ESG is dominated by environmental sustainability goals, but social issues also play a critical part in a more sustainable future for society and financial services. As highlighted by a recent article on LinkedIn, financial inclusion features as a target in 8 of the UN’s 17 Sustainability Goals.
The pandemic placed many in unprecedented positions; multiple jobs, remote working, redundancies, childcare, credit and mortgage repayments, to name a few. The second coronavirus wave saw the number of redundancies in the UK rise to 370,000, according to the Office for National Statistics, the highest rate since records began in 1992.
An increase in unique circumstances is making affordability assessments more complicated for lenders, and for many borrowers it has become almost impossible to get a loan.
In response, a rise in alternative lenders are catering to the needs of those who sit outside of the criteria of high street lenders. As lenders adopt new technologies, they will provide more accessible products to a wider audience.
Sarah Kocianski, lead in Strategic Insights at Founders Factory highlights the importance of accessible credit and how technology can create more appropriate products. “Affordable access to credit can help people improve their overall wellbeing by enabling them to build their own business, access education or improve their living situation, as a few examples.
That’s why it’s hugely important that financial services providers take advantage of new technologies and rethink their processes in order to be able to offer appropriate, affordable access to credit to as wide a range of people as possible.”
In the past, lenders have relied on inaccurate credit scores based on outdated information when making lending decisions. This has resulted in fewer people obtaining loans, unaffordable lending and borrowers missing repayment deadlines.
Open banking has provided lenders with access to real-time data when assessing a borrower’s eligibility. This allows lenders to make more accurate decisions because they are able to consider the individual’s current situation, as opposed to their circumstances 6 months ago.
Real-time data is crucial to analyse eligibility, particularly during the pandemic where individual circumstances changed dramatically from month to month, or even weekly. Open banking will ensure more people can access the right loans for them when they need them most.
Rishi Zaveri, Co-founder and CEO at Lendwise, a peer-to-peer lender for further education, explains how the organisation is taking a more personalised approach to credit scoring. “For us at Lendwise, the concept of ‘personalised lending’ is a very real one. We have built an approach that goes above and beyond the traditional credit score approach used by high street lenders, to better serve our market of postgraduate students, by looking at their profile on a more holistic basis.
This results in a personalised approach, which takes into account their circumstances and generates more inclusive outcomes ensuring that those who have the aptitude and desire to study further can do so, even if they don’t have all the funds required for enrolment.”
Open banking also gives alternative lenders access to an individual’s financial data, placing them on a level playing field with incumbent institutions. This intensifies competition between traditional banks and alternative lenders, and puts the pressure on to provide better products for customers.
Open banking and increased access to data can be beneficial for the lenders too. Quick access to more accurate data empowers them to lend to more borrowers and reduces the risk of loan default.
Although it may sound contradictory, AI can increase the personalisation of products and services for particular segments in society. Another important benefit is that through AI, lenders can do this without having to take on excessive financial risks.
When combined with Big Data, AI removes human elements in decision making. Instead, AI has the capacity to manage sophisticated calculations and make quicker assessments for credit.
AI chatbots can also offer faster and improved support to those who need it most. An easy-to-use platform and AI Chatbot can quickly find an individual’s historical data and provide a tailored service to help resolve any issues the customer has.
The process is automated to streamline information and provide a solution quickly. Chatbots can make the lending process more accessible to customers who may have difficulties in the loan application process or organising repayments, for example.
Automating processes will not only improve the services for customers. Sarah comments that taking advantage of digital transformation, “will not only result in the lender having more customers, and therefore more revenue, but will also help them improve their contribution to societal good — which is becoming increasingly important as consumers grow more concerned with the ESG impact of the companies they acquire goods and services from.”
Diversification of services and competition
In addition to technology, the sector is seeing innovation in the services that lenders provide and who they provide to. Specialist and fintech lenders have formed to build products for those individuals and businesses that miss out on the high street lender’s eligibility criteria.
Whether it’s to provide shariah-compliant student loans, postgraduate education, or loans exclusively to LGBTQ+ communities, minority-owned businesses or provincial populations, specialist lenders will play a critical role in sustainable and inclusive post-pandemic recovery.
As Rishi adds, “Through Lendwise’s affordable and flexible student loans, we enable our customers to achieve positive outcomes such as salary enhancement and career progression by up-skilling or re-skilling through the power of education; thus addressing the UN’s SDGs 4 and 10.”
Through competition and innovation in the financial services sector, players are encouraged to offer customers better digital banking, borrowing, and budgeting options, which allow consumers to access a broader range of products and better manage their finances.
Since 2019, the government has allocated £96 million of funding from dormant assets towards financial inclusion and organisations such as Fair4All Finance are continuing to support community finance providers.
Simon Dukes is Chief Executive of Fair for You Enterprise CIC, a credit provider which enables borrowers to buy essential items for their homes, with affordable and flexible credit based on their income. As he notes, “By allying the clever use of technology to a responsible, customer-focused approach, there are huge opportunities to make sure the financially excluded are excluded no more.”
At FTT Lending 3.0 on 30th March, we will continue to explore how lenders are building products to serve particular segments in society and closing the financial gap.