Guest blog: Can a square peg ever fit a round hole?

Guest blog by Steve Carruthers, Business Development Director, Iress, Mortgages

Guest blog by Steve Carruthers, Business Development Director, Iress, Mortgages

The short answer is yes! But maybe it’s not the peg that’s the problem.

The term 'to fit a square peg in a round hole' is frequently used to describe a person or persons who in some way don’t fit the norm, the usual, the status quo. The interpretation comes from an early 19th-century philosophical paper (“On the Conduct of the Understanding" by Sydney Smith) that considered people and their situations as a wide range of shapes - including triangles and oblongs, and noted there was seldom a perfect fit.

Typically we tend to avoid putting square peg people into round hole roles, and a lot of the ways lenders underwrite mortgage applications sustain and perpetuate this approach.

However, a Dutch building method used for joining major pieces of structural timber involved creating round holes into which square pegs were driven.  The corners of the pegs flattened and rounded against the holes, and the holes became a curvy square shape. Ultimately, there was a very good fit and a very firm joint.

This approach demonstrates that through a combination of lateral thinking and innovation, ideas and solutions from one field or discipline could be applied and incorporated into a different one.  This truly is the stuff of creativity and innovation - combining ideas that don't apparently have any connection. It may seem to be a risk, but there may be a greater risk in sticking to the safe and known. In a rapidly changing world, this could give a lender the competitive edge.

In a constantly evolving market, catering for mortgage borrowers with complex situations - square peg scenarios - offers lenders challenges as well as opportunities.

Risk based pricing as a concept has been much discussed over the last couple of years in the mortgage market, in particular when it might take hold in the market.

But it has already gone from theory to reality and we are seeing it enable lenders to think outside the box when faced with applications where borrowers don’t tick all the boxes or conform to the ‘vanilla’ process journey. 

Most importantly, it works in conjunction with a lender’s decision engine to restrict product availability to specific propositions for different borrower risk profiles and allows for new product exclusive propositions to be launched quickly without the need to write code.

The capability enables lenders to define any number of borrower risk profiles e.g. adverse credit, high loan to income, low credit score etc., and to control which underwriting teams work which risk profiles depending on staff competencies.

The number of square pegs in the UK is only set to increase. According to research from the University of Hertfordshire, for example, 5 million UK adults work in gig economy jobs at least once a week.

The IPSE estimates there are 19 million freelancers in the UK and that the solo self-employed workforce contributes £278bn to the UK economy. Indeed, the rise of hybrid and remote working means more people are finding their way to becoming square pegs as far as a mortgage application is concerned.

While it may be some time before complex situations become the norm, Iress clients such as Leeds Building Society and Yorkshire Building Society have already deployed the capability as a way to tap into the enormous potential this subset of the market has.

And it’s an often seen problem in financial services that instead of evolving with changing customer needs, we tend to try and shoehorn them into current business operations. As the statistician Nate Silver said, “when we can’t fit a square peg into a round hole, we’ll usually blame the peg.”

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If you'd like to find out more about risk based pricing and how it could work for your building society, click here.