How are lenders responding to rising defaults?

Against a backdrop of ongoing economic and regulatory uncertainty, and with rising delinquencies, UK lenders are looking for new ways to grow their businesses. In a fiercely competitive market, they’re focused on approving more loans whilst improving collection processes.

The need for better and faster credit decisioning along with a growing lack of confidence in traditional credit data, is forcing lenders to consider new loan origination strategies, alternative credit data and advanced technologies, to enhance their credit decisioning and competitiveness, whilst balancing the requirement for strong risk management and default prevention.

We asked 150 consumer lending experts, across a range of different loan types – mortgages, personal, home equity, credit cards, motor finance, BNPL and wider – for their insights around the key challenges and opportunities they’re facing in the UK market today.

Here’s what they told us.

Accessing a larger pool of potential customers

Firstly, over the next two years, one of the top concerns for the vast majority (95%) of lenders is their ability to attract new qualified borrowers and retain existing customers.

One of the strategies they’re employing to achieve this is to open a wider audience of potential new customers by sourcing new and different types of data to supplement traditional credit scores in assessing creditworthiness.

Alternative credit data, including insights around life events, credit-seeking behaviours and the digital footprint created by consumers as they engage in commercial activities online, contributes to a more comprehensive view of a potential customer’s creditworthiness and avoids the lender missing out on customers who might otherwise be overlooked due to being thin- or no-file based on traditional credit scores alone.

Better visibility of creditworthiness

Lenders today are also feeling less confident about making consumer lending decisions based on traditional credit data alone when compared to a year ago.

This is in some part due to the lack of coverage of the consumer population — nine in ten lenders said they can only evaluate up to three quarters of their applicant population with traditional credit data. However, in the main, it’s due to the limited visibility that tradeline data provides around negative payment history (89% of lenders).

More confidence in credit decisions

Meanwhile, trust in alternative data is increasing, with four in five lenders (84%) admitting they feel more confident using alternative data today than they did a year ago when making their consumer lending decisions.

Additionally,, two thirds (65%) of lenders in the UK are currently looking to expand their use of alternative data across additional stages of the loan lifecycle.

Over half (56%) are already using alternative data to pre-screen applicants, with almost three quarters (72%) using it for loan origination, while two in five (60%) are using it for portfolio management and almost a quarter (24%) are now using alternative data to support collections.

A third (34%) of lenders are exploring new types of alternative data to enhance their credit decision-making.

Rising delinquencies spur capability changes to seize opportunities

95% of respondents ranked collecting on delinquent loans amongst their top anticipated challenges over the next two years.

When asked about the top changes planned in the next six months, half (49%) of lenders confirmed that monitoring their loan portfolio more closely for signs of financial distress is a firm priority.

This is largely driven by 43% experiencing an increase in delinquencies over the last 12 months. And the situation is not expected to change.

Same or higher levels of delinquencies are expected over the next 12 months

In the next 12 months, half of respondents expect the rate of delinquencies and defaults to stay much the same, whereas over a third (36%) are expecting a further increase, with some expecting the rise to be quite significant.

As a result, over a half of firms (59%) are looking to upgrade their collections capabilities. Again, alternative data is expected to play a big role in this, particularly as under a quarter of firms currently use alternative data to support with collections.

Almost two thirds of respondents (65%) are considering further investment in alternative data across different stages of the loan life cycle, to improve visibility of consumers and hopefully head off some of the issues further down the line.

Further investment in alternative data can support lenders in the long run, helping them identify which consumers are most likely to pay, where they are located, and supplying them with the most accurate, up-to-date details to make contacting easier, with the end result potentially being fewer debt write-offs and increased profits.

Over the month of November Credit Strategy, in partnership with LexisNexis Risk Solutions, is investigating the benefits of alternative credit data. Take a look at the Consumer Lending Confidence Report to find out where we currently stand.