Going Deeper into Ability to Pay and the Right Way to Measure It

Going Deeper into Ability to Pay and the Right Way to Measure It

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For those who have dealt with taxes, you may have heard the term Ability to Pay (ATP). If translated literally, Ability to Pay means the capability to pay. In the context of taxation, ATP signifies the principle or criteria in tax collection. However, its meaning will differ for customers and banks regarding capital loans, and so forth. Let's delve further into understanding how to measure ATP and its connection with leveraging open finance.

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In the principle of ATP, an individual bears different cost burdens according to their ability. An individual here doesn't just refer to individuals but also includes businesses, whether large-scale or SMEs. To simplify understanding, here's an example scenario. Suppose someone wants to start a business for the first time. They need a capital loan but have never applied for a loan before. Therefore, the bank or lender needs to measure the Ability to Pay of this individual.

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Loans of any scale need to measure the ability to repay to avoid detriment to both parties involved. That's why every entity providing capital loan services must measure the ATP of every potential borrower. To measure the Ability to Pay accurately, consider the following aspects. Also, understand its connection with open finance.

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Measuring Ability to Pay

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To measure the ATP of each individual, there are criteria that must be met. Some common criteria include assessing the financial capability and age of potential customers. However, Ability to Pay also needs to be seen from five other factors that should not be underestimated.

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1. Character

The most essential character trait of a customer is trustworthiness and having a generally good attitude. Especially regarding completing installment payments. Intensive interviews over several hours can be one way to gather important information. This includes lifestyle, living patterns, credit history, and family background, for instance.

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2. Capability

The next factor is the ability of the potential borrower to repay installments according to the agreement with the lender. This can be seen from how they manage the resources they have, whether it's money, business capital, or the business itself. It's pointless if a potential borrower appears wealthy but their financial management is poor. It could be that paying installments is not their priority.

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3. Owned Assets

Ownership of valuable assets or wealth is a factor that may be evaluated at the initial stage. Examples of what are assessed include savings balance, investment assets, deposits, the business being run, and so forth. Because from these assets, the lender will determine the maximum amount to be borrowed and the amount of installments to be charged to the borrower. To ascertain this factor, lenders usually need to conduct field surveys to verify the authenticity of the mentioned assets. Both in terms of quantity and ownership authenticity.

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4. Collateral

Not all owned assets are used as collateral for borrowing. Because the consequence of collateral is the withdrawal or seizure of assets if the borrower fails to repay the installments as stipulated. Of all the assets available, the potential borrower needs to determine which assets will be used as collateral. The larger the collateral or the value of the collateral, the greater the likelihood of the potential borrower being accepted. Of course, the ATP of that person will also be adjusted accordingly.

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5. Conditions

In addition to the internal factors of potential borrowers explained above, lenders must also be aware that there are external factors. These external factors are usually unable to be calculated beforehand. For example, the economic conditions of certain countries or regions that are unstable due to the impact of the Covid-19 pandemic. Especially if the business conducted by the borrower is the most affected party. Therefore, lenders must also consider this factor before determining someone's ATP.

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ATP and Utilization of Open Finance

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Advancements in technology also affect progress in financial matters. One of them is the ease of determining Ability to Pay through Open Finance. Open Finance technology utilizes API or Application Programming Interface features. API features are used by third parties and act as intermediaries between lenders and borrowers in terms of data exchange.

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Through Open Finance, lenders such as banks and financial institutions will find it easier to determine the ATP of potential borrowers. Open Finance technology providers can provide basic data to lenders, making the ATP determination process shorter. This data is obtained from banks that have collaborated with these technology providers.

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Considering the complexity of the Ability to Pay measurement process, the use of API technology in Open Finance will greatly assist you. Especially if customer data is substantial every day. Brick implements API technology in managing various financial data. Ranging from transaction data, account verification, to transaction summaries and balances. Everything is easily accessible and allows for a more effective and efficient ATP process. ***

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