We’re often told that the UK has a credit problem – that we’re too reliant on cheap debt – but many lenders would say they have the opposite problem with their customers.
Recent research suggests that there is as much as £90 billion of unused credit in the UK: credit lines to which consumers are entitled but which they choose not to access. In many cases, they have used their “dormant” credit cards only once, or maybe even never.
Such borrowers are of course potential customers for lenders, but this unused credit is about to become a costly problem for banks. To explain, we’ll have to briefly enter the rarefied world of accounting regulation – IFRS 9 to be precise, which from January 2018 will require card issuers to make provision for a year’s worth of unexpected loss on credit accounts. For the first time, this will include unused credit lines. For the highest-risk customers, banks must hold enough capital to account for lifetime losses.
This will be a costly requirement but it could be just the push banks need to either retire inactive accounts or galvanise their relationships with dormant customers.
My own experience is that they’re not great at the latter. I have a current account, a savings account, my mortgage and an ISA with one major UK bank which persists in offering me financial products that I simply do not need. What’s particularly frustrating about this is that it has all the information at its disposal to tailor its offering precisely to my lifestyle and financial requirements.
As banks decide how to solve the problem of unused credit, they should look to what they already know about their customers. But to really get this right they need an insight into what drives borrowers’ behaviour.
Psychometrics – the measurement of personality, values, aptitude, opinions and other traits – offers lenders a direct, predictive window into the impulses governing their customers’ financial decisions.
At one end of the spectrum, psychometric testing can identify the kind of customers lenders simply don’t want – irresponsible people who do not prioritise their obligations. In an environment when unused credit in itself is expensive, regardless of loss, identifying this cohort is critical as banks rebalance their customer base.
But more intriguing is the capacity of psychometrics to help credit providers re-energise their relationships with the customers they do want, by giving them the insight to offer products of direct relevance. Conscientious people might respond to a bank offering products tailored to home improvements, for example, while adventurous types might respond well to offers related to travel.
Psychometric testing offers exactly this level of perception about the customer base. All borrowers need to do is take a quick image-based test, provided by the bank, which can then use that information to offer a highly tailored product set to individuals.
Lynsey Hoxha, Business Development Director at COREMETRIX