Business Day Credit Management Insights (February 24 2022)

INSIGHTS

Covid-19 spurs rise in cybercrimes: report

extend credit based on the client s unblemished credit record and historic cash flows. Now, with income and employment levels yet to return to pre-pandemic levels, Hieckmann believes consumers could face increased risks in serving the debt secured to tide them over during the pandemic.

TransUnion’s Q4 Consumer Pulse Study showed that among consumers who said their household income is currently impacted, 85% remained highly concerned about their ability to pay their bills and loans.

The period of rising interest rate cycles we re moving into increases the cost of money and introduces additional expenses to the consumer wallet without a corresponding increase to their income. This development could impact the demand and supply characteristics of the market, says Sun.

likely experience the greatest distress in response to rising interest rates.

obligations” says Van Jaarsveldt. And when credit starts getting more expensive before affordability normalises, the credit bubble created by the pandemic s unprecedented demand and supply dynamics could pop. If this happens, consumers will face further pandemic-triggered financial hardship,” adds Hieckmann.

Faced with these risks, Ndimande recommends that consumers review and adjust their household budgets. Allow for the additional expense that comes when interest rate hikes increase repayments on their credit purchases. It is vital to ensure they can still afford to service their credit payments.

Cybercriminals are using the pandemic to exploit consumers and business owners, many of whom are desperate to access capital and credit amid the cash crunch brought about by stringent lockdowns and the economic slowdown. With people spending more time online while working, shopping and schooling

implications for access to credit and creditworthiness.

Berniece Hieckmann, Head of Metropolitan GetUp, believes many consumers could find themselves in challenging financial positions amid rising interest rates due to the lending environment the pandemic created. In some cases, consumers who had a good credit record prior to lockdown might have applied for credit in the low interest rate environment to get them through any financial difficulty. In turn, credit providers may have been more willing to

Brett van Aswegen, CEO of Wonga, adds that rising interest rates also means an increase in the cost of interest for the credit provider and credit consumer.

REPAYMENT STRESS Unfortunately, the credit consumer is unable to pass on this additional cost, which means, for many, the higher monthly repayment can lead to repayment stress and an increased risk of defaulting on credit agreements.

Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian, explains that middle and upper-class consumers will

According to the Experian Q4 Consumer Default Index (CDI), pockets of financial distress have emerged in the local market, particularly in those segments with the greatest exposure to secured lending products. For example, data from the report shows that defaults in the most affluent consumer group, the Luxury Living segment, deteriorated 7% on a year-onyear basis. This group has access to the greatest quantum of secured and unsecured credit in the market. Those who were already in financial distress when the latest interest rate hiking cycle started will struggle with affordability as even a 50 basis point rise adds significantly to their repayment

Lenders adjust their risk thresholds

More broadly speaking, credit providers will also likely feel the impact of rising interest rates, suggests Chris Ogden, the CEO of RubiBlue.

While rising interest rates mean more revenue, the likely rise in defaults will impact the business. It also remains to be seen if providers will attract more loans in a lending environment where consumers are under financial pressure and cannot afford the repayments, he concludes.

Data, digitalisation spur market growth

predominantly from device and geolocation data when consumers opt in to a datasharing process that meets all regulatory requirements.

Providers use this information to build granular consumer and credit risk profiles based on behaviours, not just credit history data. This approach is proving more accurate than the traditional risk rating mechanism because it is more predictive about future behaviours.

However, many consumers remain reluctant when sharing their personal data beyond basic information, particularly when it comes to their transactional financial details.

This reluctance can cause difficulties for organisations when they want to embrace a data-driven approach, says Ferdie Pieterse, CEO at Experian Africa.

“However, organisations have identified how better data can improve everything, from onboarding and quicker decisioning to more accurate analytics, while also reducing the cost for manual processes, all of which improves the customer experience.

“Leveraging

sources have become insufficient in growing a more inclusive credit economy. According to Van Jaarsveldt, alternate data comes

Simply put, organisations struggle to provide the best services to the end-user without adequate data.

According to research conducted by Forrester on behalf of Experian in 2021 and published in the Data, Digitalisation and the Return to Pre-Pandemic Growth report, lack of sufficient data to get valuable insights was seen as the third biggest challenge prohibiting companies from achieving their top initiatives.

Findings from the report show people are willing to consider sharing their data but want to make an informed decision by understanding what they can receive in return, continues Pieterse. Businesses that can demonstrate the value people derive from consenting to share their data stand to grow rapidly in the digital world. In this regard, Van Jaarsveldt highlights benefits such as streamlined onboarding with shorter processes, improved services and better rates through more accurate credit risk assessments. From a credit risk perspective, tracking online behaviour and

Growing trust deficit hurts trade credit

Companies that previously provided supplier trade references are now reluctant to do so, fearing contravention of the Popi Act. Furthermore, two of SAs biggest banks have stopped issuing bank codes. Trade references provide potential credit grantors with an insight into how a debtor has fulfilled their credit obligations to those who

Mixed bag for consumer credit as volatility persists

Report

with low vaccine take-up and new variants in the population, this uneven recovery is likely to continue, explains Weihan Sun, Director of Research and Consulting at TransUnion Africa. And with many South Africans still experiencing financial hardship because of the pandemic and mounting inflationary pressures, it is proving difficult for lenders to chart a path to recovery. Only by portfolio benchmarking and constant monitoring can they remain agile and respond to the changing dynamics of the market adds Sun.

Experian s Q4 2021 Consumer Default Index (CDI) also highlighted important shifts in the financial health of specific consumer segments. Consumers with credit and loans are starting to feel the pinch due to rising interest rates and record unemployment, with significant job losses experienced across all consumer segments, says Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian. More specifically, the home

loan and credit card indexes deteriorated slightly in Experian s latest report.

We are witnessing pockets of distress within consumer segments that have the greatest exposure to secured lending products. Even the middle and upper levels of the consumer credit market are starting to struggle says Van Jaarsveldt.

According to the Experian CDI report, between December 2020 and 2021 the most affluent consumer group, the Luxury Living segment, experienced a 7% year-on-year deterioration in defaults.

“If these consumers are already in distress at the start of the latest interest rate hiking cycle then we can expect defaults will rise over the coming year, he says.

However, pockets within the South African consumer credit market are heating up, especially as younger generations show increased participation. TransUnion s Industry Insights report showed strong year-on-year growth in originations across all major categories, with the exception of credit cards, driven predominantly by younger consumers. Capitalising on these shifting generational dynamics will become vital to drive market growth, with younger consumers already accounting for much of the growth in several key categories. When looking at nonbank unsecured personal loans, millennials (born 1980-1994) accounted for 41% of total originations volume, according to TransUnion data. A similar trend emerged in the home loans category, where millennials accounted for more than half (52%) of all originations in Q2 2021.

High unemployment rate constrains credit market

not have large funding reserves, client bases and commercial pressure management capabilities compared to larger enterprises. These factors mean small businesses require finance to see them through extended periods of low turnover and cash flow, yet these businesses tend to find it more difficult to access credit during tough economic times as the risks associated with borrowing increase, says Hermanus. Loan providers will scrutinise the applicant s credit history more intensely than usual to fully understand the business s financial health and ability to service debt. That is why more financial and credit education is required to help SMEs overcome the financial difficulties caused by the pandemic and start people on the path to financial recovery.”

The resultant job losses

there has been a marked decline in their numbers. Despite their importance in creating gainful employment opportunities, these businesses are often the least robust during times of crisis because they do

“While we expect an increase in lending to younger generations over time as their income and credit needs grow, the current trend is significant because it starts to reverse what we saw earlier in the pandemic when younger generations were the first to withdraw from the market,” elaborates Sun.

“While in most categories, lending to younger generations has still not returned to prepandemic levels, this latest round of figures shows significant momentum in closing the gap. Overall, home loans recorded the largest percentage

increase in originations in TransUnion s most recently released data up 149.6% year on year in Q2 2021. This figure reflects increased activity in the market due to record low interest rates, as well as a relatively low corresponding base from the same period in 2020. Similarly, the auto market experienced a recovery, especially for newer used models. This activity helped vehicle finance record strong year-on-year originations growth of 95.8%.

Van Jaarsveldt also highlights significant trends in the retail sector, where defaults were 10% lower than a year ago, according to Experian s latest CDI data.

PAID DOWN DEBT

Consumers were more cautious over the period, and they also paid down outstanding debt with money they saved from subdued spending on social activities due to lockdown restrictions, adds Van Jaarsveldt. However, we are seeing the end of this trend as consumers are again starting to lean more on credit cards.

Financial literacy is key

SA finds itself in a consumer debt spiral. According to results from Experian s Q4 Consumer Debt Index (CDI), households hold a cumulative R1.7-trillion in outstanding debt.

Worryingly, consumers access credit to cover day-today expenses, which has created a credit market built on consumption lending, says Alfred Ramosedi, CEO at Bayport Financial Services. Consequently, most overindebted consumers are not using credit to finance assets that can appreciate in

impacted lower-income consumers (households earning less than R50,000 per annum) hardest, with 38% indicating someone in their household lost their job in October 2021.

TransUnion s ongoing Consumer Pulse study showed that among consumers who said their household income is currently impacted, 85% remained highly concerned about their ability to pay their bills and loans.

Among those with these bills and loans, unsecured credit remains their top worry, with the main items consumers cannot pay being personal loans (29%), loans from informal and/ or unregistered credit providers (28%), private student loans (24%) and retail and clothing store accounts (21%).

While we re seeing a slight improvement in the number of people negatively impacted financially by Covid-19, the study highlights the fact that many South Africans remain under pressure, explains TransUnion Africa s Director of Research and Consulting, Weihan Sun.

Despite these financial hardships, the study revealed a lingering wariness of credit. While eight in 10 households considered access to credit important or moderately important only 34% believed they currently had sufficient access to credit.

Nearly half (47%) of consumers whose household income was impacted during the pandemic said they had considered applying for credit but ultimately decided against doing so. The major reasons for this were fear of being declined due to the status of their income or employment (35%) and the cost of new credit, which many felt was too high (34%).