With the debate around thecredit crunchstill raging and the
finger of blame being pointed in a number of directions, what have
we learned from the events that have hit the UK financial markets
so hard over the last few weeks?
The credit crunch and the subsequent run on
Northern Rock by consumers concerned they may lose their life
savings had a knock on effect on other financial institutions that
saw their share price drop. For a few days, despite the
Bank of England stepping in and giving a 100% guarantee for
retail savings deposits, a media frenzy whipped up consumer concern
to such an extent that many were reported as saying that they had
lost trust in the British banking system.
While the credit crunch and run on Northern Rock most obviously
affected savers, it will of course have a knock on effect on how
lending decisions are made. Many are asking have financial
institutions been lax in their lending criteria. And have they
taken their eye off the ball in terms of affordability assessment
of borrowers?
The biggest trend in traditional credit risk management is
making better use of transactional data and multi-bureau data.
Traditionally lenders have taken a credit view on a customer the
day they accept his application - and often never look at him
again. But using transactional data, it is possible to provide
lenders with a daily feed of information from many sources
regarding the customer so that if, for example, he falls behind
with one payment to another creditor, the lender is immediately
notified and can make appropriate moves. In this way there can be
daily monitoring of a lender's existing customer base. This,
however, also indicates to lenders how borrowers are improving
their payment patterns.
Analysis of changes in customer accounts shows that over a
period of 3 months, over 50% of all customers experience some
change in their credit score, so keeping a close eye on
developments using multiple bureaux in order to enhance their
decision-making, provides lenders with a far more accurate and most
crucially, holistic assessment of their customer base.
There are a number of fiscal benefits to adopting the
multi-bureau approach. In multi-bureau markets, the extra scoring
and decisioning power derived from a second bureau can add enough
value to make it cost effective, even if only on marginal or "thin
file" records.
For example, if a client handles five million applications a
year, with a refer rate of 10%, they have 500,000 applications for
manual underwriting. If they pull additional data on these
individuals then, conservatively, they may remove 50,000 referrals.
At a cost of £30 per referral, this would save them £1.5m in
processing costs.
With the credit crunch having taken hold of financial markets,
financial institutions need to re-invigorate consumer confidence.
Lenders need to be consistently monitoring their customers' ability
to repay through use of transactional and multi-bureau technology.
In this way they can immediately identify consumers who may be
struggling with their debt levels and equally, make an important
step towards retaining a more stable customer base.