Consumer lending in times of uncertainty
We’re barely two years into the decade so far, and nobody can say that it has been uneventful. In early 2020, the world turned upside down when the COVID-19 pandemic entered our lives and brought with it worldwide panic, lockdowns, and multiple industry disruptions. Through it all, the financial industry has had to undergo many changes, shouldering the heavy responsibility to keep a global economy afloat in these unique and uncertain times.
The start of the 2020s has been very unstable for the financial industry. From the pandemic, followed shortly by the Russian invasion of Ukraine.
Nonperforming loans are projected to reach as high as €1.4 trillion by the end of 2022, with cost-of-living prices soaring.
Our latest report gives you all the information need to know on what lies ahead in the future of lending.
The outlook for 2022 was relatively good, with financial institutions reporting increased revenues in 2021. The pandemic situation was improving, while supply chain and logistics bottlenecks were starting to ease. But everything changed on February 24, when Russia invaded Ukraine, ushering in a new sense of urgency as Europe faced its first war in decades.
Since then, global stock markets have experienced a severe correction and energy prices have soared sky-high as many European countries lost access to the Russian gas on which they were so dependent. All across the globe, inflation rates have been climbing relentlessly during the first half of 2022, followed by a rise in interest rates.
In the UK, a perfect storm of post-COVID economic issues brought on by sluggish supply chains, Brexit, and the war caused inflation to reach 10.1% in July 2022. The categories of spending where consumers are experiencing the strongest price increases are housing and utilities (such as gas, electricity, and water), transportation, food, and beverages.
The rise in inflation and interest rates has pushed many economies into a cost-of-living crisis, made worse by the fact that real wage growth in countries such as the UK is at its lowest in 21 years. The UK government announced a raft of measures to help tackle cost-of-living hikes, but is under increased pressure to go further. The financial industry will need to find ways to protect the vulnerable in these troubled times, using whatever tools we have at our disposal to help consumers stay afloat.
The UK is not alone in needing to tighten its belt. All over Europe, consumers feel that their cost of living has increased in the last year (see Figure 1) – and many fear that it will continue to rise. In response to the dire situation, the European Commission (EC) has revised the EU’s growth outlook downwards, and the forecast for inflation upwards. Rising energy prices caused by the Russia-Ukraine war are the most significant contributor to this year’s economic uncertainty, triggering a domino effect and causing the price of food and commodities to rise, curtailing households’ purchasing power.
Insolvencies and nonperforming loans
Last year we wrote that the rate of nonperforming loans (NPLs) was at an all-time low and had become unsustainable. To the surprise of many analysts, credit performance continues to be strong in 2022. In the EU, the ratio of nonperforming loans has dropped to only 1.95% in the first quarter of 2022 — the lowest level ever recorded since supervisory banking statistics were first published.
But now that the worst of the pandemic is over, the economic uncertainty has given rise to questions about many borrowers’ ability to repay their loans. Indeed, the European Central Bank (ECB) believes that the economic crisis caused by the coronavirus pandemic is likely to trigger a sharp increase in nonperforming loans – they could even reach levels as high as €1.4 trillion by the end of 2022.
Protecting the vulnerable
In these turbulent times, the financial industry has a responsibility to help consumers stay afloat. In this, a lot of the responsibility belongs to lenders. For both lender and borrower, it has always been imperative that consumers only take out loans they can afford to repay. In June 2020, the European Banking Authority (EBA) released its comprehensive approach to loan origination in response to financial stability concerns. The EBA’s updated guidelines on loan origination and monitoring are necessary to protect consumers and the sovereignty of the credit market. With regulatory support, borrowers can be protected from borrowing money they can’t afford to pay back. At the same time, lenders can ensure that their credit portfolio aligns with their risk appetite.
The UK’s Financial Conduct Authority (FCA) has also jumped into action to protect those affected by rising inflation, a higher cost of living, and stagnating wages. New Consumer Duty rules have been introduced that set higher and clearer consumer protection standards across financial services and require firms to put their customers’ needs first. And in June 2022, the FCA sent a letter to 3,500 lenders reminding them of the standards they should meet as consumers across the UK are affected by the rising cost of living.
With this new economic climate and the FCA’s stern reminder to lenders, the importance of credit institutions’ risk management and assessment is evident. As many banks and other credit institutions still use suboptimal onboarding and assessment processes, it’s clear that this field requires modernisation. In this digital age, manually processing applications with heaps of paperwork makes little sense when there’s the option to safely and securely enable access to data – the kind that open banking enables.
Rising concerns over interest-free credit
The UK government is going even further in its attempt to protect consumers from unsupervised lending. In June 2022, the HM Treasury announced a plan to implement stronger regulation of interest-free buy-now-pay later (BNPL) credit agreements in the interest of ‘protecting consumers and fostering the safe growth of this innovative market in the UK’. This regulation aligns with research published by Barclays, which suggests that vulnerable consumers could fall into trouble by using BNPL instead of more traditional forms of credit in a cost-of-living crisis.
As BNPL services are growing in popularity, regulators aim to ensure consumers are protected by the same rules when using these services as with more traditional loans or credit services. Under the new regulations, lenders will carry a larger responsibility to ensure that loans are affordable for consumers. They will be required to conduct affordability checks and make sure their advertisements are ‘fair, clear, and not misleading’.
Do you want to delve even deeper into the world of consumer lending? Our latest report - ‘Lending unlocked; a new era of credit’, covers everything you need to know about the future of credit lending, – from the role that open banking plays, to key interviews and more in-depth information on the effects that current events have had.
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