Credit Management July and August 2021

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TRADING PLACES Credit information in a post-pandemic digital world. AUTHOR – Neil Munroe MCICM Advancing the credit profession / www.cicm.com / July & August 2021 / PAGE 20
OPINION AS we look to eventually exit the pandemic, there is no doubt that the focus will turn to how to stimulate economic recovery. Key to achieving this will be the ability for individual’s and businesses to gain access to credit and key to making credit available will be having the best possible understanding of an individual and a business’s ability to pay back any borrowings. As we come out of the pandemic ‘knowing your customer’ (KYC) is going to be more crucial than it’s ever been. When I use the term ‘know your customer’ I am not just referring to compliance with KYC regulations but to the whole customer lifecycle from acquisition, risk assessment, account management and collections. All of these points of contact with customers are changing as the relationship is more and more online. As we have all experienced, this shift to a digital world has been accelerated by the pandemic. There is no doubt that the move to digital services can provide significant benefits to many. But as we have also seen it can increase the risks of financial crime, including cyberattacks, fraud, data breaches and money laundering. In such a world, having access to relevant comprehensive information on a timely basis is going to be even more crucial. So what changes (if any) are we likely to see in the credit information space as a result of the push to restart economies and the ever quickening move to a digital dialogue with customers? Many, is the answer with a number already taking place. Changes in the ‘data landscape’ and in the use of technology I believe are two of the major ones. I also believe that you will see a significant shift in the service offerings of the credit information providers to support the growth in digital services and help limit the risks I mentioned above. Alongside all of this will be the challenge of regulatory developments that will come about as Governments look to support individuals and businesses rights. INFORMATION ASYMMETRY There is no doubt that the pandemic has increased the degree of information asymmetry between lenders and borrowers. While some businesses may appear solvent due to Government support (e.g. subsidised loans, repayment holidays), their condition may weaken when this support expires. Credit providers are likely to see a deterioration in traditional credit history of businesses. The same can be said of individuals as measures put in place for them also expire. It is likely that if credit providers are relying on traditional credit information they will start to see a growing number of individuals and businesses who will fail to meet their lending criteria. There is no doubt that despite having had issues during the pandemic some of these individuals and businesses will have managed to recover and will be a good risk going forward. So how are credit providers going to identify these? One way will be through ‘alternative data’. Around the world, alternative data can take many different forms; from non-financial Further afield (particularly in the Far East) the data landscape is also changing as a result of the growth in e-commerce platforms. In countries where credit information is less developed this type of data is increasingly being used to grant credit to individual and businesses. Advancing the credit profession / www.cicm.com / July & August 2021 / PAGE 21 data such as utility data (gas, electricity, telco), to transaction data such as current account information or online e-commerce transaction information to data from social media platforms. In the case of non-financial data credit providers are able to gain a better understanding of how an individual or business is able to meet their commitments. With transactional data credit providers are also able to better understand cash flow and income. By accessing these ‘alternative data’ sources, credit providers are able to fill ‘the gap’ in their knowledge of a customers’ finances. Prior to the pandemic the credit information industry had already identified that there was a gap in the information they could supply to provide a 360 degree view of a customer that credit providers need to make effective lending decisions and ensure such things as affordability requirement were met. Whilst credit information providers have always been able to provide a view of outgoings, providing information on income has been more of a challenge. OPEN BANKING The evolution of ‘open banking’ and ‘open data’ post the financial crisis of 2008, driven by the desire for Governments for individuals and businesses to ‘own’ their data, has provided the credit information industry the opportunity to fill the ‘gap’. The introduction of the 2nd Payments Services Directive (PSD2) in Europe has further supported this move. Using open banking and open data channels driven by an individual’s consent has enabled credit information providers to enhance the level of both alternative and additional data they can provide. These channels provide credit information providers with real time access to new sources of data via APIs alongside the traditional monthly updates from lenders. This customer driven ‘self-reporting’ of data (on the basis it required consent from the individual or business) is changing the customer dynamics for the credit information providers with individuals and businesses also being seen as the ‘customer’, and more and more direct engagement with them as a result. Is this really the case I hear you ask? Well you only have to look at the advertising campaigns about ‘boosting your credit score’ and ‘taking control of your credit score’ to see that it is already taking place. Another example of the move to customer driven ‘self-reporting’ is the increasing ability for consumers to supply their property rental data to the credit information providers through specific organisations that have been set up to collect the data from individuals. This whole area was supported by the UK Government with its Rent Recognition Challenge in 2017. Further afield (particularly in the Far East) the data landscape is also changing as a result of the growth in e-commerce platforms. In countries where credit information is less developed this type of data is increasingly being used to grant credit to individual and businesses. As a result such platforms are moving from e-commerce operations to also being credit information and financial services providers challenging continues on page 22 >
Page 1 and 2: CREDIT MANAGEMENT CM JULY & AUGUST
Page 3 and 4: JULY & AUGUST 2021 www.cicm.com 24
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Credit Management July and August 2021

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