?
One option could be to take the ONS data and apply a blanket ten per cent ‘inflation uplift’ across all the main categories of spending (food, transport, entertainment, etc), to give an estimate of today’s expenditure. However, this masks the fact that prices are rising at different rates for the different types of goods and services. Average gas and electricity prices have jumped by over 50 per cent, and that’s just in the past year. Fuel prices are up around 30 per cent since last April. Of course, this does not necessarily mean that fuel expenditure has increased by the same proportion, because families may modify their spending habits as a result of the price rises.
In addition to the inflationary pressures, customer lifestyle and behaviour have undergone changes since the start of the pandemic. According to a recent ONS survey, 36 per cent of responders reported they now work from home (at least part-time) and almost half of those home-workers said they spent less as a result of this.
Could Open Banking data prove more effective in developing affordability models?
Open Banking could provide real-time insight into how price increases are impacting on disposable income, which should help make affordability models more sensitive to sharp changes in costs. Open Banking take-up is currently estimated at around 5.5 million users in the UK, so just over ten per cent of the adult population, however this is expected to increase to around 60 per cent by September 2023.
Larger lenders are potentially at an advantage in untangling all these moving parts as they will have access to customers’ current account and credit card spending patterns. This should allow them to gather more robust data on how customer spending by category of goods/services has changed over the past two years.
This recent volatility looks likely to persist in a way that we haven’t experienced for a long time. Lenders will need to be flexible and ready to quickly respond to changes. The question stands: will we see some tightening of lending criteria, as firms may become more cautious in the face of all this uncertainty?