As the UK moves towards tentative economic recovery, it’s clear that the country’s SMEs will play a key role in helping spending return to some semblance of normality. At first glance, the situation would seem positive – 68% of small to medium-sized businesses surveyed in August believing they will return to pre-Covid levels of success in early 2021. However, the risk may come more from consumer confidence, especially as the UK considers further measures to manage the spread of COVID-19. Recent reports indicate that employers in Britain are planning more than twice as many redundancies than they did at the height of the last recession, while the Bank of England estimates UK unemployment will spike at 2.5m by the end of the year.
This comes at the same time as traditional sources of consumer liquidity are drying up, with large numbers of consumers being rejected for mortgages, credit cards and loans. In order to sustain recovery, consumer finance will play a key role in providing assistance to consumers, but doing so safely will require a keen eye on risk and process.
The state of spending
The global pandemic has hit consumers hard, with many facing increasing uncertainty regarding their income levels, employment and lifestyle. As expected, this led to a steep drop in consumption on non-essential purchases (across almost all categories).
Many consumers have instead changed focus to repaying and managing existing debt, with Bank of England figures showing consumer debt fell £7.4bn in April as many cut spending. There were bright spots in the world of retail, with growth in e-commerce throughout the pandemic as consumers moved to safer forms of retail, but the short term impacts were nevertheless significant.
According to surveys by Starling Bank, 63% of SMEs experienced a decline in revenue and 19% made no profit at all during lockdown. In an effort to keep up, SMEs have increased investment in digital commerce, with many having to reallocate their annual software budget and move the timeline forward for almost six months due to the pandemic.
While 75% of business owners now feel more confident than they did in July, adaptability will be key to moving forward as businesses look to recoup revenue lost during lockdown, costs spent adapting to new retail conditions and maintain positive cash flow in the face of consumer uncertainty.
Strategic customer finance
The ability to finance customer purchases greatly increases short term financial stability for retailers due to the ability to secure 100% of the purchase value upfront, while outsourcing the issue of managing the debt to a third party.
However, for consumer finance providers the current situation brings considerably more risk. Furloughed workers are three times more likely than other employees to have defaulted on a payment, while workers in service or gig positions face considerable uncertainty about their incomes or even employment conditions.
Risk management and customer insights are more important than ever in order minimise non-performing loans. In addition, the FCA is setting out stricter guidelines for how consumer credit firms should look to support their customers, with an emphasis on taking a helpful approach to managing and restructuring debt for those facing financial difficulty.
For those in difficulty, consumer finance firms must balance financial obligations with client wellbeing and maximising chances of repayment. For existing customers, this may entail adjusting loan conditions to protect customers from imminent insolvency, waiving some fees or even extending dates of loan maturities. Firms must also place a greater emphasis on segmentation and credit underwriting for new customers to effectively gauge exposure.
Data-driven lending
In this new scenario, customer information will be the key differentiator and driver of competitive advantage. Firms will need to place greater emphasis on tracking and centralising customer insight (and management of the loan application and agreement management) in order to keep up with the fast moving economic conditions.
This starts with bringing your loan management system online to be able to quickly engage customers and gather necessary details on financial circumstances and requirements. For those operating legacy loan management systems, upgrades will be an urgent priority.
With office working and customer interactions once more at risk, a live, up to date view of customer information is a must-have. It’s essential that your team can effectively track changes in customer circumstances such as employment status, household income or industry conditions to maintain an accurate picture of in-book risk.
It is also likely that firms will see increased web and phone traffic in response to lower rates. In this scenario, firms must be clear and transparent about the guidance given to customers on the requirements for approval, including what documentation they need, process and timelines.
Building future advantage
In spite of current uncertainty, there remain significant opportunities for firms that can quickly adapt to the changes taking place in the market. Competitive advantage will go to those that can most effectively meet customer expectations around service and digital experience while also balancing risk and debt. In this scenario, the right technology behind the scenes will be essential.
QV Systems works with the world’s most innovative lenders and consumer finance businesses to accelerate and optimise their digital transformation programmes. We help to create agile systems that can quickly adapt to changing circumstances. Our future-ready platform is custom-built to help you create a best-in-class experience for your customers while giving you the insight you need to manage risk.
To find out how QV Systems can put you in the strongest position for the future, get in touch with our team today.
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