Callcredit Blog

Balancing Risk and Growth: challenge or opportunity?

Credit Risk & Affordability

The debt to income ratio is at its highest level since the last financial crash – representing a correspondingly high risk to lenders. At the same time, there are numerous other signposts to suggest the direction risk is taking.

For example, there are record levels of unsecured consumer debt. Meanwhile, as a result of rising inflation, household costs are increasing whilst wage growth remains comparatively stagnant. At the same time, the economy is growing at just 1% while consumer credit card debt, car finance and unsecured personal loans have increased by 10%. These factors clearly reflect negatively on the long-term ability of existing customers to repay debt.

In parallel to these pressures on current customers are those on lenders.

A general cooling-off of the economy now looks increasingly likely. This would lead to a decrease in borrowing – and therefore in potential new customers – as major spending on high-ticket items is deferred.

Meanwhile lenders are being squeezed from the other side by the Bank of England’s urgings for greater caution in lending decisions. The threat is that if this is not exercised voluntarily, the Bank will impose credit controls which will have the effect of further stifling demand for credit.

However, it’s not only the BofE which is driving these demands. The FCA – through its Treating Customers Fairly code – and customers themselves are expecting a better borrowing experience. Those lenders who can provide it will find themselves with a competitive advantage when it comes to acquiring more new customers with less risk.

Better borrowing

Almost three-quarters of businesses say improving the customer experience is their top priority. Providing borrowers with a better onboarding experience is, of course, good for customer acquisition.

At the same time, it is important to reduce the risk of customers getting into unrecoverable debt, and the following best practices can help to reduce this risk:

  • Carefully pre-identify customers as acceptable risks
  • Target them accurately with the right products for their needs and financial situation
  • Monitor customers, and proactively identify any developing repayment problems as early as possible.

In addition to reducing risk, a better customer journey can actually optimise the efficiency of the origination process. And if companies take advantage of technology to do things better and differently – breaking away from the traditional business models – it can also provide a powerful competitive advantage.

Digitising the customer journey

Combining proven technology and software with access to comprehensive data sources can:

  • Increase the likelihood of identifying “at risk” customers
  • Enable more accurate lending decisions
  • Increase the speed and efficiency of customer on-boarding
  • Optimise the efficient management of customers
  • Enhance the customer experience and improve customer engagement.

For example, using a phone app can simplify and accelerate data capture, and ID can be acquired and verified quickly and easily from a picture or driving licence. Links to back-end data sources will provide fast and accurate information enrichment and confirmation. A broad overview of data across all customer debt will also make it easier to spot developing risk earlier, and to take steps to mitigate it before it becomes harder to manage.

In the current economic and regulatory climate, a proactive approach is also important in adopting a more digital approach to the customer journey as a whole. Developing a plan for process change and digitisation, based on expert advice, can demonstrate to regulators your awareness of the need for more cautious lending, as well as providing a competitive edge over other lenders both in efficiency and customer service.

Though the overall aim should always be to reduce risk to a minimum, the essential element in all your planning for change should be the customer. If you can identify what better customer service looks like, you can make changes which will not only enhance your efficiency and reduce your risk, but will also give your customers an enhanced borrowing experience.

Then the balance of risk and sales will be tipped firmly in your favour, and you will have turned today’s challenging lending environment into tomorrow’s opportunity.

Discover what an end-to-end customer engagement solution such as Callcredit Cosmos can do for your customers and your business.

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