WH ITE PAP E R :

Making the Consumer

Lending Market Work
for Everyone

If loans were offered on a high street, each shop

The Consumer
would have a representative price in the window
Lending Market – which 51% of customers get. The consumer would
Uniquely Opaque choose a shop and once they are inside they would
be told one of three things: -

1. Good news, you are in the 51% of people who we

approve who get the advertised price

2. Bad news, we can’t give you the advertised price

but we can offer you a higher price and you
better take it because you will now be locked out
of all the other shops

3. Bad news, we can’t help you but because you

asked us you will now be locked out of all the
other shops

This sounds bad, but there are other issues with the
current market. Even when using price comparison
services, consumers can’t be certain who will say yes.

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 This means they may choose a lender with a higher rate
in expectation that they will more likely be offered a loan
or card. Once the consumer has applied for a higher rate
product they have little chance of being accepted for a
lower rate because the application search on their credit
file will negatively affect their credit rating.

“
The only way for the market to work effectively is for
quotes to become mandatory. These quotes must
be binding on the lenders but place no obligation to
consumers and not affect their credit rating.”

There are good reasons why consumers can’t shop around

for multiple products and load up on credit. However,
markets aren’t working when the buyers don’t know the
price of the products. In most markets, consumers have
benefited greatly from the ability to quickly compare
products digitally and choose what represents good value
to them. That consumers need to risk their credit rating
and ability to get the product they need, just to find out
the price, is unique to consumer credit products. The
technology exists to solve this problem and many lenders
have risen to the challenge of providing complete clarity
before a consumer applies.

The only way for the market to work effectively is

for quotes to become mandatory. These quotes must
be binding on the lenders but place no obligation to
consumers and not affect their credit rating.

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Digital 20 years ago, when digital financial services were
becoming mainstream, many consumers were
Consumer
concerned about the idea of making financial
Lending – decisions and choosing products digitally. It is a
A Story of reflection of how technology has advanced, and
Winners and how banks and lenders have done a great job of

Losers simplifying and presenting products, that many

consumers are now completely comfortable
switching bank account, credit card or mortgage rate
on their mobile. We now see a cohort of consumers
who have grown up in a digital world.

The emergence of the financially savvy

digital native
Consumers who are both financially and digitally
savvy can only be won with the right value, delivered
seamlessly. They are well versed in comparing across
multiple lenders and platforms, they access the
best value products and need only be loyal if their
existing providers continue to offer great value. In
the long-term, the proportion of the market that this
segment represents can only grow.

The information gap for

vulnerable consumers
More vulnerable consumers are less well served.
Eligibility services may offer them a modest chance
of acceptance and a low representative rate. In
reality, there is a significant chance of being declined.
Even if they are accepted, the rate they are offered
may be five or even ten times the advertised rate.
Lenders with a broader risk appetite may be able to
offer them greater certainty but some consumers are

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 tempted by a 50% chance of a representative rate of
2.9% APR. They would be far better off applying for
a loan with a 20%+ APR but much greater chance of
acceptance. In the short-term, this segment is likely
to grow, at least until the impacts of Covid-19 finally
wash through.

“ Consumers need to be offered the credit they

deserve seamlessly, with certainty, and at a price
which is fair to them.

The opening of a digital divide

While more financially sophisticated digital
consumers now easily access great value across a
range of financial products, many consumers may
be excluded. Less sophisticated consumers may
find products complex. These consumers may have
the negative experience of being declined for a
product. They may have been caught out by a digital
journey built for those with longstanding financial
relationships and a simple address history.

The regulatory focus

The FCA’s latest business plan clearly sets out their
desire to ensure consumer credit markets work well
and that fair value is delivered in a digital age. To
address this, consumers need to be offered the credit
they deserve seamlessly, with certainty, and at a price
which is fair to them.

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A Winning Being fair and transparent to more
Approach for vulnerable consumers
Many of the lenders who offer top tier pricing deliver
Lenders great value to super prime consumers. However,
those same lenders can cause confusion and anxiety
to more vulnerable consumers. Few provide a firm
quote before application. They either require a full
application and a hard credit search or they offer an
indicative quote with a representative APR through
a standalone eligibility tool. The consumer still has to
weigh up what price they may be offered and their
chance of acceptance.

Many specialist lenders do not have the cost of funds

to support market leading headline interest rates
but they do offer real rate quotes before a consumer
applies. This leaves consumers in the dark about the
best rate available to them. Do they apply for a 12%
APR loan from a specialist or do they apply for a
2.9% representative rate from a bank or retailer?

“ Do they apply for a 12% APR loan from a specialist

or do they apply for a 2.9% representative rate from
a bank or retailer?

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 Acquiring the best and most price
sensitive digital natives
The highest credit quality consumers expect (and
get) the best rates on the market. They expect to
be accepted for the very lowest rates available, and
appearing top five rather than position one in a best
buy table can have a very significant impact on
volumes and the quality of applicants.

Some of these consumers demand and deserve

the best deals on the market. Others are not quite
super prime but will flock to any lender with top tier
pricing but less than cutting edge risk capability.

Avoiding adverse selection

If the lender’s top tier pricing is as little as 0.1%
Lender A
2.8% higher on a loan or if the teaser is one month less
on a credit card, they can suffer significant adverse
selection. The borrowers with the very best scores
take the best rate on the market. Only those who
Lender B can’t get the very best rate resort to a lender with
2.9% a slightly higher rate. In a best buy table crowded
with rates of 2.8% and 2.9%, the difference in quality

Lender A Volume can be marked. Lenders with a slightly higher rate

miss out on the best consumers and only get the
Lender B Volume
customers who don’t qualify for the best rate.

Consider a model where the top 2 lenders have

rates of 2.8% and 2.9% respectively. Lender A with a
rate of 2.8% will capture all the consumers that they
approve. Lender B only acquires Lender A rejects.

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 Because the lender A rejects have been assessed to
be higher risk by a different, but valid and predictive,
model they will perform worse than average.

In reality, models are not all equally powerful and

lenders may experience a skew in applications
through a number of mechanisms: -

They may have specific weaknesses in their

model where they get all the consumers
everyone else rejects because their model
doesn’t include a predictive variable that is
widely used by their competitors.

Having the lowest cut off for a given price

point is also problematic. A lender will get their
share of high-quality applicants but they will
get a disproportionate share of all the other
lenders’ rejects.

A lender with a competitive but not market

leading rate will experience a significant skew
towards their cut off. Consumers with higher
scores will opt for lenders with rates which may
only be 0.1% or 0.2% lower.

“ In a best buy table crowded with rates of 2.8% and

2.9%, the difference in quality can be marked.

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 Lending to prime digital consumers
To operate profitably in this market, lenders need
the following: -

1. Better risk assessment than the competition

2. An in depth understanding of how risk varies

based on pricing relative to the competition

3. Real time MI to identify any opportunities or

worrying trends and to permit early action

4. A culture of constant testing, analytics, and

optimisation

“
5. An innovative approach, striving to identify
new predictive variables

6. The best user experience

By working very
hard on the
other five points, Of the above, point 1 is the most important but it is

lenders earn the very difficult to achieve and impossible to maintain

in a competitive market. By working very hard on the
ability to play in
other five points, lenders earn the ability to play in
the super prime
the super prime market and at times may find they
market and at
have a risk assessment advantage. Looking at the
times may find other points in turn: -
they have a risk
assessment 2. Having an in depth understanding of how risk
advantage. varies based on pricing relative to the competition
permits lenders to take the right action based on
the business flows they are seeing and their relative
pricing. A lender facing adverse selection who can

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 afford to price market leading or joint market leading
has the choice to lower price, and improve quality
and risk adjusted margin. If this isn’t an option, they
may need to increase cut offs and accept much
lower volumes, or they may be able to price up if
their analysis shows the increased gross margin
won’t be fully offset by further adverse selection.

3. Knowing how risk varies based on relative

competitive position is no use if current performance
can’t be measured and changes made in real time.
Timely application flow data allows negative trends
to be spotted early and rapid cut off and pricing
changes can mitigate these trends.

“
Timely application flow data allows negative trends
to be spotted early and rapid cut off and pricing
changes can mitigate these trends.

4. Developing a better understanding of the complex

relationships between risk, pricing, volumes, and
competitive position requires a cross functional
analytics approach. Traditionally organisations have
been functionalised where the marketing team may
be trying to optimise marketing spend and the risk
team are trying to optimise risk adjusted margins.
The two are interdependent and the business team
must be able to act collectively to manage risk cut
offs, pricing and distribution strategy simultaneously

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 based on the same data and reports. To a certain
extent, this has been a “holy grail” in the credit
industry for 20 years or more, yet few players have
had the tools and enduring commitments to break
down the high walls separating risk from
marketing teams.

5. Derived variables, variables from new sources and

internal variables all create the opportunity to super
select the best consumers and push lower quality
consumers to the competition. It is essential lenders
have a platform which can readily consume new data
sources. Covid-19 accelerated the move towards the
exploiting of alternative data sources but without
a flexible method of consuming such data, many
lenders are stuck with empirical models upset by
short term turmoil.

6. Poor user experience is a key driver of adverse

selection. If two loans are priced equally the biggest
brand may naturally have some pull, but if one
journey is to a partially completed web form and
the other is a fully integrated mobile and desktop
journey, the latter will draw the best consumers.

“ It is essential lenders have a platform which can

readily consume new data sources.

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 Harnessing technology to improve
transparency and deliver value
The most transparent quotation and application
processes are provided by lenders who have a
two stage but fully aligned process. Firstly, they
take all the information they need to make a final
decision and run this through the services they use
to make the final decision on a soft search basis.
They provide a quote which will be valid as long as
nothing changes between quote and full application.
Then the consumer is invited to apply and the same
information is used to complete the application. The
searches are updated from a ‘soft’ quotation search
to a ‘hard’ application search.

“
Many of the lenders who offer the best rates have
grappled with high-cost legacy technology which
does not readily support quotes and API integration
to distribution channels.

Where there is no accurate quotation service a

consumer’s only choice is to apply. If they are
declined or offered an unacceptably high rate, they
may not be able to access the best real rate quotes
because their credit rating will have been affected
by the hard application search.

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 Many of the lenders who offer the best rates have
grappled with high-cost legacy technology which
does not readily support quotes and API integration
to distribution channels. Outdated decision
technology has been used to create indicative
quotation services based on a single credit bureau.
The latest cloud-based quotation decision software
can be coded to precisely replicate back-office
decision processes using the exact same multi-
bureau and other services. These services can
then be deployed to offer real rate quotes across
lenders’ own channels and connected to third
party distributors such as aggregators and credit
platforms via API. Lenders get to precisely target the
consumers who are in risk appetite, and consumers
know exactly who will give them the best rate. The
consumer lending market will work much better
for everyone.

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About GDS Link
GDS Link is a global leader in credit risk
management, providing tailored software
solutions, analytical and consulting services.
At GDS Link, we have been advocating the
need for transparency in lending processes for
years. Our cloud-based risk management and
process automation platforms are integrated
with a wide range of traditional and innovative
data sources and we are constantly adding
new services. GDS Link is not part of, or
affiliated to, credit bureaus so we are keen to
ensure our clients only use the best and most
cost-effective data sources. Globally, GDS Link
has a wealth of experience both integrating to
and powering digital distribution platforms. We
are ideally suited to addressing the challenge
to deliver transparency and digital inclusion for
all consumers.

gdslink.com I info@gdslink.com I