Open Banking in support of post-covid credit analysis
In March 2020, the COVID-19 health crisis occurred amid an already gloomy economic context. Its consequences on France’s economy instantly reverberated on a micro-economic level, severely impacting businesses and households.
Because both were expecting difficult upcoming months, they reacted quickly by saving considerably and by asking for debt adjustments for those who held consumer credits and/or mortgage loans–i.e. half of French households according to the Household Credit Observatory. Consequently, credit organisations were flooded with requests for payment deferrals and faced an increase in defaults in their portfolios.
In this context, Algoan, a French Fintech company specialised in “Open Banking Credit Decisioning” (credit analysis based on banking data provided by the loan applicant) decided to take a closer look at the effects of the COVID-19-related economic crisis on the credit risk of households and to shed some light on the repayment of consumer credit in France.
The conclusion is clear: the reduction in income recorded during the crisis has caused many households to request payment deferrals, and sometimes to default on their monthly repayments, thus putting them in the “at risk” category. Hence, the number of households at risk has been multiplied by four in the second quarter of 2020, compared to the previous quarter.
Throughout this study conducted in a COVID-19 stress test environment, we have attempted to show that traditional scoring methods are no longer sufficient to determine the risk profile of borrowers. The obsolescence of these methods could be largely offset by the practice of Open Banking Credit Decisioning.