Financial data: The new opportunities it brings

David Johnson MICM CEO Talefin

In Australia, the view on credit reporting has shifted in recent years. What was a predominantly negatively driven industry, is now embracing comprehensive credit reporting (CCR) to help lenders more accurately assess credit applications and make better-informed decisions.

The Australian government has also implemented several measures to protect consumers against unfair credit scoring practices, such as giving individuals the right to check their credit score annually and dispute and amend any errors on their report.

These changes have been welcomed by consumer groups and the financial services industry alike, as they help to ensure that credit reporting is fair and beneficial for all involved parties. CCR has been seen as a positive step in improving the accuracy of credit reporting in Australia.

With the increased uptake of CCR the credit industry in Australia is in a period of transition, undergoing an overhaul with introduction of new regulations and reforms designed to better protect consumers. In the wake of the Royal Commission into banking and financial services, the industry has come under increased scrutiny from government regulators, with a focus on reducing the risks associated with lending and borrowing.

In addition to the introduction of CCR, the commission recommended additional measures such as the banning of unsolicited credit card offers and the introduction of new rules for lenders which require them to assess a borrower’s ability to repay before approving a loan.

Australia is planning a digital economy by 2030. New technologies have emerged which could potentially revolutionise the way that credit is offered and accessed. This creates both opportunities and challenges for lenders, borrowers, and regulators alike.

Risky business

With the multi-faceted changes to the Australian financial sector, credit providers are now tasked with additional checks prior to approving any credit. The new rules for providing credit to consumers requires more insights to ascertain suitability of the product. Non-compliance to new regulations may result in increased risk to both the credit provider and the consumer.

Responsible Lending

Let’s begin with responsible lending. In Australia, responsible lending regulations have come a long way in the past decade, with recent changes in legislation introducing stronger consumer credit protection regulations. For lenders, these new rules not only provide consumer protection, but also open opportunities to engage with customers in a responsible and motivating way.

The National Consumer Credit Protection Act 2009 (NCCP) established the concept of responsible lending in Australia, aiming to provide consumers with credit that is appropriate for their needs and repayment capacity.

In 2012, the NCCP was amended to include additional consumer protection measures, such as mandating that lenders conduct reasonable inquiries into a consumer’s financial situation and verify provided information. Additionally, a new ‘not unsuitable lending’ test was introduced, requiring lenders to evaluate whether the credit provided is unsuitable for the consumer’s financial circumstances and needs.

Since 2012, further amendments have been implemented to strengthen responsible lending obligations for lenders. The new rules require lenders to conduct more comprehensive inquiries into a consumer’s financial situation and to obtain and evaluate more information regarding their requirements and objectives.

Moreover, the ‘not unsuitable lending’ test now encompasses a wider range of credit, obliging lenders to take reasonable measures to ensure borrowers can repay their loans without hardship.

These changes aim to ensure that consumers are better protected when seeking credit and are provided with products that are genuinely suitable for their circumstances.

Ddo

2021 saw the introduction of the Design and Distribution Obligations. This began the shift away from relying solely on disclosure as a form of consumer protection, and instead introduces measures to ensure products are distributed to their intended target market.

Credit providers must meet the distribution obligations in relation to their ‘retail product distribution conduct’, such as giving financial advice, providing a PDS or disclosure document and arranging for someone to apply or acquire a financial product.

The application of DDO often causes considerable consternation among the businesses we interact with. This confusion primarily stems from uncertainty about who should be subject to DDO requirements and how these requirements should be applied. While the intent of DDO is generally well understood, many individuals feel that the rules are too subjective, making it difficult to confidently interpret how they should be applied in practice.

Bnpl

BNPL is currently one of the most discussed topics in the industry, with a variety of opinions and perspectives on the matter. However, many personal finance lenders are finding it challenging to provide credit responsibly to consumers who use BNPL. As BNPL is not required to have suitability tests, often the result from one participant not assessing credit risk, other credit providers will inevitably be at a disadvantage. Especially in the case of BNPL, where a different set of rules applies, the sector is exempted under NCCPA due to interest rate of 5% or less per annum. The BNPL sector argues that most of their customers make payments on time (virtually true of all credit products) and argue for the status quo to remain.

The introduction of Buy Now Pay Later (BNPL) legislation in Australia is likely to have a significant impact on the industry. The new laws will require providers to assess the ability of customers to repay their debts and provide greater protection against irresponsible lending.

This will impact low-income consumer who utilise BNPL services. They will be assessed on their ability to make all repayments, not just the initial repayment and whether they can service multiple BNPL products at the one time.

Additionally, the legislation could lead to stricter regulations regarding fees and other charges associated with BNPL services. These changes could mean fewer incentives for customers to use BNPL products and services, and this could have a negative effect on businesses in the sector.

On the other hand, the new laws could also lead to increased consumer confidence in

BNPL services, which will result in more people using them. Overall, the implications of the new legislation are yet to be seen, but it is certain to have a major impact on the BNPL industry, in addition to the entire credit industry in Australia.

Change is inevitable

The industry is at precipice of change, facing the possibility of significant shifts due to forthcoming legislative reforms. As a result, some sectors may experience a decline while others may undergo an evolution. Reform is inevitable, technological advancements and changing consumer demands propel the industry into the new areas of opportunity. While some may see risk, the reality is that the credit industry and financial sectors now have the potential to excel and enhance their offerings to better serve their customers’ needs.

By embracing these changes and adopting innovative solutions, the industry can not only survive but thrive in the current economic landscape. In addition, regulatory reforms can help to establish a more robust and transparent industry that protects both consumers and businesses. Therefore, the industry should view this period of change as a chance to reinvigorate and improve its practices, ultimately creating a more prosperous and sustainable future.

The success of a credit provider is increasingly dependent on obtaining nuanced insights into their customers. Actively engaging in comprehensive credit reporting can provide detailed feedback that can be used to capitalise on changes in the market. Armed with the right financial insights, credit providers can make better decisions faster, increasing their returns, and lowering their arrears.

With the changing landscape, simply denying credit to those who appear to be a risk should no longer be the default option. Instead, credit providers should leverage comprehensive data to understand the nuances associated with potential customers. By doing so, they can identify positive financial behaviours in a client’s history, determining that they are not actually a risk but potentially experienced financial difficulties in the past.

Real-time financial insights can provide critical indicators to identify points where proactive assistance may be necessary to prevent customers from entering financial hardship. Having additional data points to monitor changes in financial behaviour and financial situations can help credit providers work with clients to promote continuous, albeit amended, payments.

The industry is currently undergoing rapid evolution. Identifying and classifying risk when determining credit eligibility is more than just a yes or no. With accurate insights, credit providers can instead focus on finding the ideal product for each consumer that is sustainable in the long term for both parties. By leveraging technology and innovative solutions, the credit industry can evolve to meet the changing demands of the market and better serve its customers.

CCR and real-time financial data will only help bolster your business, have you considered the risk of not engaging in it?