Assessing affordability

Eamonn Tierney discusses how utility providers can use affordability assessments to better determine whether customers are able to afford the services they sign up to.

According to PwC, bad debt across energy utilities rose from £400 million in 2011 to £640 million in 2015, with UK water firms showing a similar trend from £263 million to £379 million. By using technology, data quality audits and affordability assessments, utility companies can get an insight into what services consumers are able to afford, enabling them to offer more realistic payment plans.

Affordability is a complex subject with many variables. A customer’s ability to afford a service is not fixed by income alone, but also by family and personal circumstances, such as school age children or dependents with disabilities, other financial commitments and previous credit history. Affordability assessments, using big data technologies, give the most accurate, real-time view of a customer’s income, living costs and spending habits without the need for manual intervention.

By gaining a complete understanding of customers’ financial circumstances from the day they sign up, you as a utility provider have a better view of their ability and readiness to pay bills on time, and can help ensure they can afford the payment plans they sign up to.

Armed with knowledge, it becomes possible to determine the customer’s needs and act as their requirements change. Should affordability assessments flag that a customer’s financial situation has changed, you can use this insight to tailor your services and offer appropriate tariffs and payment plans, whether that is a credit account or a prepayment solution. Thereby you can avoid customers getting into arrears or agreeing to unsustainable repayment plans.

Further, our research of 200 risk professionals earlier this year revealed that treating customers fairly is also increasingly important for organisations themselves. A large majority (72 per cent) of respondents believe their organisation has a social responsibility to prevent customers from over-stretching themselves financially.

Affordability assessments provide a utility provider with greater confidence in what it is offering. And it makes it significantly easier to achieve best practice in affordability and meet the tightened regulation on debt collection introduced by the Financial Conduct Authority, and initiatives by Ofgem and Ofwat to prevent the disconnection of vulnerable customers.

Continuously obtaining data on consumers’ financial profile can not only improve customer experience but is crucial to avoid bad debt throughout the entire customer lifecycle. Financial history, as the name implies, is historic. Circumstances inevitably change for some customers, and even those with impeccable affordability criteria can find themselves in debt, often through factors out of their control.

Affordability assessments allow affordability to be assessed both at point of application and for future sustainability. This provides a comprehensive overview of the customer as a whole, rather than just a snapshot of his or her data at a particular point in time. This allows utilities to base payment decisions on future and present performance rather than solely relying on payment history. Crucially, ensuring that should a customer’s financial situation change this can be flagged early on, utilities can proactively adjust payment plans.

It can also aid in identifying customers who should be claiming Warm Home Discounts or transitioning on to social tariffs, which can further help to avoid more complex and expensive debt recovery processes. We recently worked with a major utility provider to train its team to spot customers who may be struggling with their bills and be at risk of going into debt. Identifying these vulnerable customers by getting a better understanding of their financial situation helped the provider ensure that the right customers received aid before they fell into arrears, and their water bill spiralled out of control. Importantly, this also helps customer experience as consumers do not have to send supporting information to validate their income.

By using affordability assessments in this way, you can adjust your approach from debt management to customer management and ensure that fewer customer accounts experience bad debt. Ultimately, this will reduce the number of payment problems and provide additional benefits such as reduced volumes of complaints, higher customer satisfaction and better customer retention.

Considering these clear benefits, it is no surprise that in addition to credit checks, two-thirds of organisations carry out affordability checks, with a further 27 per cent planning to introduce them within the next 12 months. By ensuring you have access to quality data, companies can create a complete view of a customer, which means customers can have total confidence that the decisions made about them are fair.

Eamonn Tierney, managing director, Credit Solutions