At the time of writing, the world feels more chaotic than at any time in recent memory.
And yet we have to keep going. The financial and economic world doesn’t stop when chaos rules. And we have a responsibility to our industry and our employers and our customers to ensure that these systems remain solid.
We have to ask the question… What does the future hold for lenders?
Credit and Chaos Don’t Mix
Effective lending models are based on solid scoring systems that rely on the predictability of human behaviour for their accuracy.
And yet, increasingly, human behaviour is anything but predictable.
How can it be when the world itself is so inherently UNpredictable.
At one time an unexpected event in the financial world meant an unpredicted bump in inflation or an unannounced change in interest rates. Now unexpected events, including brazen new fraud offences and similar events of this magnitude cannot help but have a sizable impact on the world economy and, eventually, the decisions that lending businesses have to make.
The past two years, especially, have demonstrated that these impacts arrive in two forms: immediate and indirect ripple effects. Organisations must have measures in place to adjust and respond to both.
Here are just a few examples of globally-impactful events and the impact (or potential impact) on the lending and credit industries…
Global Pandemic Increases Lending Business Opportunities… AND Risks
The Covid-19 pandemic resulted in lockdowns in countless countries depressing spending in sectors, such as entertainment and travel, decreasing consumer demand for credit. On the flipside, however, demand for commercial loans soared as businesses sought needed funds simply to survive.
This created a profitable opportunity for lenders but also an unknown level of risk. Without an accurate prediction around how long the pandemic would last, lenders were left struggling to properly assess applicants’ ability to repay.
Additional considerations also had to be made around public perception. When a slow or rejected credit application can mean the destruction of people’s livelihoods it becomes very difficult to balance fiscal prudence with community responsibility.
Recent Sanctions on Russia Destroy Numerous Red Lines
The recent economic sanctions on Russia are extensive and unprecedented, with the trickle-down effect being felt in all corners of the globe.
And it’s impossible to know whether these sanctions will prove to be short-lived or represent a new paradigm.
How does an organisation properly forecast for these developments? And how does an organisation adjust their lending models going forward?
Rapidly-Advancing Tech Produces Unexpected Lending Trends
The fintech and insurtech companies are betting big on AI and Machine Learning. And the one thing that can be predicted with great accuracy is that we can’t predict what trends are going to emerge as a result.
Who would have predicted, for instance, even just a couple of years ago, that in the midst of a global pandemic, companies like Klarna, Clearpay and Laybuy would explode onto the lending scene with that most basic of lending products – the Buy Now Pay Later (BNPL).
If you’re a lender and you don’t have a BNPL product at least in the works, you’re already trailing your competition.
There’s no reason to believe (FCA regulations notwithstanding) that short-term lending products won’t maintain their popularity. But this poses yet another challenge for lenders since the current rules don’t necessarily require BNPL lenders to share information with the credit reference agencies.
This is a huge challenge to the goal of responsible lending and yet another example of how traditional lending models are totally unsuited for the modern, chaotic world.
How to Modernise Your Lending Models
A competitive lending business in the current climate needs to be focused on balancing low friction application and underwriting processes with responsible lending.
To achieve this in a world that is growing increasingly unpredictable requires the ability to pair prudent assessment of current trends with rapid, on-the-fly adjustments at a speed that only cutting-edge software can produce.
In fact, given this aforementioned unpredictability, the neutrality and unbiased “thinking” of a machine is the only way to make consistently sound decisions.
Human beings find it notoriously difficult to make balanced assessments when there are emotional consequences to the events in question. Of course we need humans to balance pragmatism with compassion when making the big decisions. But when it comes to making rapid adjustments to moment-to-moment changes in circumstances, we should be grateful that we have software available that can read the numbers with disinterest and make decisions that are in everyone’s best interests.
If you’re a lending business or a related fintech, and you want to explore your options for upgrading (or even replacing) your credit scoring model with something better suited for the modern landscape, you should strongly consider a scoring and underwriting system with stronger Machine Learning capabilities so you can react faster and with more accuracy as market conditions change.
For a no obligation chat with one of our modelling specialists, click the button below.
Supporting the Victims in Ukraine
It’s not our place to tell you how you should feel or react to the war in Ukraine, but if you’d like to offer direct financial support to those affected, this helpful article by WHICH offers a number of safe options: https://www.which.co.uk/news/2022/03/how-to-make-your-support-for-ukraine-go-as-far-as-possible/