Traditional lending broken, according to new research by Tink
Traditional lending models are broken, according to open banking platform Tink, which found that some people being denied access to credit unnecessarily.
A survey of 308 financial services executives conducted by YouGov on behalf of Tink discovered that half of UK lenders are not using technology to generate a credit score based on bank account data, while more than a third are not using it to assess overall affordability.
As a result of outdated credit scoring models, people who can actually afford credit are being denied loans, Tink said. In addition, because the way credit checks are conducted remain static and backward-looking, there isn’t a robust way of protecting consumers if circumstances change.
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“It’s clear many lenders still rely on traditional credit checks to determine eligibility for loans,” said Tasha Chouhan, UK and IE banking and lending director at Tink. “There is no place for such models in our current economic climate, and the sooner this is recognised, the better the outcome will be for both lenders and consumers.”
Tink found that a significant number of UK lenders have not yet adopted affordability assessment models that would create fairer, better lending processes.
It also pointed out that consumers like expats, young people or the self-employed are automatically rejected because they are seen as being financially unstable or they are not in the “system”.
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The main reason respondents gave for the inability to assess an applicant’s risk was not being able to verify assets or collateral. For UK lenders, the main reasons people are denied credit are the inability to verify identity or legal status or the inability to access payment history.
Information received from credit bureaus are usually incomplete, incorrect and out of date, Tink said.
“Using antiquated as opposed to real-time data leads to poor customer experiences and an increased risk of rejecting creditworthy applicants and approving those who may not be in the same financial situation as they were when the data was recorded,” Tink noted in its report.
Chouhan added: “New forward-looking models are drawing on open banking technology to provide a holistic picture of people’s finances. It’s vital to protect potentially at risk or vulnerable consumers from problem debt or default as the economic climate worsens. At the same time, it’s key to promoting financial inclusion, as people now more than ever need access to safe, affordable, and regulated borrowing options.”
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