Improving lenders’ consumer duty through data & technology

Written by Frode Berg, Managing Director, Europe at Provenir 

With several economies on the brink of recession, burdened by escalating inflation and rising interest rates, cost-of-living concerns continue to plague consumers and lenders alike.

Amidst this period of economic strife, consumers are becoming increasingly reliant on credit to satisfy their financial needs. 

Data from Statista shows that consumer lending, excluding student loans, in the United Kingdom (UK) reached over 28 billion GBP in January 2023 – a figure that is three billion more than the previous peak in January 2020, before the Covid pandemic. 

On the other hand, financial firms have become increasingly hesitant to lend money. They are tightening credit standards and shifting away from speculative deals. This is making it harder for consumers to gain the financial support they need. 

To ensure that financial institutions offer a consumer-centric approach to credit, the UK government has introduced pioneering industry-wide regulation, a new Consumer Duty, which mandates firms to address customer needs and provide additional clarity on their products and services. 

An industry-wide change… 

With the Customer Duty due to come into force on the 31st of July, the Financial Conduct Authority (FCA) aims to establish higher and clear standards for consumer protection. To prevent customers from experiencing financial harm, financial institutions will need to provide consumer protection that is laid out and articulated in simple terms. 

Transparency – and the provision of fair value assets – is vital to a consumer’s financial journey. Whilst this adds a layer of complexity, as financial firms are expected to simultaneously deliver ‘good customer outcomes’ whilst preventing ‘foreseeable harm’, this is not a mere papering exercise for the FCA, and companies should not treat it as such. 

The FCA’s flagship principle is expected to increase standards and improve the consumer experience. The new legislation establishes a “Consumer Principle” which addresses four key outcomes: governance of products and services, price and value, consumer understanding and consumer support. To achieve this, companies will be required to review their products and implement anti-fraud controls. Whilst there has been concern that smaller firms will experience an unnecessary burden, the safety of the end user must always be upheld. 

To effectively comply with the FCA’s proposed changes, financial institutions will need to display a considerable shift in mindset. However, they must not view this as merely a tick-box exercise. Firms must evolve and embed a customer-centric approach within the culture of their wider organisation. 

AI-powered credit risk decisioning – a unique advantage 

To reflect the FCA’s legislative effort to prioritise the consumer, all players must now strive to provide a better user experience. Both traditional institutions and nimble fintechs need to adopt flexible technology solutions to prioritise the consumer, prevent harm, deliver clear and accurate information and ensure equitable outcomes for customers. The use of technology-driven solutions 

will ensure efficiency, minimise fraud and tailor lending solutions to each user, whilst also minimising customer abandonment rates. 

One way for lenders to enrich user experience is to use data and AI-powered credit risk decisioning tools. By integrating advanced analytics and data-powered decisioning technology into their operations, banks and fintechs can process loan applications more quickly. From credit bureaus, employment data and financial statements to mobile phone records, web presence and rental or utility data, AI technology can collate and analyse large data sets quickly and efficiently. 

Moreover, by allowing for a broader range of data points, lenders can gain a more comprehensive and accurate understanding of an applicant’s creditworthiness, giving an opportunity to ‘thin file’ consumers who would otherwise lack access to credit. Lenders can further utilise AI to ensure equitable practices as algorithms can be trained to identify and mitigate any discriminatory patterns that may arise from the data. In doing so, lenders can minimise biases to ensure the fair treatment of all applicants, upholding consumer duty regulatory requirements as a result, while also fostering trust with their customers. 

AI eliminates time-consuming and labour-intensive manual assessments resulting in numerous benefits for both customers and financial service professionals. Not only does it reduce the wait time for borrowers, but it also frees up additional time for auditors. What’s more, lenders are finding it increasingly difficult to understand future risk using traditional credit metrics. 

AI’s ability to analyse extensive data sets to uncover valuable insights and patterns proves particularly beneficial in understanding future risk, surpassing the limitations of traditional credit metrics. By leveraging AI-powered credit risk decisioning, financial institutions can expedite and enhance risk assessments, resulting in prompt credit approvals. This streamlined process benefits consumers by facilitating timely access to credit. Seamless integration of data and AI empowers lenders to make informed and efficient risk decisions, improving the overall lending experience. 

Financial institutions can also achieve a level of personalisation by interpreting data on consumer behaviour and wider lending patterns. This will enable firms to tailor their lending strategies, identify areas of potential risk, and mitigate issues before any harm befalls their customers. This upholds the level of customer care outlined in the Consumer Duty whilst meeting the increasing demand for personalised customer experiences. 

The regulatory landscape is constantly evolving. This makes it crucial for lenders to embrace a flexible platform in order to ensure long-term viability and compliance with industry guidelines. AI-powered decisioning tools, with their inherent flexibility and adaptability, are well-suited to accommodate shifting regulations. The compliance monitoring mechanism of these tools regularly validates and audits their decision-making processes to ensure adherence to the latest regulatory guidelines. By actively monitoring and adapting to changes, these tools can assist lenders in maintaining compliance, avoiding hefty penalties, and mitigating any legal implications that may arise. 

Both fintechs and traditional institutions have much work to do, in order to meet the new standards of the FCA. However, they must first seek to expand and improve their product range with innovative technology. This is vital to remain compliant, diversifying their offerings and establishing wider financial inclusion within the lending market. And given the cost-of-living crisis and imperative to facilitate lending, the immediate answer is to embrace data and AI-powered technology.