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With more than 1.2 million UK customers in “severe debt”, many non-bank lenders are concerned at the rising levels of debt on their balance sheets and may be at the point of collapse.

However, FICO’s vice president for collections and recovery, Bruce Curry (pictured above), explains that open banking-based affordability evaluations, digital customer engagement tools and an increased use of AI and big data could turn things around and better safeguard at-risk customers.

Two weeks on from the Budget, UK lenders are likely to still be coming to terms with the potential new levels of bad debt risk they might face as a consequence of the extension of the furlough scheme and self-employed support. The number of UK customers deemed to be in ‘severe debt’ already stands at more than 1.2 million, with another 3 million at-risk. Unemployment is also forecast to continue rising, to 6.5% during Q4 2021.

For those working in sectors most severely impacted by Lockdown 3.0, the extension of support would have been welcome news. But the fear is that financially stressed households are continuing to look at alternative ways to extend their credit and borrow more to stay afloat with the result that many lenders, increasingly under the close scrutiny of regulators, face a headache in maintaining a clear picture of their customers' actual financial position.

It's clear we're facing a debt tsunami and it’s not unreasonable to expect that several Tier 2 lenders simply won’t survive given the level of debt on their balance sheets. For those that continue trading, profits are likely to be low alongside higher losses, driving the need for increased provisioning and reduced credit availability

Going beyond historical data

Given the dramatic affordability challenges being experienced by many consumers, reliable, accurate and up-to-date information is far more valuable than the sole reliance on historic behaviour analysis. Identifying high-risk and at-risk customers hinges on the fast adoption of broader data insights underpinned by AI-driven analytics that delivers pre-emptive and automated portfolio management.

Open Banking is now the most direct route for major banks and financial institutions, which have seen the immediate value in incorporating its affordability and transaction-based analysis directly into scorecards. As a result, Open Banking-based affordability evaluations are now helping inform marginal credit increase-decline-accept decisions to help safeguard more customers.

Self-service improves customer engagement

How to engage with customers – and how they can engage with lenders – is the other critical factor as the end of forbearance nears for many. Banks, financial services and motor finance companies and the energy sectors are now offering self-serve digital tools to support customers' affordability assessments. It's a channel that has saved many firms thousands of man-hours in advisers' time and ensured those that are not in need have been able to maintain their payments.

Even the energy sector is embracing the use of Open Banking data and self-serve channels to help determine appropriate repayment plans without needing to talk directly to an agent.

AI and Big Data point a path past the pandemic

Thanks to the scalability and flexibility of AI, combined with tailored digital offerings, new customer journeys can be devised and delivered within hours rather than weeks.

It’s a trend that’s only going to continue as more and more back-office processes continue to leverage the power of Big Data, which drive next best actions and service recommendations for at-risk customers. AI-driven solutions are no longer an optional investment but are quickly becoming fundamental differentiators in the successful delivery of customer service.