Locked up Loans: The need to build flexibility in the credit system

In a world where the financial landscape continues to evolve, the rigid nature of the current credit system is a significant roadblock to financial inclusion and growth. The one-size-fits-all approach to credit checking has left many consumers locked out of accessing essential financial resources at significant moments in their lives. And the credit models in place today are not only stopping lenders from reaching a broader group of customers in need of financial support, but they are also preventing the growth of lending institutions.

People seek credit for a huge range of reasons – be it for purchasing a home, making a holiday payment, or buying a new car. What’s more, when pay dates don’t align seamlessly, credit serves as a critical buffer. However, while credit is designed to address real-world needs, changes and problems, the terms of loans are often fixed. Life, on the other hand, is unpredictable. Lenders must recognise that they are not just facilitating transactions; they are fulfilling a fundamental human need, one that is bound to change over time.

An ever-evolving lending market

Increasingly, consumers have grown to appreciate the ability to tailor the terms of their loans to align with their evolving needs and situations. And as the market continues to become ever more competitive, there is now a clear and growing demand for financial products that adapt to the unique circumstances of each borrower. With more and more financial institutions tailoring products and services to best fit their customers, this trend signifies a shift in consumer expectations, urging traditional lenders to rethink their strategies.

The good news is that a wave of new market entrants is actively exploring opportunities to introduce adaptability into credit products throughout the entire lifecycle of a loan. This marks a positive step towards fostering financial inclusion and better serving the diverse needs of customers. Though despite these promising developments, there is still more to be done to serve consumers of today.

Fixing loans for the long term

The current credit system operates on the idea of fixed terms and standardised credit assessments. While these models might simplify processes for the financial institutions offering them, they often overlook the nuances of individual financial situations. With more and more industries beginning to dip their toes into customer centricity and personalisation, the lending industry cannot afford to fall behind. Developing products and broadening borrowing options tailored to individuals’ specific needs are critical components of a successful transformation of the sector.

To truly meet the increasingly diverse needs of today’s borrowers, lenders must adopt a more dynamic approach to credit assessments. This involves moving away from rigid credit scoring models that categorise individuals into predetermined risk brackets and makes use of outdated bureau data.

Open Banking has the ability to play a pivotal role in enabling this shift towards flexibility. By leveraging the power of Open Banking data, lenders can access rich insight about up to 100 individual attributes of a customer to get an accurate picture of their creditworthiness. This Open Banking data can include, a borrower’s financial history, their repayment history and recent transactions. This not only facilitates a more accurate credit assessment but also opens the door to innovative lending products that providers can adapt to changing circumstances.

Building flexibility into a stagnant industry

We’ve established that the development of flexible repayment options is key to the future success of the industry. Borrowers should have the freedom to adjust their repayment schedules based on life events such as job transitions, unexpected expenses, or, perhaps most relevant to the current market, a cost-of-living crisis. This approach not only aligns with the reality of people's lives but also reduces the financial stress that rigid repayment terms can impose – and in turn make people much more likely to repay them in full and on-time.

By integrating technology alongside Open Banking data, such as artificial intelligence and machine learning algorithms, lenders can provide borrowers with the ability to customise their repayment plans at any time, while also collecting data that will help predict and accommodate changes in borrowers' financial circumstances, further enhancing the versatility of credit products.

In a credit landscape where borrowers have the opportunity to shape their credit experience according to their unique needs, the likelihood of acceptance and making timely loan repayments is drastically increased. This involves not only redefining credit scoring methodologies but also fostering a culture of financial education, where lenders can provide a duty of care by empowering borrowers with the knowledge to make informed decisions about their credit and increase their financial literacy.

The credit system is at a crossroads, and the need for flexibility has never been more apparent. By embracing Open Banking, redefining credit scoring models, and offering more dynamic and personalised borrowing options, lenders can meet the evolving needs of their customers and also foster a more inclusive and resilient financial ecosystem. It is time to unlock the potential of the credit market by breaking free from the constraints of the past and embracing a future where flexibility is the cornerstone of financial empowerment.