June 5, 2016

Overcoming barriers to consumer credit

FinTech innovation is helping to tear down barriers to financial inclusion, says Freddy Kelly. 

Recent estimates put the number of people without access to mainstream credit at around nine million in the UK. The net effect is more and more people turning to high-cost loans from payday and doorstep lenders. Whilst the barriers to mainstream credit are varied, this article will set out to define four major categories, or as I’m calling them, “fallacies of consumer credit”.

Attainability

Perhaps the most obvious barrier to mainstream credit is a lack of attainability. The age-old “chicken and egg” problem still plagues first time borrowers. Credit Reference Agencies (CRA) consider a variety of factors when evaluating potential risk. Chief among these is historical repayment data, be it for a mortgage, loan, mobile phone contract or other forms of credit. No matter how much of a “good risk” you may be, lack of historical data very often works against you when applying for a credit product. This is compounded if you have borrowed from a high-cost lender as outcome data from doorstep/payday lenders is rarely considered by the CRAs, and carries far less significance.

Suitability

If it’s not attainability preventing borrowers from successfully applying for credit, often the suitability of product offerings can be the limiting factor. Alongside credit history, CRAs also consider “account turnover” data collected from partner financial institutions. This usually means an applicant’s bank account balance for a given time period. Whilst this can provide insight, it can also be misleading if the applicant does not receive income at regular intervals (think zero-hours contracts, freelancers and contractors, for example). At best this misjudgement may lead to applications being wrongly declined (false-negatives), or far worse, wrongly accepted (false-positive). This might happen if an applicant shows a “healthy” financial state during application but whatever reason is unable to maintain sufficient income required to meet the repayments. The latter example is further compounded by the inherent delay in data reaching the CRAs (records are often a month or more behind).

Transparency

“Credit scores aren’t a problem until they’re a problem,” a senior director at a large lender once told me. He was referring to the fact that most people don’t think about their credit profile until they get rejected for a loan. The “spot-check” model employed by CRAs is completely opaque. Few of us know what our credit score is, and fewer still actually understand the factors that come together to calculate it, not to mention the adverse effects of simply having the calculation performed. Whilst improvements in financial education will certainly help the situation, I believe a move to a participatory form of credit scoring is necessary if we are to buck the “head in the sand” attitude that is prevalent today.

Portability

Perhaps the elephant in the room, or, more precisely, the elephant in the head offices of most CRA’s, is portability. That is, the lack of a formal credit paper trail that crosses borders. I recently moved back to the UK having spent the first two years of my working life based in San Francisco. Despite having been in full time employment for the entirety of my absence I still struggled to pass CRA checks when signing tenancy agreements or applying for a mobile phone contract. This seems like such low hanging fruit, and yet there’s still no widely accepted solution. There’s no reason for my financial history in a given locale to be siloed.

So what is being done to address these major failings of the current system?

The Financial Inclusion Commission made a number of key recommendations in their March 2015 report. Firstly, the Government should “enable the use of public sector and non-traditional data in credit scoring, with safeguards, to make access to financial services easier for excluded groups”. As well as this, the Government should “lead a collective effort with retail banks and others to promote wider data disclosure and to fill the low income credit gap which has been widened by departing payday lenders”. Both recommendations point to the need for innovation and change in the sector.

A number of new entrants are working to develop scoring products that leverage a much wider “non-traditional” dataset. Aire’s platform (currently in closed beta) will enable borrowers to contribute their own information in order to build a score through means of a mobile application. Self Lender (currently US only) helps borrowers build credibility with the existing CRA’s through a series of “credit builder loans”. Tools like ClearScore add transparency, giving users access to their Equifax score and providing advice on how to improve it.

There’s still much change yet to come, with many services still relying on CRA’s and borrowers playing second fiddle to obsolete algorithms when it comes to building credibility. The end of 2015 saw the Open Banking Working Group deliver their report to HM Treasury, laying the foundations for an open API standard in UK banking. Programmatic banking could provide the key to far richer analysis and scoring. Research has already shown the efficacy of using account transaction data to predict delinquency. Pairing such methods with an appropriate permissions model to alleviate consumer anxiety is important. Trust will be required to invite borrower participation and provide a much needed change of course to address these four failings going forward.

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  • Shadow Warrior

    Hammond is continuity Brown. He is a hand-wringing lefty looking for clever wheezes to raise more tax in ways that people don’t immediately notice.

  • captainslugwash

    I predict the Budget will attempt to show the Left how caring the Tories are, and it will be funded by screwing over the working man.
    If Corp Tax comes down, I bet Divi tax will be going up.
    I would love to be wrong.

  • skynine

    We really need to look at tax credits, in particular in work tax credits that encourage people to work part time to preserve the benefits. 45% of women work part time and I would hazard a guess that tax credits are the main cause. This leads to low pay, low skill work in supermarkets and the retail sector including coffee shops. The government needs to get back to the employer paying people to do a job for economic reasons rather than to get onto the tax credit ladder. Like all government benefits it distorts the market and diverts government expenditure into non productive areas.
    The refrain that the government has cut expenditure is not true, it increases every year as more and more goes into welfare.

  • MrVeryAngry

    fat chance

  • MrSauce

    So, when wouldn’t we want a ‘budget for growth’?

  • Rob

    I note that the UK Government has just slapped on a 25% tax charge for anyone moving abroad and wishing to move out their private pension from the UK.

  • SonofBoudica

    The Remoaners will do their utmost to sabotage the Government’s negotiating position. They do not want a successful outcome; they want a failure. They want to be able to scream “Told you so!” from the rooftops.

  • EnglandLaments

    Thank goodness for Andrew Neil, the one media hack who scares the pants off the established politicians. He was spot on with Heidi Allen!

  • joshuafalken

    I had a very long, hard, studied and considered look at the hope, care and aspirations of all Europeans, before I voted to get the UK out of the toxic grasp of Brussels.

    The European Union and it’s charge of “ever closer union” has borrowed and spent its way to oblivion, whilst enslaving the working and middle classes in debt.

    The central control mantra of the unaccountable Brussels ruling elite, delivered through a mixture of socialism, globalism and corporatism is entirely responsible for the populist revolt by the millions of “Just About Managings” across Europe.

    We must remember the ultimate goal of socialists, globalists and corporatists is control, not prosperity. see https://mises.org/blog/goal-socialists-socialism-—-not-prosperity.

    Social equality and economic growth always fail under central control and fighting against the Brussels doctrine on behalf of all Europeans is why I voted for Brexit.

    Britain has a long history of helping Europeans depose tyrants and Brussels is just the latest incarnation.

    Britain is the most racially advanced and accepting society on the planet. We welcome those in need and those that can help us with open arms and a smile; that will not change.

    We are also one of the most innovative, talented and open societies in the world, which why everyone wants to live here. However, we cannot fit everyone in, so we have to have clear, balanced and fair immigration policy which is where the arguments start between the monetarists and humanists will never be reconciled.

    I thought long and hard before coming to the conclusion that leaving the EU was in the best interest of all Europeans, as Brussels is toxic and cannot be reformed from within.

    Also, I find it insulting that people who voted Remain have insufficient faith in British ingenuity, compassion and skill to get a good deal for us and see the Europe that we love get a better deal from Brussels and the reform that European people deserve. https://mishtalk.com/2017/03/29/bad-brexit-deal-better-than-no-deal-mathematical-idiocy-odds-of-no-deal/ and https://www.worldheadlines.info/2017/03/after-brexit-9-reasons-to-be-bullish-on-great-britain/

    The politics of left verses right are dead because neither have delivered the promised economic growth and social mobility for anyone, but themselves. The populists are not selfish per-se, they just want to take back control of their own destiny that left/right politicians have freely given away and/or exploited for their own ends. In my constituency, the local residents group are taking over the councils as politicians ignore voters, so Westminster should beware of the well-organised, local resident independents at the next election. This is a peoples revolution which should be shouted from the rooftops, but liberals remained deafened by the socialist, globalist and corporatist “vested interests” that have spectacularly failed us and are obediently crying foul and fake.

    There will be an initial unpalatable inflationary cost to fighting globalism and rolling back central control that few appear to have factored in, but dismantling failed left/right vested interests should eventually free libertarian socially-conservative capitalism from the shackles of TBTF corporatism to feed economic growth and social mobility.

  • agdpa

    The EU usually makes the wrong decision – on immigration, on freedom of movement, on the euro, on the Ukraine, etc. etc. Little hope it will get Brexit right.

  • brownowl

    Eh? Reference please!

  • Neil2

    Sod caring. Screw the spongers and breeders. Kill HS2. Stop all “green” subsidies. Slash “foreign aid” and walk away from the EUSSR with immediate effect.

  • Rob
  • John C

    What a confused article. It conflates surveillance by the security services with poor defences against fraud.

  • John C

    Err, it’s the UK that’s leaving the EU, not vice versa.

  • John C

    Me, now. ‘Growth’ is a manic obsession.

  • La Face Nord

    Mr Redwood – are you aware of the Biased BBC website? It’s been exposing their agenda for a long time, but I imagine you’ve been well aware of the BBC’s agenda for quite some time…

  • Contact Rvtech

    The post is great

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