The Bank of England’s news release, following its September Financial Policy Committee (FPC) meeting, warned that whilst the overall domestic credit environment was pretty stable, there was a “pocket of risk in the rapid growth of consumer credit”.This area of vulnerability has arisen, reported the FPC, because lenders “are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn.”
The BoE went on to recommend that UK banks should increase their capital buffers by £10bn to protect themselves from consumer credit losses.
What Have We Learned?
Lessons have certainly been learned since the 2007 financial crisis, the quality of consumer credit is much more robust. But, as the FPC statement makes only too clear, there is no room for complacency and banks will have to demonstrate greater resilience when the Bank of England publishes its annual stress tests in November.
The BoE reports that what seems to have happened is that banks have looked at a falling default rate amongst their consumer creditors and incorrectly concluded that the credit quality of their customers must be improving. In reality, however, customers have been keeping the banks at bay by juggling credit cards with zero interest offers.
The root of the trouble for the banks is that, however much they number crunch, predicting the ebbs and flows of consumer credit, means understanding consumers and that means understanding human behaviour. How could they have known that underneath the seemingly calm waters of consumer credit, those consumers were thrashing away like mad, just to keep their heads above the water?
The Technology To Improve Credit
They could have been known. They could have known exactly how their customers were juggling and struggling. Castlight’s CaaS® (Categorisation as a Service) technology could have told them in minutes.
Our CaaS® technology has been developed to create a safer financial world for both lenders and customers. Our banking clients give us access to all the transactional data of their customers. This anonymised data is then sorted into over 155 categories of discretionary and non-discretionary spending. For example CaaS® will instantly identify and categorise salary, benefit payments, rental repayments, child care costs, the weekly grocery shop or how much is spent travelling to work. Equally, it will categorise exactly where Peter is being robbed to pay Paul – where one credit card is being used to pay off another. CaaS® will provide even more sophisticated reporting. Over and above the categorisation, the technology will also compile a powerful analysis of spending patterns or “characteristics” allowing lenders to anticipate problems in cash flow, provide solutions and support their customers through difficult times.
Banks and lenders adopting CaaS® can have data and insights at their fingertips to improve the credit assessment process and make 3D informed lending decisions. And by identifying credit problems before they escalate, they are in a strong position to safeguard the economy from within – well before there’s a £10bn buffer to find.