High inflation continues to impact the payment industry and increase the strain on the global economy as the cost-of-living crisis heightens.
Payment Expert spoke to Tasha Chouhan, UK & IE Banking Director at Tink, on how to adapt affordability checks in an evolving economic climate and the role of Open Banking in transforming the lending process.
PaymentExpert: Can you tell us more about how Tink is responding to high inflation?
Tasha Chouhan: At Tink, we’ve been talking about how Open Banking is powering a new world of finance – a world where data can be used as a force for good – for the best part of a decade. With high inflation prevailing, this statement rings true now more than ever.
For example, we’re seeing Open Banking-powered technology transform lending processes, enabling financial institutions to offer more accurate affordability decisions through greater visibility of financial data.
We understand the importance of financial inclusion amidst the ongoing cost-of-living crisis. During this period, we’ve launched a risk product suite – including Expense Check, Income Check and Risk Insights to provide lenders with a holistic picture of a person’s finances, enabling more accurate credit assessments in seconds.
We have also partnered with a number of new businesses who are now using open banking to protect vulnerable customers in these difficult times. For instance, we joined forces with Sambla Group – a leading loan broker in the Nordics – to offer the lenders in its network access to more accurate affordability assessments.
PE: In what way do you believe current affordability checks are out of date?
TC: As it stands, the manual and incomplete nature of the data lenders traditionally use makes it difficult to accurately assess affordability. A traditional loan origination process relies on backward-looking, outdated models – involving a lot of manual verification processes which are a burden on back office operations. They also still often leave out a lot of key information when it comes to assessing creditworthiness.
Research we conducted in 2022 revealed that a key issue here is that many lenders still rely on traditional credit checks to determine eligibility for loans – with 50% saying they still don’t use technology to generate a credit score based on bank account data. This is potentially excluding millions of people who can afford credit.
More specifically, UK lenders say that some of the main reasons that people are denied credit include the inability to verify identity or legal status (41%), being unable to verify assets or collateral (32%) or the lack of access to payment history (35%).
It’s clear that the loan origination process suffers from a lack of aggregated and categorised information to support its credit assessment practices. As the economic crisis continues, the acceptable margin for error here is dwindling to a worryingly low level. The most accurate lending decisions are needed to both protect and support consumers during this challenging time, as well as reduce the risk to lenders posed by a new wave of defaults on the horizon.
PE: As inflation remains close to a 40-year high, why is it crucial that affordability checks are brought in line with the latest technology?
TC: Against the current economic climate, factual errors in consumer data are unacceptable, increasing the likelihood of people being unnecessarily excluded from financing at a time when many need it most.
For individuals who wish to be financially empowered, we must also ensure that there is full transparency and visibility when it comes to accessing their data.
Credit agencies and lenders should lean on fintech advancements, such as data-driven affordability solutions, to upgrade their creditworthiness assessment models and guarantee the accuracy of lending decisions.
For example, real-time access to a consumer’s bank account data can paint a full picture of a consumer’s finances – taking into account up-to-date figures on income from multiple sources, and account expenses such as mortgage costs, loan payments and utilities bills.
These solutions also hand control back to consumers, who can then use their own real-time data to access new products and services.
PE: What role can new tech play in improving the affordability strategy for firms?
TC: Open Banking data allows financial institutions to meet their responsibilities in protecting vulnerable consumers while further decreasing the amount of non-performing loans and boosting revenue.
Compared to traditional loan origination, open banking-powered lending provides access not only to the applicant’s income, but also their expenses and other bank account activity – all in a matter of minutes. This enables lenders to accurately assess loan amounts, helping to reduce the number of loans that default.
From a customer perspective, it also results in a seamless user experience that boosts conversion and customer experience while minimising drop-off. A win-win for all involved.”
PE: Do regulatory frameworks need to evolve to keep up with growing affordability approaches?
TC: It’s imperative that frameworks keep pace with technological innovation in the lending space, an initiative being advocated for by the likes of the FCA following its call out at the end of last year for reform amongst credit reference agencies.
It’s these parameters that have the power to unlock fairer and more accurate affordability checks for consumers, provide a better consumer experience, but also a competitive advantage for the sector, as businesses reduce the risk of payment defaults.
