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The consumer credit landscape has experienced some major changes, almost overnight. Things will be really different going forward... (1/n)
Credit risk profiles of existing lenders books changed overnight. What once seemed like a good risk to take, is now much riskier. It's much harder to repay loans today (drop in income) and it's much easier to not repay (PR push for forbearance)....(2/n)
So this means that, perversely, the 'best' lenders, who were able to grow their loan book faster than others, take more risk than others, acquire more customers than others, are all of a sudden holding the bag. They are sitting on way more risk than they wanted... (3/n)
Due to huge outstanding credit books (just weeks ago, we were in an overcooked bull market with huge risk appetite), the biggest lenders should be expecting big losses. Increased losses will consume equity and depending on how levered a lender is, it could be painful...(4/n)
Lenders can't really do much (other than hope and pray) about existing credit risk that is outstanding. Especially with the backdrop of the recent FCA guidance on forbearance...(5/n)
Another big overnight change has been in decisioning. Again, the biggest and best lenders had huge leads in data science. But this lead has collapsed, as a result of the FCA and CRA guidance on forbearance.... (6/n)
The data that most of these lenders use to make decisions, despite all the OpenBanking noise, is mainly CRA data. But CRA data just changed. Due to CRA guidance, if borrowers miss payments due to COVID, this won't show up on a credit record...(7/n)
Since the quality of the data just changed, so will the quality of decision making. When an application for credit is now made, a lender may see that someone is 'current' on payments, but no longer believe it... (8/n)
It is totally right that people should not be 'punished' for needing forbearance in this time of need, given the circumstances. Especially given how long it takes to clear bad marks from one's record. But the flip-side of this, is now lenders don't trust the data..(9/n)
If you don't trust the data, you take less risks. If you take less risk, supply gets constrained. This is what we are seeing and hearing across the market....(10/n)
So on top of having to withdraw from the market to preserve equity for future losses, the biggest lenders will also now pull back due to uncertain decision making. This is causing a double whammy in credit supply...while at the same time demand is skyrocketing..(11/n)
This creates a large opportunity for new fintech lenders. If you don't have the millstone of large future losses around your neck (due to not being big enough yet), but you do have the infrastructure to scale and service loans, the time has never been better...(12/n)
But of course fintechs have their own problems...accessing funding to grow in this environment won't be easy! (13/13)
