Experian highlights cautious credit risk approach

Experian has released its inaugural Risk Radar report, examining key priorities and concerns of Australia’s most senior risk leaders across the lending market.

The industry-first report shows lenders are taking a cautious credit risk approach while they invest in more technology. Meanwhile, this could limit would-be creditworthy borrowers’ ability to access the level of credit wanted without placing themselves in financial stress.

COVID-19 impacts on loan deferrals, rising house prices as well as proposed changes to Responsible Lending regulations are the key macro trends influencing risk leaders’ conservative strategies.

This comes as almost two thirds of the report’s Australian respondents acknowledged poor lending decisions could put their customers into financial hardship, while 78 per cent said improving regulatory compliance was a top priority.

Experian’s general manager of Decision Analytics A/NZ, Mathew Demetriou, said: “Lenders are having to stay ahead of, and respond to, a changing regulatory landscape. For instance, the government announced earlier in the year the potential to wind-back some of the more onerous lending regulations, while more recently, the RBA signalled a tightening of mortgage lending criteria to cool the property market.

“Lenders may find themselves caught between a rock and a hard place. Lenders want to do all they can to help borrowers achieve their financial goals and avoid facing hardship or defaulting on loans. However, they must also balance this with the need to remain competitive,” he added.

MoneyPlace’s chief risk officer, Paul Abbey, said: “There are ongoing macroeconomic factors and implications of vast areas of the country having been through lockdowns. While 2020 was much more resilient and upbeat than most people expected, some of those tailwinds remain, but headwinds are gathering strength.”

Harnessing technology to remain competitive

The report identified the challenge of balancing speed, accuracy and compliance, with lenders losing market share if they are too slow with approvals, particularly as nimble fintech entrants compete with rapid customer acquisition and onboarding experiences.

The Risk Radar report found lenders are acutely aware of the role technology must play in overcoming this challenge as 7 in 10 risk leaders identified modernising legacy systems as a top credit risk priority, while almost two thirds felt the same about leveraging new data sources.

However, awareness didn’t necessarily translate into investment, with less than half of Australian risk leaders thinking that their business was accessing all of the data sources available to them.

“There is a vast array of consumer data that is now available to modern lenders beyond traditional banking, credit bureau and employment information,” said Demetriou. “This includes digital transaction, BNPL and subscription data, amongst others. Therefore, we are seeing growing demand for systems that can help lenders to analyse this information to make informed, actionable decisions.

“Decisioning technology that applies automation, data and analytics at the point of customer acquisition, can not only improve the speed of approval for a better customer experience, but also ensures responsible lending obligations are met. This helps to reduce the risk of defaults and likelihood of hardship down the track.

“Sophisticated credit risk models using new technology can ultimately help improve customer management, reduce credit losses and minimise fraud,” said Mr Demetriou.