More than 7 million people in the UK are at risk of being excluded from affordable financial services due to credit rating gaps and are forced to rely on expensive options, such as high-level creditors, instead.
Data sources outside of bank statements and utility bills could offer a better picture of the finances of individuals facing “financial exclusion,” according to a report by LexisNexis Risk Solutions, which is designing software to help banks detect suspicious transactions.
“It is becoming increasingly clear that credit scoring methods, relying on general trends in credit history, are becoming ineffective in the face of an increasingly dynamic UK population in which people’s lives are nuanced and complex,” said Steve Elliott. Managing Director at LexisNexis.
LexisNexis estimates that one in seven adults in the UK is at risk of financial exclusion, including 5.8 million who have no open or closed current account data and 1.7 million without financial or credit activity in the last 24 months.
While the national average of 13.2% of the population is applied relatively consistently across most of the United Kingdom, it reaches 22.8% in Northern Ireland.
People between the ages of 55 and 75 are most likely to experience financial exclusion, especially due to a lack of a current bank account and a greater reliance on cash. This week, the postal service announced an expansion of the framework with large banks to allow customers to use cash branches by the end of 2025.
In contrast, millennia with limited access to safer, core financing are accumulating mortgage debt, although the industry continues to face pressure from regulators. About 37% of short-term loan applications are submitted by people aged 26 to 35.
But the costs outweigh the loans, Elliott said. “Among consumer activity, you can find people targeting higher-cost solutions due to a lack of access to cheaper ones,” he said. “You may not get a smart meter in your home, for example, so you may need to get a more expensive pay-as-you-go option.”
Energy prices have become a particularly acute problem this year, with Britain’s energy regulator Ofgem announcing an increase in the ceiling on February 7th after a 12 per cent increase in October.
But gas and electricity are not the only rising costs for consumers. Prices in the United Kingdom rose at their 30-year high in December, with consumer price inflation reaching 5.4%, well ahead of profit growth.
LexisNexis said it was able to offer a risk assessment of more than 5 million financially excluded, going beyond traditional indicators such as bank statements.
Alternative data sources may include telephone contracts, rent payments and payment history in the Buy Now, Pay Later apps (although these apps face separate criticisms of the level of credit checks they require).
Efforts to build alternatives to traditional risk assessment are not limited to those facing financial exclusion. “Traditional credit data is based on a close look at someone’s financial situation – using information such as previous loan behavior and address history – which can be up to 60 days old,” said Freddie Kelly, CEO and founder of Credit Kudos. which provides technology for rental applications.
“Alternative data sources, such as Open Banking, provide a far more holistic, up-to-date view of a person’s overall financial health using transaction data,” he added.
However, privacy concerns may limit data collection. Such fears grew during the pandemic amid concerns about how personal and public information aggregated by private companies could be used, for example, for targeted advertising, or ultimately to punish those it is intended to help.