In the second of a two-part series, Josh Cook investigates how innovation might help the market keep credit open to people in a crisis.
With the economy in a state of suspended animation the uncertainty caused by the crisis will undoubtedly create financial hardship and drive people into high risk credit categories. With a ten fold increase in universal credit applications many ostensibly credit worthy people will be deemed too risky for lenders at a time when they may need access to financial products most.
However this is not a run of the mill massive financial crisis, as Credit Kudos CEO put it when he spoke to AltFi last week. This is a crisis unlike any other, he says.
“This isn't a financial crisis, this is a health crisis that's leading to an economic crisis.”
Given this is not a typical financial emergency, can the market adapt and change its rules to keep credit open to people when they need it most? Will fintech innovations help or hinder people who may need credit to see out the crisis?
For consumers there may not be an immediate need to take out loans, since the government is supporting individuals with generous giveaways. But while these commitments are likely to last the extent of the health pandemic they are unlikely to last the length of the financial pandemic.
Mick McAteer Founder and Co-Director of the Financial Inclusion Centre, a pressure group promoting fair access to financial services, predicts demand for consumer credit coming later in the crisis.
“We're not seeing demand for credit [increase] yet. That will come later on, whenever some of the government schemes start to run out,” he said.
If these schemes expire before the economy is fully back on its feet there will be a renewed focus on the consumer credit market and how it can remain open to people.There are digital products available in the market to give consumers the best information about the options available to them something more and more people may need in the coming months.
Nicole Mustard the Chief Revenue Officer & co-founder at Credit Karma - which gives consumers access to their credit scores and matches them up with lenders- believes platforms like hers can play an important role helping people make the right choices when facing difficult financial decisions.
“Fintech can really help to move visibility across a wide array of options… comparing the financial options to find what's best for [consumers]… and give them access to credit, that they may not have been aware was available to them.”
For Mustard this will be especially key when people are cut off from their social networks that normally act as a pool of knowledge and advice to draw on.
“People are trying to settle their own financial situation…without the same social network that they have in the past,” she said.
Consumer insight into their own finances has clear benefits when keeping people in the loop about their options and at least making sure people who still have access to credit know about it.
Some campaigners, however, are concerned the new visibility fintech gives lenders on consumers might exacerbate financial exclusion during the crisis.
McAteer told AltFi innovations such as Open Banking may accelerate the exclusion caused by the crisis “where you get more segmentation in the financial services you get more exclusion”.
He says, these innovations will cast many people in a harsher light. If the crisis accelerates the adoption of these tools, then for some, the financial difficulties created by the crisis will be more exposed to the market than ever before.
Freddy Kelly, However, CEO at Credit Kudos- a digital credit reference agency that uses open banking- argues the increased transparency for lenders is key to keeping credit open for the maximum number of people.
Although he recognises open banking may mean some people are segmented into higher risk categories, he is confident it will keep credit open to more people by improving the quality picture for lenders.
He told AltFi: “If perceived riskiness is being amplified, because of the opaque or inefficient signals that lenders are able to access at the moment, then excluded people are going to be even more excluded at a time of greater need.” In his view, by reducing the overall uncertainty, Credit Assessment methodologies that use open banking data are a net benefit in terms of financial inclusion.
But should the very notion of what lenders consider creditworthy change to account for such extraordinary circumstances? Nicole Mustard told AltFi there has been some discussion in the industry about whether non payments should be counted against credit scores during the crisis.
The argument being this would help adjust for the non financial nature of the crisis. Mustard, however, thinks ultimately the market would adjust to well-intended interventions like this.
“From an underwriters perspective… whatever changes you are putting in the front end system they will adjust for on the back end. So, I'm probably not as bullish as many are about changing the data accuracy or the data transparency that lies with the bureaus, because if I'm an underwriter...I'm going to just be more conservative.”
So obscuring people’s credit history for the duration of the crisis is unlikely to shield them from the fundamental realities of the market.
“The reality is, consumers that are defaulting on payments will be affected over time. It's unfortunate, but that's the way that the financial markets work,” Mustard added,
Despite the unique nature of the economic problems caused by the crisis there is little notion that the fundamental rules of the credit market will be changed or suspended by the crisis.
It’s clear without government backing to absorb some of the risk there’s a limited amount even the most innovative fintech solutions can do to keep credit open to people.
“I think banks and the government are trying to make as much credit available to consumers,” Mustard said.
She says it was a call for governments to make how long market altering interventions like the furloughing scheme will last; “at the moment the government can only take it so far …they'll have to figure out how much they can dedicate to that”.
The technical advances of open banking and greater market transparency can only do so much to keep credit flowing.
The pressure on governments to step into the market to keep credit open to people made high risk by the crisis may increase as more people enter that category . But the mood music from authorities has in fact been to tighten the belts of consumer credit lenders.
A report from Business Wire earlier this month noted the Prudential Regulation Authority was set to “impose a more stringent regulatory regime”, naturally curtailing the supply. It will remain to be seen whether this attitude can be sustained or whether the shock of the pandemic will lead to a different approach.
For McAteer the fundamental rethink a significant intervention would require is beyond the scope of this crisis and he sees little indication of this kind of change on the ground.
“It’s started a lot of talk about changing the financial sector but I see no evidence of it actually happening,” he said.
He is concerned rather than heralding a new era of financial freedom and shaking off old fiscal constraints for governments and citizens, the uncertainties in the market will bite hard for many.
There is a risk that if people are squeezed out of the legitimate credit market more unscrupulous lenders will entre this space, something, which McAteer saw after the 2008 crisis.
McAteer is clear to truly mitigate the effect on people’s standing in the credit market more work is needed from campaigners and policy makers in this space.
“We need to redouble our efforts to provide an alternative credit system” that’s one that operates outside the constraints of profit “if we are going to meet the needs of people as more and more are classified as higher risk”.
Fintech can no doubt bring its innovations to bear on such a project but it will depend upon a change in attitude by the government.
So while from a technical point of view lenders are in a better place than ever to support consumers. To keep capital open to people in the crisis even to people who would otherwise be perfectly creditworthy is more than just a technical challenge.
This would require an alternative set of rules and the growth of a new alternative credit scoring sector built on them. It seems it may take more than a global pandemic to drive this change.