Oct 2023 | Digital | Affordability, Digital

Meeting the challenge: How data and technology empowers lenders to navigate complex affordability decisions

Lenders are having to strike a balance between meeting responsible lending obligations and making faster decisions to help deliver seamless customer experiences. The increasing financial pressures impacting consumer finances means circumstances can change quickly, making measuring affordability increasingly critical and complex. Harnessing data and technology can help businesses make well-informed affordability assessments throughout the customer lifecycle.

Getting an accurate view of an individual’s financial capacity is becoming increasingly complex. Income and expenditure have become more volatile due to factors such as inflation, rising interest rates and the impact of increasing cost-of-living. This in turn affects consumers’ financial stability and circumstances can change quickly.

This places more emphasis on the ability to understand and assess an individual’s affordability accurately and with speed. Successfully navigating this challenging terrain while meeting responsible lending obligations and consumer expectations is pivotal to success.

The key areas of focus include:

  • Accurately assess an individual’s income
  • Understanding an individual’s essential expenses and disposable income
  • Monitoring an individual’s affordability to ensure positive outcomes.

A crucial aspect of this endeavour is ensuring that the data and processes you’re using are capable of addressing and mitigating foreseeable harm throughout your relationship with a consumer.

How economic factors impact affordability

Organisations need to see the individual in more granular detail, both today and in the future. Affordability depends on two factors: income and essential expenditure. However both have become more challenging to verify or to use historical data to inform the future. This is because we’re seeing more volatility in people’s income and expenditure due to the current economic conditions.

1. Income volatility and unpredictability

While Australian headline unemployment figures look relatively stable and at historically low levels, these figures can mask income shocks, a decline in real-term incomes, individual changes in employment, varying threat levels in different employment sectors, and other factors leading to complex volatility patterns in individual incomes.

2. Mortgage and housing shocks

Since May 2022, interest rates in Australia rose 12 times in 13 monthly RBA meetings. With the cash rate sitting at 4.1%, a household with a $500,000 loan is paying $1,134 per month more than in May 2022, a whopping 49% more, and for a household with a $750,000 loan this jumps to $1,701 and $2,269 per month for borrowers with a $1 million home loan according to RateCity. These increased costs also flow through to higher rental prices as landlords look to cover rising financial costs. CoreLogic revealed the national annual increase in Australian rent values is sitting at 9.4%.

Not only do the higher interest rates impact existing borrowers, but they also hit those looking to borrow to purchase a home. According to Compare the Market, a family with two children and a household income of $150,000 per year for example have seen their borrowing power drop by 28%.

The recent WeMoney and Experian State of the Economy Report revealed that if there was any further increase in interest rates, 40% of Australians surveyed would struggle to make repayments on their debt. The sentiment is reflected in our credit bureau data which indicates that 25% of WeMoney users are currently navigating some degree of credit stress and around 20% are currently facing some challenges in making payments.

3. The cost-of-living crisis and high inflation

Australia has been grappling with high inflation rates, impacting essential expenses such as groceries, fuel and energy. The WeMoney and Experian State of the Economy Report reveals that 90% of Australians surveyed say they have been impacted by the rising cost of living, with 60% saying their regular weekly expenses are up by $100 or more. Our data also shows that since the start of the year, WeMoney members have witnessed significant changes in their average payments for the following:

  • Average utility payments are up by 79%
  • Expenditure at the petrol pump is up by 40%
  • Supermarket spending is up by 10%The cost-of-living crisis and high inflation poses risks to consumers, particularly regarding their credit commitments.

Consumer responses to economic challenges

The WeMoney and Experian State of the Economy Report offers some insights into how Australian consumers are responding to the cost-of-living challenges:

  • Nearly 60% of Australians surveyed are worried about the next 12 months
  • 2 in 3 don’t feel prepared for the upcoming changes to the Australian economy
  • 80% are concerned rising interest rates will impact their future plans

This financial strain is leading to shifts in spending patterns for WeMoney members since the start of the year:

  • 20% decline in travel transactions for upcoming holidays
  • 15% decline in event ticket purchases
  • 5% reduction in subscription payments

Experian credit bureau data has also shown that Australian consumers are turning to short-term lending to cope with a 54% increase in new credit card enquiries in the past two years, a 42% rise for Buy Now Pay Later products and a 36% jump for personal loans.

This, coupled with rising non-discretionary spending, creates a complex landscape of financial pressures and individual responses.

How you can respond and how we can help you meet the affordability challenge

Organisations need to monitor volatility, assess income, and identify changes to an individual’s affordability more accurately. By harnessing data and technology lenders can navigate complex affordability decisions with ease, and at scale.

1. Assessing income. In a turbulent economic climate, it’s no longer safe to assume that a consumer’s income will stay stable (or increase) over the duration of a loan. Although widely reported to be rising, wage increases are not keeping up with price inflation – in many cases, real incomes are falling. Organisations need to understand more about the source and security of a consumer’s income to make the right decisions. Experian Affordability solutions can help simplify income assessment to provide a clear and up-to-date view of a consumer’s earnings so you can determine if they have sufficient income to manage new lending. We also help unlock income trends so you can easily recognise recent changes in income and affordability.

2. Assessing non-discretionary expenditure and indebtedness. Cost-of-living pressures mean consumers’ discretionary spending is being squeezed. An affordable product or service two years ago may well be less so now. Organisations require a more informed view of an individual’s expenditure and indebtedness so they can make the best affordability assessments and meet responsible lending obligations. Experian Affordability solutions can provide a holistic view of a customer’s financial situation so you can calculate disposable income swiftly and accurately.

3. Continuous, ‘always on’ affordability monitoring. Increasing uncertainty amongst consumers to be able to cover the cost of a loan, and greater consumer expectations with nearly two thirds of Australian consumers wanting credit providers to proactively monitor their financial health, puts renewed pressure on organisations to monitor affordability. Being able to continuously monitor affordability throughout your customer relationship is essential to identifying risk and emerging vulnerability. Experian Affordability solutions can help you identify consumers with low financial resilience, recognise changes in income and expenditure, and whether they’re turning to other credit products to help manage their finances.

If we can assist your business in making well-informed affordability assessments throughout the customer lifecycle, please get in touch with us using the form below.

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