Australian lenders struggle to assess customer creditworthiness, report finds

A recent report by global information services company, Experian, has revealed that more than half (55%) of Australian lenders and business leaders feel they lack the necessary data to assess the creditworthiness of customers, and by extension make responsible lending decisions in the current economic climate.

The need for more encompassing data is particularly acute given the recent surge in financial hardship and missed repayments witnessed in the country's lending industry, the researchers state.

This finding originated from Experian's detailed survey of 75 Australian risk leaders, which was complemented with research commissioned from Forrester involving 889 Financial Services and Telco leaders, including 66 participants from Australia.

Overall, only 16% of Australian risk leaders voiced confidence that their organisation was highly skilled at proactively identifying customers struggling with financial stress. An astonishing two in five (39%) rated their ability to do this either slightly effective or entirely ineffective.

In the meantime, a considerable 55% of lenders revealed that it wasn't until customers missed a repayment that their organisations could reliably identify signs of financial stress. Even worse, around a quarter (23%) of the lenders would only know if a customer was under financial stress once the customer informed them personally.

According to Charlotte Rankin, Director of Client Advisory, Credit Services, "It's never been more important for lenders to be able to proactively identify when a customer's financial situation has changed. Using the data and technology available, lenders can intervene sooner to help customers minimise financial stress and maximise financial wellbeing."

The majority of Australian risk managers specified the lack of necessary resources and investments as the primary impediments that kept their risk management systems from performing optimally. Addressing this deficiency, about 77% of Australian lenders have decided to utilise AI and explore new data sources for managing risk in their lending portfolio. The goal, as Rankin put it, "is to better understand risk in their portfolio through a deeper understanding of their individual customers and applicants financial situations."

As part of their commitment to improving risk management, 80% of lenders are also prioritising investments in cloud technology to enable unified data integration. This aims to tackle significant risk concerns like cybersecurity, data privacy, the impact of regulatory changes, and macroeconomic risk.

Over half (59%) of those already utilising AI for risk management have seen productivity gains offsetting the initial cost. Nonetheless, there still exist challenges surrounding the seamless integration of different data assets in a data warehouse to adequately support AI technology.

Rankin concluded by stating, "AI and data are at the heart of understanding credit worthiness and providing a better customer experience. The race to implementation is well underway with adoption set to double as the majority of early adopters have already seen a competitive advantage."